Nigerian Entrepeneurs, Not a Scam

The abstract of a study for the World Bank by economist David J. McKenzie reads

Almost all firms in developing countries have fewer than 10 workers, with the modal firm consisting of just the owner. Are there potential high-growth entrepreneurs with the ability to grow their firms beyond this size? And, if so, can public policy help alleviate the constraints that prevent these entrepreneurs from doing so? A large-scale national business plan competition in Nigeria is used to help provide evidence on these two questions. The competition was launched with much fanfare, and attracted almost 24,000 entrants. Random assignment was used to select some of the winners from a pool of semi-finalists, with US$36 million in randomly allocated grant funding providing each winner with an average of almost US$50,000. Surveys tracking applicants over three years show that winning the business plan competition leads to greater firm entry, higher survival of existing businesses, higher profits and sales, and higher employment, including increases of over 20 percentage points in the likelihood of a firm having 10 or more workers. These effects appear to occur largely through the grants enabling firms to purchase more capital and hire more labor.

Pointer ultimately from Tyler Cowen. My cynical thoughts:

1. How does one keep corruption out of such a program?

2. Does this imply that there is an unexploited profit opportunity in lending to would-be entrepreneurs in underdeveloped countries? Note that the money the firms received seems to have been in the form of grants, not loans.

Thoughts on Drug Pricing

A reader asked me to comment on this story, about the guy whose firm bought the license for a drug and then jacked up its price.

1. I don’t know the whole story in the example. My understanding is that with a decades-old drug, the patent is no longer effective, and generics can be made. So there is something going on here that has not been explained in the stories that I have read.

2. In theory, if someone bought a license to a drug, the cost of the license was tied to the potential revenue from the drug. We might want the value of such a license to be high in order to encourage drug research and development. But again, I am missing some important institutional details in this case.

3. Assuming that the value of the license for the drug indeed is high, then this is a fixed cost. Like many products nowadays (electricity, data transmission, digital content), pharmaceuticals are characterized by low marginal cost and high fixed cost. A price that is efficient in that it is close to marginal cost is too low to cover the fixed cost.

4. This means that there is no price that is “correct.” It also means that price discrimination often can improve the outcome. That is, charge a high price to the people willing to pay such a price, but get additional revenue by charging other consumers a price closer to marginal cost. As I tell my economics students, “price discrimination explains everything.”

5. Another option, in the case of pharmaceuticals, would be to offer prizes instead of patents. Prizes could be funded by taxpayers, or they could be funded by associations of people who would benefit from the medications.

6. However, price controls on medications treat only a symptom, without getting at the underlying problem. Price controls will lower the value of licenses to produce a drug, and that means less incentive to undertake research and development.

UPDATE: Alex Tabarrok says that we thank the FDA for the lack of generic competition.

Also, on this post, commenter Matt had an interesting solution. He would have the FDA issue blanket licenses to proven-quality generic drugmakers, so they they could instantly start to copy any drug that goes off patent without having to submit samples of that particular drug for approval.

Tyler Cowen after the Republican Debate

He writes,

The two participants who have done the best relating to voters, through the media, are the two former CEOs, Donald Trump and Carly Fiorina.

A priori, you would think that being a professional politician selects exactly for people who can do well in a televised national debate. Yet, from this limited number of data points, it is the CEOs who have the relevant skills.

Politicians make more speeches. CEO’s participate in more business meetings.

Think of making a speech as like playing rhythm guitar on a 1960s pop single. You play continuously, and your job is to give the song atmosphere through your use of volume, tempo, and tone.

Think of participating in a business meeting as like playing lead guitar. You come in for short “fills,” and your job is to move the song from where it has been to where it is going by hitting a few really striking notes at just the right time.

Because there are so many candidates at this point, Republican media events are more like business meetings than speech-making opportunities. So that would be my explanation. I think that the comparative advantage of the lead guitarists will be much less when there are only two or three candidates on stage.

Markets and Trust

Liran Einav, Chiara Farronato, and Jonathan Levin write,

Businesses that hope to create successful marketplaces or platforms for matching buyers and sellers have to solve several problems. They need to help buyers and sellers Önd each other, either by developing a centralized assignment mechanism or by allowing for e§ective search. They need to set prices that balance demand and supply, or alternatively ensure that prices are set competitively in a decentralized fashion. And importantly, they have to maintain an adequate level of trust in the market, by developing mechanisms to guard against low quality, misbehavior and outright fraud.

In The Book of Arnold, I write,

In the 21st century, many of us shop on the Internet. How do I know that the biking gloves I order really have the padding that I want? How do I know that the retailer will send me the gloves that I order? How do I know that the gloves will not be stolen before they reach me?

When you consider these sorts of questions, you realize that our modern market economy is built on layers of trust. In order for trade to take place, individual beliefs, cultural norms, and formal institutions must be aligned to reinforce such trust.

The catch is that almost every mechanism for promoting trust has flaws and can be abused.

An Uninspiring Sentence

With its heavy Scandinavian population, Minneapolis is a key U.S. player in the most avant-garde movement in food today: New Nordic cuisine, based on fish, dairy and cold-weather crops such as rutabagas, mushrooms and radishes.

I’ve missed many a trend in the foodie world, and I can’t wait to miss this one.

From an interesting article on nine cities that supposedly have thriving start-ups in specific industries. My comments:

1. Minneapolis is cited as an exciting place for restaurant start-ups. I call baloney sandwich. If you are an exciting place for a type of business, the business has to produce tradable goods or services. Restaurants do not count. If you want to start a restaurant, do not go to a city where the main growth industry is restaurants. Go to one of the other cities instead.

2. Baltimore and Boston are cited for New Commanding Heights businesses–education and health care, respectively.

3. How does this story affect my claim that cities will be increasingly chosen for their consumption characteristics, not for their production characteristics?

Shake the Kaleidoscope

Josh Constine of TechCrunch reports,

Forbes is building a social networking app exclusively for these millennial leaders, which will launch at its 30 Under 30 Summit in Philadelphia on October 4. The goal is to stoke this community into somewhat of an alumni network that attracts more powerful youngsters to the Forbes empire. It will offer a directory of members, a feed where they can post social media stories or polls, and the option to message each other.

This ties in very loosely to something I have been thinking about, following a conversation with the UK’s Stephen Brien. That is, from a PSST perspective, what can be done to combat a recession? I talked about how World War II created new social ties among American servicemen, leading to businesses being formed by buddies who had met during the war. Stephen coined the expression “shaking the kaleidoscope” to describe doing something that might lead people to create new patterns of specialization and trade.

Experiments with new forms of social networking might be a way to shake the kaleidoscope. Is there a way to foster better connections between people in small-town Ohio and people in coastal cities? Between loud-mouthed sales people and quiet engineers?

When I started an Internet business in 1994, I kept in mind a documentary called “The Compleat Beatles,” in which early on the narrator says that “They were lucky, meeting the right people and playing the right clubs at critical moments in their careers.” This led me to try a lot of networking opportunities, hoping that I would meet the right people. Almost all of my efforts led nowhere, but two of them brought me my key partner and my key software engineer, without whom I would have had no chance. You could say that I shook the kaleidoscope a bunch of times, and a couple of times I got lucky.

Anyway, what I have in mind is not an app or a local happy hour. I am thinking in terms of in-person events that combine people from different backgrounds and different locations. Conferences sort of do that, except that people often have very similar backgrounds and many conference organizers put too much focus on speakers and not enough on creating opportunities for connection.

Suggestions welcome.

Teach Yourself

Tyler Cowen said,

But the second skill, and this is a tough one, is to be very good at teaching yourself new things. Right now, our schools are not so good at teaching this skill. The changes we’ve seen so far are just the beginning; 20-30 years from now, we’ll all be doing different things. So people who are very good at teaching themselves, regardless of what their formal background is, will be the big winners. People who do start-ups already face this. They’ve learned some things in school, but most of what they do they’ve had to learn along the way; and that, I think, is the future of education. I’m not convinced that our schools will or can keep pace with that; people will do it on their own.

Several months ago, I had this odd desire to recover some of the gymnastic skills of my youth. I soon developed rib-cage muscle problems, which I never had way back when. I ended up reaching out on Facebook for advice and going to YouTube for instructions on exercises that would help. Note that I could have taken a Yoga class, but that is not the direction I went. That may tell you something about the future of learning.

Possibly related: Gary Vaynerchuk on entrepreneurship. Right off the bat, he says he does not think that it can be taught. He says that the most important thing is to know yourself. It reminds me of what ‘Adam Smith’ (George Goodman) wrote in The Money Game about the stock market:

If you don’t know who you are, this can be an expensive place to find out

Vaynerchuk reminds me of my main former business partner. Lots of smarts (with zero educational credentials), lots of passion, lots of testosterone. Our partnership clicked because we aligned in terms of intuition and competitive drive, but it was a good thing that we were separated by thousands of miles. If you watch the video, let me know what you think, and see if you can identify/articulate what I find off-putting.

Hobbies: Narrower and Deeper

Karl Taro Greenfeld writes,

By any measure, participation in the game is way off, from a high of 30.6 million golfers in 2003 to 24.7 million in 2014, according to the National Golf Foundation (NGF). The long-term trends are also troubling, with the number of golfers ages 18 to 34 showing a 30 percent decline over the last 20 years. Nearly every metric — TV ratings, rounds played, golf-equipment sales, golf courses constructed — shows a drop-off. “I look forward to a time when we’ve got the wind at our back, but that’s not what we’re expecting,” says Oliver “Chip” Brewer, president and CEO of Callaway. “This is a demographic challenge.”

I forget how I got to the article, but I think I started with Instapundit somewhere.

In any case, I have probably remarked before on what I see as a trend for hobbies to get narrower and deeper. That is, fewer people do X, but there are more people deeply involved in X. X could be following professional baseball, playing bridge, playing golf, or what have you.

I think that hobbies are getting deeper because the Internet gives you more ways to go deeper into a hobby. You can get better at it by watching YouTube videos. You can learn more about it by reading stuff on the Web. What happens is that fewer people try to learn to play guitar, but the people who do play will tend to be pretty good at it.

I think that hobbies are getting narrower because (a) there are more choices, so people who might otherwise have done X will now instead do Y; and (b) because people are getting deeper into hobbies, this tends to discourage the more casual participant. Baseball was hard enough to understand before all the new statistics concocted by the sabermetrics nerds. Twenty years ago, I used to joke about “tournament folk dancing” to describe an especially difficult folk dance session. Now, the phrase could describe most sessions.

In any case, I would not bet on golf or any other hobby experiencing a persistent increase in its casual user base.

Do Not Code Your Business Rules!

Sorry to be somewhat off-topic as far as economics goes. This is another one of my biases about systems development–not that I am a qualified professional at it. But on an earlier post, a commenter wrote,

code sent messages to customers by e-mail, phone, text, etc., for flight notifications (on time, late, cancel, gate change, etc.). Just for frequent flyers, the decision making on whether to send a message that a flight was delayed ran past 1000 lines of code. It depended on whether messages had been sent before already, plus results from multiple databases with customer contact details, timezones, whether the flight was a connection or originating, time-of-day, saved preferences, plus legal issues such as whether the customer had triggered telco opt-out for text messages.

My claim is that none of that should be written into computer code. Instead, think of a list of conditions that might trigger a message. Put those into a database and write code that constantly checks against those conditions. Then think of a list of conditions for sending a message by phone, a list of conditions for sending a message by email, etc. Put those into a database, and when “might trigger a message” is true, check these conditions and if they are satisfied, send a message.

My point is that business rules should reside as much as possible in data, not in code. That way, you know where they are, and you do not have the maintenance problems that come with large amounts of code.

One of the advantages I see in rewriting software is that you take the business rules that have crept into the code out of the code and into data.

When Will the Cable Business Model Break?

Kathleen Madigan writes,

In the inflation gap between goods and services, one of the biggest chasms is between the price of a television set and the accompanying cable bill. In the past five years, the price of a new TV set is down nearly 58%, while the cable bills have risen nearly 14%.

Her article cites the higher prices being charged by content providers, such as ESPN.

My household is providing a subsidy to cable TV. We don’t watch it, but it comes bundled with our Internet service. When will the cable TV model break, so that it can no longer extract so much revenue? Some possibilities.

1. Never. My household is an outlier. Other households are getting ever-increasing value from cable TV, and they will gladly pay more for it.

2. Never. The business model of bundling is sound when there are high fixed costs, as in wiring up a community.

3. When enough spectrum is freed up that consumers like me start to get rid of cable and rely solely on wireless.

4. When enough consumers shift toward Internet-based entertainment.