Robert Peston highlights a nice, rather knotty, little economics problem for Arsenal Football Club . This conundrum highlights a number of areas of economic theory: Generalised agency problem . The interests of the different stakeholders in the club all, potentially, conflict with each other. The fans want maximum money spent on good players so they have a chance of winning something for the first time in years. The management of the club want (I guess) stability and a profitable business, which probably means accepting a lower probability of sporting success. The different shareholders want different outcomes: Usmanov may want an equity issue because, with more cash available than the other shareholders, it would probably allow him to increase his stake. Other shareholders want to preserve their stake relative to him, so they are less keen on the increase in investment. The players and manager presumably want to be successful on the pitch, well-paid and - in Wenger's case - to hav...
Rory Sutherland's new book Alchemy: The Surprising Power of Ideas that Don't Make Sense continues his 10-year campaign against the traditional, logical pursuit of business advantage, through a scientific lens that includes several cognitive economics themes. As ever, a curated series of amusing anecdotes about people or companies who took an unusual angle on marketing or product invention, fuel a philosophical wander. That philosophy could be summarised as: if it makes sense, someone's already tried it. So try something that doesn't . The ideas that underpin the book are broadly based on behavioural economics and cognitive science, with bits of evolutionary theory, statistics and old-fashioned advertising intuition thrown in. At first it doesn't look like a behavioural science book as such: the theoretical backbone takes a while to show. Rory's style is discursive: an after-dinner-talk of anecdotes, dismantling of conventional wisdom, ever-so-slightly outr...
Chris Dillow says that there may be: ...a structural dearth of investment opportunities; even in the boom of 2007, firms had a large surplus. If this is the case, then a permanent large corporate surplus means permanent large government borrowing...government borrowing is - to a large extent - out of the government’s hands. But this is an odd argument. It starts from the premise that: government borrowing + corporate borrowing + household borrowing - net foreign lending = 0 Which is true, because by definition these things must add up. From this, Chris infers that the government has no control over its borrowing, because after corporates, households and foreign investors have made their choices, the government will be stuck with whatever's left over. This is untrue, however. It implies that all other actors have free choice and the government has none. In fact, the levels of borrowing are a negotiation between all the four parties in the above equation. Imagine a simpler e...
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