Time preference

If something that you want to buy will cost cheaper if you wait for a couple of weeks or months, are you willing to wait?

Of course, the answer is not obvious. That depends on many things; whether you still have the money, whether the thing will still be available, how urgent do you need it now (or, how do you value the goods later), and - for sure - how much cheaper will it be. In many occasions, we will still buy the goods immediately. I need a new laptop now, so it doesn't matter if next year it will cost much cheaper. The text book will surely cost cheaper by the end of the semester, but by that time I will have failed the subject. I am desperate to know the ending of Harry Potter's saga, so I don't want to wait for the soft cover version.

So, I don't have to be puzzled when reading this story. But still, I was amazed. Come on... De Jong, for GBP17m when you can get him for GDP2.3m? But then, this what happens when you have an owner whose money pit is bottomless, but you are not certain whether you will not be relegated by the end of the season.

Footballnomics #10: will protection work?

UEFA just imposed the so-called "home-grown rule", which forced Champion League teams to have at least eight home-grown players. At least four must have been produced by their own academy, the other can be graduates from other local academy. This is a version of imposing nationality requirement. Under EU ruling, workers (including footballers) from EU member countries are treated as locals. So it will be illegal for UEFA or local FAs to force clubs to have a certain number of local players.

This article, and the related discussion thread, reminds me on the classical free trade vs. protection debate. Free traders argue that protection will reduce overall competitiveness. The other side of the camp argue that some kind of protection will serve as incentives for local business (clubs) to invest more.

In the case of football, I must say, both camps have valid arguments. However, we can not assess the impact now - maybe in two World Cups. Historical data doesn't help provide conclusion as there are mixed results. Italy's youth development system is pretty solid, and it is translated to the national team's achievement. The Netherlands also have a good system (Ajax and PSV are well-known as producers of young talents), but they never won any World Cup (I know, the won the 1988 and 1996 Euros). On the other hand, Brazil and Argentina's system are not better than the Europeans, but they have abundant skilled talents to guarantee the national teams always perform well. Same thing can be said for France.

If we talk specifically about England, well, the problem lies on the input. The average talents of children entering the football academy (at the age of 10-12) is poor, according to an article I once read. I don't know what the reason is. This just illustrates that such 'home-grown' protection may not help countries like England much.

In other words, protection doesn't necessarily help a country in globalization.

(Perhaps the only) post on Euro 2008

If you wonder (I doubt you'd wonder) about the lack of post on Euro 2008, these are the reasons. Ujang is busy with the new wave of IFLS. The absence of England make me a neutral without much passion in analyzing the game. And, thanks to the MNC group (RCTI, TPI and GlobalTV) for still refusing to join Astro, and the quality of their signal in my neighborhood, I am unable to watch the games live so far. Forget Aco, Rizal and Sjamsu, they are hopeless when it comes about football.

But I try to do a different thing with my 'Euro 2008 from Huntington's Clash of Civilization perspective' series here.

A side note: having four Liverpool players in their side gives me a strong reason to support Spain. Second on my list is Holland (thanks to Dirk Kuyt's presence). Also, I have reason to cheer on Portugal defeat to Germany: because two MU and two Chelsea players are in the team.

On Fears for Free Trade

Tyler Cowen argued that:

What’s really happening is that many people, whether in the United States or abroad, are unduly suspicious about economic relations with foreigners. These complaints stem from basic human nature — namely, our tendency to divide people into “in groups” and “out groups” and to elevate one and to demonize the other. Americans fear that foreigners will rise at their expense or “control” some aspects of the economy.

Dani Rodrik retorted:

So the "us" and "them" characterization that Tyler attributes to irrational nativism perhaps has more to do with the absence of a common set of international rules on labor standards, environment, consumer safety, and so on.

Now, an anecdotal evidence from the English Premier League (I know Rodrik roots for ManU, and I Arsenal -- not that this fact's important though), on foreign players' impact on the three-lions national team performance, its Chairman said:

Does the Premier League hurt the national side? I think the answer to that has got to be yes.

What is more common than football's set of rules and standard? Yet, this Englishman prefers to blame those non-Britons players for the lousy performance of its national team that even doesn't qualify for Euro 2008 final round.

I can not imagine the EPL without foreign players.

Why people support a team?

At Diskusi Ekonomi, I use voter's behavior analysis to discuss how far incentives can explain the behavior of an agent. From my very short reading list of political science literature, there are some models to explain one's decision to vote for a specific party or candidate:

• Proximity of class, demographic, religion, ideas or other characteristics.
• Psychology -- if one grew up in a Muhammadiyyah, NU, Sukarnoist or Peronist family or neighborhood, then most likely I will vote for PAN, PKB, Megawati or Kischner.
• Rational choice -- a voter calculates the cost vs. (expected) benefit of giving his/her vote, and use the act of voting as a strategic behavior (reward or punishment).

I wonder if this framework can also be applied to explain why someone becomes a devoted supporter of a football team. Even if the team is, well, a low-achiever. Yes, yes, I admit, I am talking about myself and why I still support Liverpool, despite they are close to two decades without winning the league (two FA Cups, three League Cups, one UEFA and one Champion's League trophy may be consolation prize).

Clearly, the rational choice model doesn't apply very well here. I don't know what I could gain by sticking to them, except for pure satisfaction.

Nor does the proximity model. I am not from Merseyside, so I don' support them based on regional identity (unlike my support for Persib Bandung). And the team doesn't resemble any class, religion or any identities. Some teams may still do -- look at the rivalry between Lazio and AS Roma; Glasgow Celtic vs. Rangers; Napoli or any Sicilian teams vs. the Northern Italian teams.

That leaves me with only the second explanation: psychology. It may be true. I started watching football when I was a kid, they were the strongest English team, and one of the strongest in Europe. Being a new comer, naturally I picked the current champion at that time (my family was not really a football lover, so I didn't inherit the choice from my dad or anyone). And the choice remains the same until now.

Hey, that's the different between fans and supporters, isn't it?

Footballnomics #9: are foreigners to blame for England's failure?

Not surprisingly, England failed to qualify for Euro 2008. They should just simply accept that they are not good enough. Blaming the failure on the huge influx of foreign stars is clearly out of the line. Neither will imposing a cap on the number of non-English players will help. I agree with Arsene Wenger in this case.

For one, the English team have never been great. Before the EU single market that revolutionized the football transfer market in the early 1990s, when there were only three foreign players allowed to play, England never won anything except the 1966 World Cup (the only trophy they have ever won). So the number of foreign players in the English League can not explain the national team's performance.

And remember, the EU open labor market also applied to the other countries. Foreign players have been coming en masse to France, Germany or Italy. Yet these countries won the 1998, 2002 and 2006 World Cup respectively (Germany also won the European Cup in 1996, and France in 2000).

Some people argued that foreign players have limited the chance of English players to play or be recruited by top teams. That is simply because English players are too expensive, given their (average) quality. To judge the quality of English players, just look at how many Englishmen play in the continent at the top leagues. Currently, none. At its peak, four (Owen, Beckham and Woodgate in Madrid, Hargreaves in Bayern Muenchen; altogether, only them plus Gascoigne and Ince in the 1990s who have ever played abroad).

Italy can have a stronger team because their best players can still outcompete foreigners in Serie A. The French League, on the other hand, is less competitive than the EPL, Serie A or La Liga. There are a lot of foreigners, mainly from Africa, in the French League. But the best of French players are good enough to be the best players in England, Italy or Spain.

In short, the Englishmen can not blame globalization for their crappy performance. Globalization brings competition. It exposes the country's weaknesses that come out because of domestic problems.

Update: I forgot to mention David Platt and Steve McManaman as the other English players who have played in the top European Leagues in the 1990s. Also, Kevin Keegan did it in the early 1980s.

Footballnomics 8: Who wants to pay to watch EPL?

There is currently a discontent among the English Premier League (EPL) watchers as this season the broadcast rights are owned by Astro TV, a new subscription-based TV. That means, those who only have access to free, network-based local TV won't be able to watch the games. Even for those who have access to other paid channels, like me, are upbeat because it is still unclear whether Astro will block ESPN/SkySports broadcast in other channels.

The problem began when the former holder of the rights, Trans7, decided not to continue broadcasting EPL. That was in spite of them having the first option to extend the rights. As I happened to 'work' for them, and personally know some people in the EPL production team, the new management does not consider EPL as profitable. (You may recall that Trans7 was formerly TV7, bought by Trans TV in August last year).

"The broadcast rights are very expensive, and we have to purchase all games as a package," my friend explained.

"That means we have to pay for 'small' games or games played in weekdays. Compared with the revenue from our sponsors, the margin is not that big. We showed EPL games mostly for image, not financial reasons," he added.

That means, the management thinks that it would be much profitable to allocate the weekend prime time slots for, let's say, broadcasting Hollywood Blockbuster (lower costs, same revenue, means higher profits), or another 'Extravaganza'-type program (higher revenue, similar costs, also means higher profits).

But that means we, the consumers are losing with this kind of business, aren't we? True -- it hurts my type, and other EPL-watcher type, of consumers. What about the other customers? Well, just see how much we are willing to pay to have EPL in our TV.

The thing is, in the non-paid networks, consumers' willingness to pay is irrelevant. Because we don't pay the station to broadcast the program we like. It is the sponsors. But the sponsors' decisions are based on consumers' willingness to pay for the products (how many cigarettes you'd buy after watching the game, how many SMS you'd send to join the quiz, etc.). Or, at least on the consumers' willingness to watch the program (e.g. via the rating system).

True, EPL watchers are fanatics, football lovers. But unfortunately that is not translated in substantial willingness to pay for watching the games. Many would be willing to pay high for a Liverpool-MU match. But who wants to pay to watch a Wednesday midnight match between Charlton and Watford? Who wants to pay to see ME commenting on that game (I may have to pay you to watch it!).

Things may be simpler if the TV can buy the match rights-per-show. So the TV can charge the consumers or sponsors only for the selected matches. However, the fact that the rights are sold in a bulk make the discussion irrelevant.

As a paid-service, Astro can then translate the consumers' willingness to pay into actual financial revenue. The fact that you'll have to pay a flat rate regardless of your match preference reflects the cross-subsidy from prestigious matches to the smaller ones. (Cross subsidy also comes from Astro customers who subscribe for non-EPL reasons).

For EPL lovers, the choices are:

1. If you consider the subscription charge worth all matches that will be shown (or even only for a fraction of matches you'd plan to watch), then it's worth subscribing.
2. If you are willing to pay only for selected matches, then watch them on the nearby pubs. Make sure that your expenses do not exceed the monthly subscription rate you'd have to pay instead.
3. If you can identify who else are pissed off with this decision, you can coordinate and collect money among yourselves to buy the rights, then give it to a local TV network (or subsidize the TV station). I personally like the idea. But definitely I would free ride on your efforts.

Note: a similar situation happened when my favorite radio, M97 FM, ceased to exist. Classic rock lovers are a cohesive group and highly fanatics. But as long as it does not translate into willingness to pay (or, indirectly, willingness to pay for sponsors' products), that will be irrelevant.

Update: Rara's anticipating the new season of EPL...

Footballnomics #6: Fabio Capello

We've already seen some turnovers in the manager jobs. But nothing is more dramatic (this year, at least) as the sacking of Real Madrid's Fabio Capello. To be honest, I don't really know whether it was the club who sacked him, or was it Capello himself who wants to quit, or was it a mutual agreement between the two. Newspaper reports suggest that it was the club that took the decision (like this one, which used the word 'axed' in its title). Furthermore, the decision was taken while Capello was on vacation in Tibet, so no words from him are available yet.

Capello's departure seems to be a strange decision, given the fact that he brought the La Liga title in his first year (well, his first year of the second term at Madrid). But then, just like players, the manager job market is not like a standard labor market. So we need more than the standard labor economic analysis to understand what happens.

As Leo Tolstoy once said, "All happy families are alike. All unhappy families are unhappy in their on ways." All happy, job-secured managers have these conditions met: have a good relationship with the club, players and supporters, and is able to achieve the expectations of the club's stakeholders given the budget. With the exception of Jose Mourinho, Lose one of these conditions, and most likely you are heading somewhere.

That, perhaps, what happened to Capello. In the basic principal-agent setting, a manager is an agent acting on behalf the principal, who has some certain objectives. One may think that bringing the league title means that the objective is met. True, if it is the (only) objective. Looks like Madrid's board of directors has a greater set of objectives in their mind, which Capello could not deliver:

• A Champions League title
• Higher revenue (losing Beckham means losing a big source of revenue)
• A certain type of 'style' in playing football
• The directors' health. The board may be forward looking. If every year the title has to be won in the very last minutes, it would be bad for their heart condition, and the club's financial position if they have to pay the medical benefit. After calculating this potential expenses, even after considering the club's obligation to pay Capelllo's GBP 4m annual salary for the remaning 2 years of his contract, it is still beneficial for the club to terminate the deal.

However, having sacked seven coaches in four years (including Capello's first term), one should wonder what the principal's objectives are, if any.

Footballnomics #5: transfer market

The English and most other European top leagues are going into summer hiatus. Now the activities and attentions switch off the field: transfer market. No World Cup or European Cup for clubs to do their window shopping, so most player buys will be based on mostly last season performance.

Football transfer market has been subject to many criticism for the past few years because of the inflated players' value and wages. The late Pope John Paul II once raised his concern that a football player can earn up to GBP100,000 per week, while millions of people in the world are still living below the poverty line. Forgive them, Father, for whatever sin they have committed.

Apart from that, explaining (or modeling) the transfer market is indeed a challenging task. What makes a club willing to pay GBP20m or more for a player (and pay him another 100k a week)? The player market is different from the regular labor market. It does not deal with labor with homogenous characteristics. It is rather a monopolistic competition market because each player have a monopoly over his skills that distinguish him from other players, which are observable by clubs. In the standard labor market, each workers have different skill. But firms can not observe each individuals, so they look at the pool of similar workers, and the market wage is the average earning of an average worker. Consequently, we cannot exactly draw the market demand/supply curve for player. (Therefore, it is more relevant to compare player market with the market for executive or other professionals).

So, again, what determines a player's transfer price and wage? The first and foremost is, of course, skill. This is very observable. A striker is judged by his goal tally; a midfielder by assists or passes completed; a defender by tackles; a goalkeeper by number of clean sheets or saves. Number of caps can also be another measure. There are also subjective measures like 'work rate' or 'contribution to team's success.'

A second factor is how far does a player have before his contract expires.* Obviously, when a player is closer to the end of his contract, the options for the club is either sell him in discounted price, or receiving nothing when the player decides not to extend his contract and becoming a free agent.**

If you think of a wage regression model, you may want to add a third thing: dummy variable for British player. For no obvious reasons, British players tend to be overvalued. Aston Villa just paid GBP7m for West Ham's Nigel Reo-Cooker, and Newcastle paid GBP5.5m for Man City's Joey Barton, and they don't even make it to the senior national team. The price of British youngsters are also inflated. That explains why most managers prefer to look for youngsters from the continent. And the English FA officials are complaining that the national team is suffering from the under-representativeness of English players in the top teams?

Some purchases are speculative. For example, youngsters are valued by their 'potentials for success' although they are yet to have established record. Players like Wayne Rooney may, up to know, justified their values. But no one knows why in the hell that Arsene Wenger was willing to pay GBP12m for Theo Walcott. (To be fair to Mr. Wenger, his buying record was excellent. But he made some blunders like Francis Jeffers a few years ago). Some players are skillful but injury prone. Newcastle paid GBP15m for Michael Owen who spent most of last season on the treatment table. Success in a country's league does not mean a replication in the other country's (Andriy Shevchenko, GBP30m from AC Milan to Chelsea). Some players are skillful but have off the field antics. And so on.

And some players are bought for partly non-footballing reasons. Think about the Asian players in the European leagues. Why do you think the reason Real Madrid bought David Beckham? And the motive behind Beckham's move from Los Galacticos to L.A. Galaxy?

Then, we can not ignore the role of agents in determining players' moves, transfer prices and salaries. Not that agents are bad. They do reduce searching costs, so players and managers can concentrate in training while their agents do the dirty work. Nevertheless, agents are also allegedly contributing to the players' inflated prices, although they do it legally. Well, some don't do it legally, like the recent allegation of transfer 'bung' involving Wimbledon FC.

Speaking about agents, I recently had a chat with an Indonesian sport journalist. According to him, transfer bung are very common in the Indonesian league. Here how it works. An agent offers the manager a deal to purchase a player he represents, and promised to share the transaction fee (or part of the player's monthly salary). It's the standard principal-agent problem since it's the club money, not the manager's. That's why we see a lot of foreign players with almost zero quality in the league (one player was a plumber in his home country).

Note:
* According to the Bosman rule, 6 months before his contract expires, the player can sign a pre-contract with the new club. That's why when clubs want to keep their star players, they must negotiate a new contract when the players are as far as 2 years away from the end of their contracts. If the negotiation collapse, the club at least will be able to sell the player at the beginning of his final season.
** If the club gets a player for free, that means the club has more money to increase the salary. Hence, we see many 'free' players have higher salary level.

Moving out and the end of the world cup

Dear visitors,
As my love affairs with Cambridge, MA has come to an end, I am now moving back to Jakarta, Indonesia. Well, actually I am already in Jakarta. As you may guess, the moving business is a hectic one. That, hopefully, can explain my absence.

For now, I'd like to request the manager to play 'Massachusetts' by the Bee Gees:

... and the light all went down in Massachusetts...

followed by Koes Plus' 'Kembali ke Jakarta':

... ke Jakarta aku kan kembali
walaupun apa yang kan terjadi...

Please note how the two songs are similar in their composition. See how the former influenced the latter.

On the World Cup thing -- Italy won it. Yes, whatever. For me, the World Cup has finished when England uncharacteristically lost to Portugal. (For Ujang, it ended even earlier). The English public liked to put the blame on Christiano Ronaldo. But I'd prefer to tell Sven Eriksson "I told you so...!" Now, do you agree that Gerrard and Lampard are at least non-complentary, Beckham's too slow, and Rooney can't play as a lone striker?

Overall, it was not the best competition I've ever seen. No thrills, low average goals per match, unimpressive display by supposedly star players. Even the top scorer only scored five goals, lower than the past few Cups.

So bring on club football -- domestic league, Champions League, UEFA Cup, Copa Libertadores, Toyota Cup etc.

Academic Life World Cup

Footballnomics: exception #2

Q: What is 'Incemental Capital-Output Ratio' (ICOR) and what does the number explain?

A: Simply, ICOR is the ratio of investment to output. If the number is high then the economy requires a big amount of investment to produce a certain output level . Hence, high ICOR constitutes inefficiency.

An example of high ICOR is: Ghana. They produced a lot of shots on goals, but did produce any goals against Brazil. Other example: Holland in Eur0 2000 when they were defeated by Italy in the semifinal, or Manchester United's Andy Cole a few years back.

World Cup

Footballnomics: exception #1

OK, I said earlier that I don't like mixing football and economics. But this is a minor exception.

Q: What is an example of 'substitution goods'?
A: Steven Gerrard and Frank Lampard.

Q: What is the example of 'complementary goods'?
A: One of either Michael Carric or Owen Hargreaves to either one of Gerrard and Lampard.

Q: What is an example of 'non-increasing return to scale'?
A: Having: 1) a 31-year old David Beckham, and 2) Frank Lampard. OK, Beckham is truly the best crosser and deadball specialist. But he makes it up by slowing down the game. He can't pass an opponent and are often easily beaten. Virtually, most of England's threat came from the left. And Lampard -- his passings are awful, and he baloons the ball too often. And worse, he's a Chelsea player!

Q: What is an example of 'opportunity cost?'
A: By dropping Beckham and installing Aaron Lennon in the right wing, how many potential goals should England sacrifice, vs. the potential of getting more goals from the change in style.

Q: What is an example of 'sunk cost?'
A: Eriksson's decision to bring 2 half-fit, one nonprolific and one inexperienced strikers. (Now as Owen is totally injured, he's left with 3.

World Cup

Some World Cup-related pieces

As always, during the World Cup month, productivity always declines. But the manager has threatened to cut our paycheck if we don't deliver. So this is just some updates.

When I wrote this entry, Ujang is suffering a severe depression in New Haven after the Holland team had to go gome early after controversially get defeated by Portugal. I was only relieved after England unimpressingly beat Ecuador. Well, that means two thing: 1) England don't have to play against Holland in the quarter final, which may incite a cold war between Ujang and I, and 2) from now on Ujang will be at the same side as me in supporting England. The good thing is Germany and Argentina -- two of the biggest England's nemesis -- will have to eliminate each other.

So far, the only surprises in this Cup have been the advance of Socceroos Ghana advance the second round (and the Checz Republic early exit). Like England, Brazil, France and Italy have not been too impressive. Germany is surpisingly playing good attacking football, and I'm no Germany fans! The same thing with Argentina.

World Cup

Footballnomics: Is it Going to be on the Menu?

OK - it's the World Cup month. That explains why Ujang and I who are football-maniacs and can boast to have been members of the FEUI football team (not that it's something to boast about, really - we were crap!) have been too quiet. Yes, unlike some colleagues (like our European friends in Kafe Depok, for example) we don't really keen on capitalizing the World Cup fever by offering special menu on footballnomics or econofootball.

Why not? First, in an after hours discussion among the Cafe Salemba bloggers, we felt that multidisciplinary discussions are not always useful in practice. That says, economics may not be improved or better-off by using football analysis. But more importantly, football in itself has already been interesting. Much more interesting than economics. Other than vanity ,analyzing football game using economics approach will make it be boring.

Second, the aforementioned hosts will be so busy following the World Cup that they won't have time to think about all of those cute references they always seem to find. Their posts will be pretty much like this.

Third, we have to admit there's already a number of excellent blogs with footballnomics posts out there. See for examples here, here, here, or here, In short, if you really need your footballnomics fix, there are plenty out there.

Fourth, the Manager keeps reminding us that when we did talk about footballnomics (examples are here and here), the responses were okay. But when we talked about life's other distractions such as food, raunch, polygynous marriages, and of course stupid economic policies, the responses were much better.

So, there you go. The Cafe will be a place for those seeking reprieve from the suffocating fever that is the World Cup. Sick of the World Cup? Come to the Cafe! Some of you will probably say this is just a clever ploy to bring in more female readership. We categorically deny the accusation.

Note:
1. Ujang contributed to this post. In fact, he was the one reminding me that we were once players -- crappy players, so we chose to become economists instead.
2. It's football, not soccer. That is a political statement.

Footballnomics

(Just another) reason to love football, not baseball

Am now reading this interesting book. Love to read the passage (pp.3-4):

U.S. sport leagues are closed. Team owners carefully control the number of franchises and their locations. Generally, each team is granted a monopoly over a given territory. Teams extract substantial public subsidies for their facilities. When leagues expand, existing owners charge a handsome entry fee to new owners. Limits are set on roster size. Leagues benefit from a variety of antitrust exceptions.

In the English model, leagues are open. In each country where soccer is played (save the United States), there is a hierarchy of leagues. Poorly performing teams from higher leagues can be relegated to a lower league, and strong teams from lower leagues can be promoted. New teams can enter leagues at the bottom of the hierarchy without paying an entry fee to existing owners and work their way up to hugher leagues. Teams are not conferred territorial monopolies and usually can not extort public subsidies from local governments to support facility construction.

Well, monopoly, high rent suprlus and limited competition on the one hand, versus greater competition and lesser rent surplus on the other hand. As an economist, I know which one to choose...

P.S. I made another entry regarding this book in "A Gallery of Mind."

Soccer and game theory

Had a discussion in the FEUI mailing list with an old friend about game theory. One of the discussion points was whether there is such thing as a 'mixed strategy' in the real world. He argued that no, there is no rationales for any agent in the real world to randomize between strategy. I argued that such thing is possible (remember my piece on Argentina-IMF in 2001), quoting this interesting paper.

In a personal conversation, he insisted that basically the penalty takers are not really randomizing. "They won't kick the ball backward," he replied. I replied back, saying that kicking backwards is NOT a strategy -- it's not in the payoff matrix -- therefore we don't have to bother considering such option.

Anyway, talking about penalty kick, last month Arsenal's Robert Pires found another strategy: instead of kicking directly into the goal, he instead PASSED the ball (yes, from the penalty spot) to Thierry Henry. That new strategy was not successful anyway -- so better to use orthodox ones next time. Yes, just try to kick it directly to the goal, either it to the left, right or center. As Bill Shankly once said, "If you don't know what to do with the ball, just put it inside the net. We can discuss the other options later...."

Speaking about penalty, again, still remember the sweet win in Istambul last spring... Priceless..!! (wave to Ujang).

Note: the paper I referred is A. Chiappori; S. Levitt; T. Groseclose, "Testing Mixed-Strategy Equilibria When Players Are Heterogeneous: The Case of Penalty Kicks in Soccer," The American Economic Review, Vol. 92, No. 4. (Sep., 2002), pp. 1138-1151.