Sunday, April 26, 2015

Armen Alchian, Golf, High Status Jobs, and Longevity [Also, Paper: "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process"]

The paper is "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process" [pdf] and it has some good thoughts about contracting between (or vertical integration of) oil producers, pipelines, and refineries; or of coal mines and power plants.

Appropriable quasi rents exist in specialized assets of oil refineries, pipelines, and oil fields. This leads to common ownership to remove the incentive for individuals to attempt to capture the rents of assets owned by someone else.

Suppose several oil wells are located along a separately owned pipeline that leads to a cluster of independently owned refineries with no alternative crude supply at comparable cost. Once all the assets are in place (the wells drilled and the pipeline and refineries constructed) the oil-producing properties and the refineries are specialized to the pipeline. The portion of their value above the value to the best alternative user is an appropriable specialized quasi rent. The extent of the appropriable quasi rent is limited, in part, by the costs of entry to a potential parallel pipeline developer. Since pipelines between particular oil-producing properties and particular refineries are essentially natural monopolies, the existing pipeline owner may have a significant degree of market power.

These specialized producing and refining assets are therefore "hostage" to the pipeline owner. At the "gathering end" of the pipeline, the monopsonist pipeline could and would purchase all its oil at the same well-head price regardless of the distance of the well from the refinery. This price could be as low as the marginal cost of getting oil out of the ground (or its reservation value for future use, if higher) and might not generate a return to the oil-well owner sufficient to recoup the initial investment of exploration and drilling.
Some other good examples, including mine-mouth coal plants, or specialized dies for auto manufacturers.

One of the authors was Armen Alchian who just died in 2013 at age 98. From wikipedia:
"[T]he Alchian–Allen theorem[,] colloquially known as 'ship the good apples out,' states that when output varies in quality, the lower quality output is consumed nearby while the higher quality output is shipped long distances. The reason is simple: transportation costs vary with the weight and bulk, but not the quality, of that which is transported. The added per-unit amount decreases the relative price of the higher-grade product."
Alchian's textbook Exchange and Production sounds worthwhile:
"Because of its literary quality and complexity, the textbook generally did not work with undergraduate or even M.B.A. classes."
I've been fascinated recently by the longevity of men with high-status, intellectually stimulating jobs. Charles Munger (still doing Q&A in public at 91), Judge Robert Patterson (who died last week, at 91). I'm sure it didn't hurt Armen Alchian that he lived in LA and had a flexible schedule for golfing:
"Alchian was an avid golfer throughout his lifetime. He rose very early and teed off at day break at nearby Rancho Park Golf course for an early morning round of golf. He still arrived at the office before many of his colleagues for a full day of work. When he traveled to conferences around the world, his golf clubs accompanied him. In his eighties he could look at his collection of golf score cards and describe the holes he had played on many of the courses he enjoyed."
It's sort of like how Tyler Cowen gets to eat all over the world because of economics conferences. Except a round of golf is better for you than eating deep fried chimichangas from three different street food vendors in one day.

The more, the more. If you're smart and manage to be high-status, you'll live a happier and longer life and accomplish more.


Anonymous said...

I don't know how high-status Brooklyn Law is, but this guy's doing okay:

Brooklyn Law School Professor Joseph Crea turns 100

whydibuy said...

Old news.
You only have to look back over history to see that longevity was strongly related to wealth and status.
During the black plague, it was the poor who suffered the most as the wealthy elite moved out to the country. And then they made laws such as having the family of a afflicted person be shut into their home with the sick guaranteeing the demise of all.

CP said...

Thinking about the Alchian–Allen theorem - imagine how good the single malt scotch will be on Mars!

CP said...

Charlie just did another Q&A for 2,000 people at age 95:

(Although sounds like he's getting a bit repetitive.)

CP said...

Retiring at age 98:

After 53 years as a federal judge in Brooklyn, Jack B. Weinstein is retiring.

CP said...

Academic economists seem to live a long time:

You can find Vernon Smith hard at work at his computer by 7:30 each morning, cranking out 10 solid hours of writing and researching every day. His job is incredibly demanding — he is currently on the faculty of both the business and law schools at Chapman University. But the hard work pays off: Smith’s research is consistently ranked as the most-cited work produced at the school — a testament to his ongoing academic influence and success. He manages his job and research work while also coauthoring books and traveling around the country to deliver lectures. It’s a remarkable level of productivity, made all the more remarkable by one simple fact: Vernon Smith is 96 years old. Smith, who was awarded the Nobel Prize in Economic Sciences at the tender age of 75, says he feels the same passion as he did then, and even as he did when he embarked on his career more than seven decades ago.

CP said...


I suppose luck and genes can make a difference. Still, let me look over my own family:

step-mother's grandfather, age of death 104, sharp until the last couple months: a deeply religious man who had worked in the ministry his entire life, had long passages of the Bible memorized, maintained a 1/2 acre garden and went on a daily walk up almost until the end, frequent domino/card player, lifelong teetoler

paternal grandmother, age of death 92: sharp until the last day, deeply involved in local Catholic church, talked on phone to every one of six children near daily, daily 30 minute walk, occasional glass of wine

maternal grandmother and grandfather, age of death 91: died within weeks of each other, grandfather sharp until the end, grandmother some mild cognitive decline in last 3-4 years, both took daily walk, highly involved in community, 1-2 glasses of wine with dinner 2-3 times per week

step-father, age of death 71: years of early-onset dementia, favorite activity was watching TV, a good day was if he only had 3 beers, usually 5-6, exercised by mowing lawn once a week and very occasional (boozy) round of golf

I could go on. Yeah, surely genes and luck are involved, but from what I see, exercise, lifestyle, involvement in community and church, and moderation in alcohol and diet really outweigh that.

I think there is definitely such a thing as "successful aging." Instead of taking offense, it'd probably be better to learn from good examples.