What is the effect when universities go to the capital markets for seeking funding?

Oxford university plans to sell 100-year bonds worth £250 million; it will be the first time for Oxford university to turn to the capital markets. Due to the cut in government funding, more and more UK universities sell bonds in the capital markets. What would be the impacts when the capital markets become the major financing source of the higher education sector?

Universities have several functions, and the two major functions are educating students and conducting research. Both functions can be sold; however, for universities, their products are not like ordinary goods or services that can be sold freely in the markets. For example, students pay equally tuition fees to receive education when they meet the entry requirements (ordinary goods and services do not requests buying permits from their customers). Moreover, the demand for research does not match the supply of research. The values of research are like the values of investment that the returns are uncertain, especially for theoretical reserch. This is why the demand side is more likely to demand more empirical research relatively. Theoretical research has lower private benefits but higher public benefits than empirical research. 

When universities enter the capital markets, the investors are more interested in the profit abilities of the universities rather than things like their reputations (of course, reputations can improve the profitabilities). Therefore, to improve profitabilities, unversities are likely to expand their sizes to seek more overseas students who pay higher tuition fees. Of course, receiving alumni’s donations is another source of financing; therefore, in the future, more and more universities’ facilities will be named after sponsors and students would become more selective and those who are more likely to make donations will be offered places first. Moreover, research of the universities would focus more on empirical research than theoretical research, as empirical research is easier to seek funding. In addition, the cooperation between universities and the business sectors would become more frequent.

There is one possible issue that due to the increasing influence from the private sector, the reports made by universities may lose their neutrality. 

The value of certainty

Almost a decade ago, many investors were afraid of the collapse of the Eurozone following the European supreme crisis; however, since th ECB and the German chancellor firmly supported the Eurozone and made a statement that they would do whatever necessary to keep the Eurozone, the fear in the market disappeared almost immediately. This is the power of certainty. Of course, some people made a gain due to this certainty announcement and some made a loss. 

Certainty has a value, and it is often calculated by measuring how much an individual is willing to pay to avoid a potential risk. In the real world, the prices of insurance could be seen as the market prices for certain uncertainties, for example, the value for paying for possible car accidents. So we pass our uncertainties to insurance companies, and the insurance companies also pass their uncertainties to others, so they find reinsurance companies. After several steps of insurance, the uncertainties do not disappear, they spread among the entire population. The idea is while we spread uncertainties wide enough, each individual bear less uncertainty. Although the prices of insurance are still the values of uncertainties, individuals bear more uncertainties than they actually realize. They do not only bear uncertainties that they want to pay insurances on or are willing to bear, they also bear the exogenous uncertainties due to the results of the uncertainty pooling by the insurance sector. This is the individual level of certainty value.

There is an aggregate value of uncertainty. If we assume there are always some people betting against all available states and everyone involves in the betting, then the total aggregate returns are unaffected by uncertainties, but the standard deviation changes due to uncertainties. However, from a longer time, the aggregate returns could change due to uncertainties, when we assume the marginal propensities of investment and consumption are diminishing, it means that the side which makes a loss due to uncertainties potentially produce more values in the economy than the side which makes a gain due to uncertainties actually produces in the economy, and the production gap is the value of certainty.

Should small and medium companies be given more funding and resources?

There are many governments that have made many policies to help small and medium businesses, especially in some countries, the majorities of their populations work in small and medium businesses. However, is it reasonable to encourage financial intermediaries to provide funding for the small and medium businesses above their previous levels?

Firstly, we have to assume that financial intermediaries make their financing decisions completely rationally. Once governments impose any policies, financial intermediaries still behave rationally, so in order to make financial intermediaries lift their lending (financing) levels, the governments have to increase the financial intermediaries’ possible profit rates or low the financial intermediaries’ risk levels. To increase the financial intermediaries’ profit rates, the governments can provide subsidies for the financial intermediaries when they lend to small and medium businesses. However, to lower the risk levels, the governments transfer some of the risks taken by the financial intermediaries to the governments themselves. Therefore, governments need to choose whether they are willing to bear more risks or expand their spendings. 

To conclude, when governments want financial intermediaries to lend more than they usually do, the governments have to increase the risks taken themselves and increase the budget deficits, which only involves large public costs.

What makes you impatient?

Some people are more patient than the others; of course, this could be caused by different people have different personalities. However, when living in different environments and receiving different education, people's personalities are more likely to be different. I would like discuss what factors make individuals impatient.

Firstly, what kind of behaviour is considered as impatient behaviour? Impatient behaviour is those who have to be done as soon as possible. Then why do people want to take such impatient behvaiour? It is because these people have large discount rates, which means the value they gain from tomorrow is significantly lower than today's value. Therefore, it is clear that to find out what makes people impatient, we just need to find out what enlarges the discount rate.

It is much more straightforward that there is one main factor that influences the discount rate, which is risk. There are two sources of risk. One source of risk directly impacts on individuals themselves. For example, if one individual believes that he or she is highly likely to die tomorrow, then his or her discount rate is very close to negative 100% that he or she does not care about the possible utility he or she can gain tomorrow. The other source of risk impacts on the individuals' targets. For example, if there is a hyperinflation in the economy, people are more likely to spend all their money today rather than to spend in the future. 

Therefore, when we see some people seem much more impatient than the people surrounding them, it possibly implies that these people have more sources of risk that directly impacts themselves.

How much wealthier will you feel when your house prices increase?

In economics, there is a belief that when housing prices increase, people would feel wealthier so they would consume more. This belief is usually used in policy making or to explain economic performance. Today I would like to discuss whether this belief could be explained based on microeconomics.

The important concept in microeconomics is that individual demand relies on two factors, price and wealth, (usually denoted as x(p,w)). If we only look at one time period, housing prices increase, the wealth increases, so individuals are likely to consume more. When we consider the aggregate demand, the population consumption will increase when housing prices increase. However, in the real world, we cannot only consider one period, when we are thinking about infinite time periods, we have to consider the changes in our wealth and the changes in prices, as individuals do not only make their consumptions on this period's prices and their net wealth, but they would also consider their future wealth and the prices in the future. Under such circumstance, the factors that influence housing prices increase. Moreover, considering the increase in wealth caused by housing price rise could be a temporary change or a permanent change in wealth. For example, in some large cities, particularly in China, the housing prices keep increasing over the time, such housing price rise could be seen as a permanent increase. Such change would cause one time permanent increase in individual's consumption; to generate more consumption boosts, it is necessary to have surprising increases in housing prices.. Of course, an one time increase in housing prices is a temporary change in wealth, this will increase individuals' consumption for only one period and in the next periods, the consumption will fall back to its previous level.

Therefore, the increase in housing prices could have impacts on consumption, but the effect is rather limited.

Street interview: the most unreliable reference

From TV programmes and some online media, we often see there are many street interviews which are used to support the media’s opinions or observations. Then here comes a question that how reliable these street interviews are.

My answer to this question is that street interviews are the most unreliable sources that you can trust. The major reason is street interviews have serious selection bias issues. Firstly, the population who are willing to answer street interviews, particularly those involve very sensitive questions, share similar characteristics; therefore, the interviewees are not randomly selected, the results generated by street interviews cannot reliably reflect the entire population’s opinions. Secondly, the interviewers usually conduct street interviews within limited regions due to cost concerns and other constraints, so the sample is selected based on their geographical characters. Thirdly, we do not know whether we watch all conducted street interviews or a selected sample of street interviews, and the media does not tell us either.

Moreover, many studies have found that the ways to answer questions can largely influence the interviewees’ answers to the questions. Therefore, it is possible for interviewers to design their questions to ensure they are more likely to get the answers they want. 

Since street interviews are so unreliable, when we are watching those, we should ignore the messages they send and focus on the data coming from a much larger and randomly selected sample.

What makes Japanese exports so special?

According to the latest report, Japan’s trade surplus rose by 21% in October compared with the previous month. In column terms, Japan’s exports increased by 3.8% on a year ago, and the imports increased by 3.2%. Despite the fact of a weaker yen, the increase in its exports to China is another important factor that caused such increase in Japan’s trade surplus. Japan’s exports to China rose 26% on a year ago, and the demand from China has been shown very solid and would continue to contribute the Japanese economy. Although Japan’s exports to other nations also increased that the trade surplus with the US increased by 11%, the enormous demand from China is a major drive of the Japanese economy. China is a large international exporter, and often referred as “the world manufacturer”; then what makes China demand so many Japanese products, even when China is a large manufacturer already?

In China, there is still a myth that foreign products, especially those from more developed countries, have better qualities than domestic products do. In Asia, the economies that are more developed than the Chinese economy may only be the Japanese economy and the Korean economy. When comparing the Korean economy and the Japanese economy, the Japanese economy is more diversified that the Japanese economy is able to provide all types of products and services while the Korean economy seems to be more specialised in several particular sectors. Therefore, if Chinese want to demand products from these two countries, the demand for Japanese products and services is much more likely to be higher than the demand for Korean products and services. Moreover, standing at the Chinese people’s position, when they are comparing products and services across the world, the Japanese products and services are more preferred than the Western products and services, this makes the Japanese companies more likely to provide products that better match the Chinese people’s preferences. The culture differences seem narrower. For example, both Chinese people and Japanese people love eatin sticky rice, so the Japanese companies are more likely to produce the right type of rick cooker for the Chinese customers. Moreover, Asian people look different from people from other races, in terms of height, weight and skin colour and etc. Therefore, especially for clothing, the Japanese companies are more likely to design products that fit the Chinese people than the Western companies. Such biological difference does not only have impacts on the clothing and fashion industries, it also plays a role in other sectors as well, especially when ergonomics is becoming more and more important in our product designs. Moreover, when more people like using Japanese products, according to herding effect, more and more people would like to buy Japanese products. There is another important factor that makes people like using the Japanese products. It is that Japan still has a culture of craftsmanship, that it is able to produce handmade unique products. Under today’s highly industrialised environment, craftsmanship becomes an attractive selling point that matches the nature of people that we like to be different and unique from others.

However, it does not mean that the Japanese economy has no worry. The Chinese economy’s performance is able to affect the Japanese economy significant, as the demand from China is enormous. In addition, once the Chinese people become more confident in their domestic products and services, the growth in the demand for the Japanese products and services may slow down and even turn negative. But it is undeniable, in the Chinese economy, the Japanese products and services face relatively limited competitions at the moment, due to the natural advantages.