Tuesday, August 12, 2014

How the internet is changing the worlds oldest profession

WARNING: We rarely feel the need to alert readers to explicit content. But our discussion of the online sex trade requires frank language, and some may find the topic distasteful.

The Economist has an article on how the Internet has changed the worlds oldest profession.
Now specialist websites and apps are allowing information to flow between buyer and seller, making it easier to strike mutually satisfactory deals. The sex trade is becoming easier to enter and safer to work in: prostitutes can warn each other about violent clients, and do background and health checks before taking a booking. Personal web pages allow them to advertise and arrange meetings online; their clients’ feedback on review sites helps others to proceed with confidence.

Labor mobility is discouraging price fixing:
Twenty years ago most prostitutes in Norway were locals who all aimed to charge about the same, says May-Len Skilbrei, a sociologist at Oslo University. Today, with growing numbers of sex workers from the Baltic states and central Europe, as well as Nigerians and Thais, such unofficial price controls are harder to sustain.

The wealth of online data allows industry participants to make better pricing and investment decisions:
going from flat-chested to a D-cup increases hourly rates by approximately $40, meaning that at a typical price of $3,700, surgery could pay for itself after around 90 hours. 

Thursday, August 7, 2014

Unocal holds up California

Every state has their own summer gasoline formula to reduce pollution. After California Air Resources Board decided to use Unocal's formulation--and after the refiners sunk billions of dollars re-tooling to produce CARB gasoline--Unocal said "Oh by the way, we have patent on the formula" and charged them a royalty of five cents/gallon.

The FTC sued Unocal for illegally acquiring monopoly power, but a judge dismissed the complaint in 2003 basically because the patent laws "trump" the antitrust laws, and allow a patentee to do what they want with their patents (this is NOT true in the EU and is changing in the US).

But the FTC got the relief they wanted when Chevron put the patents in the public domain as a condition for approving the Chevron/Unocal merger.

REPOST: Larry the Liquidator



REPOST: Stossel on Vanderbilt's GREED

Monday, August 4, 2014

Europe's troubles are microeconomic

Nice article in the Financial Times about the path to growth in Southern Europe: "good" deleveraging, then new equity capital to buy up the failed companies.

Good deleveraging is when balance sheets are restructured and bad debts written off. This way, viable businesses and creditworthy households should be able to borrow from healthy banks to fund productive investment. The economy grows and the burden of debt falls. 

But good deleveraging requires clear legal rules to restructure debt:  

...insolvency regimes across Southern Europe are too weak and borrower-friendly, and judicial systems too cumbersome, to enable the swift resolution of bad debts. In Italy, Greece and Cyprus, for example, it can take 10 years for a bank to get its hands on its collateral through the bankruptcy courts.

And finally, once the loans get restructured, the assets must be sold off to new owners.  New owners have been taking control of real estate, but not the smaller family owned companies:

The snag is that this problem may be largely cultural—and therefore more difficult to fix. Many businesses in Southern Europe are family-owned and family-run. These family shareholders may be reluctant to bring in outside capital, preferring to walk away rather than hand over control to financial investors. 
At the same time, many equity providers may be wary of taking control of businesses in parts of Europe where governance may be weak and success can often depend heavily on close personal relationships with politicians, officials, banks and suppliers. The alternative is to share control with the existing owners, which private equity is typically reluctant to do.

Wednesday, July 30, 2014

Fee-for-service vs. capitation: 10 fewer amputations per capita

It is difficult to align the incentives of physicians (making money) with the goals of patients (low cost, high quality care) due to asymmetric information:  only the physician knows what the patient wants.

What distinguishes Medicare Advantage plans from traditional fee-for-service plans is the degree to which they use mechanisms designed to encourage the delivery of cost-effective quality care. Three critical mechanisms are financial incentives that are aligned with clinical best practices, a selective network of providers, and more active care management that emphasizes prevention to minimize expensive acute care.

Here is what happens:

  • Single-year mortality rates fell from 6.8 percent in the traditional fee-for-service sample to 1.8 percent 
  • Patients in the Medicare Advantage plans had shorter average stays in the hospital (about 19 percent shorter.)
  • Patients in the managed plans were more likely to receive preventive care ...For example, diabetic patients in the fee-for-service sample had an average of 11.5 amputations per 1,000 patients; those in HMO plans with global capitation had only 0.3. 

BOTTOM LINE:  Incentives matter
 “We've found that U.S. private insurers have created an operating model that can deliver better care at a lower cost and have a major role to play in the ongoing national efforts to improve health care quality,” said Stefan Larsson, a BCG senior partner and coauthor of the report. “Quite simply, we’ve found that the more aligned the care, the better the quality delivered.”

Sunday, July 27, 2014

How to Encourage Good Reviews

I got to go whale watching while on vacation. At the end of the cruise, the proprietor handed out these cards. It is not explicit but it implies that the discount on a second cruise is conditional upon you reviewing the first cruise. Which customers have an incentive to review the cruise? Most likely, those who want to go again. And they probably want to go again because they enjoyed the first cruise. So, those who will review the cruise are those will tend to write positive reviews. The cruise line is essentially using future discounts to screen potential reviewers.

Friday, July 25, 2014

Book review: Ethics and Public Policy by Don Welch

BOOK REVIEW:  Ethics and Public Policy by Don Welch

After students learn benefit-cost analysis, they are often eager to start policy debates with their friends and family.  But they usually come away frustrated by their inability to influence others.

QUESTION:  Why is this?

The answer reminds reminds me of some of my favorite economics jokes:

  • "An Economist is someone who knows the price of everything and the value of nothing;" and
  • "You may be an economist if human interest stories don't interest you." (from Yoram Bauman)

While economists are trained to compute the consequences of policy, we are not very good at getting others to see things from our point of view.  More often than not, the cause of the disconnect is the peculiar ethical framework we use to evaluate policy.

Economists are consequentialists (the ends justifies the means) where we measure progress using a total welfare metric (shareholders are people too).

In contrast, normal people are deontologists, who evaluate policy by how well it conforms to a set of principles, like the Ten Commandments, the Golden Rule, or "from each according to their ability, to each according to their need."

So while economists often disagree about the consequences of policy, we do not disagree about how to evaluate policy.  For example, it is likely that a dirigiste economist and a libertarian economist would agree that redistributing income penalizes success and rewards failure, but disagree about the size of the response.  The dirigiste would argue that the response is small, while a libertarian would argue that the response is large.  In essence they would reduce their disagreement to two different hypotheses, and resolve it by testing them against data.

In contrast, when and economist debates with a deontologist, they often speak past one another.  The economist argues about the effects of the policy, while the deontologist argues about how well it conforms to his guiding principles.  Unless the source of the disagreement is made clear, it will never be resolved.

It is here that I found Don Welch's book remarkably valuable.  Clearly and concisely (dare I say "efficiently"), he lays out the various ethical frameworks and illustrates their use with examples. Along the way, he proposes a framework that encompasses the various ethical approaches so that we don't end up talking past one another.

I liked the framework (goodness knows we need one so we can discuss issues cohesively, and reach better decisions), but I think it is utopian in two ways:  

First it relies on an honest accounting of the consequences of policy.  But in modern political discourse, people on both sides of the political spectrum overstate the benefits, and deny the costs associated with their preferred policies.  Fo example, would the Affordable Care Act would have passed if the President hadn't mislead us about its effects?  

Second, these kind of frameworks often get passed down to agencies who have to find ways to implement policy.  If you have an agency with any but a narrow mandate, they become difficult to oversee and manage.  Contrast the successful (and bipartisan) antitrust agencies which are concerned only with consumer welfare with agencies like the EPA, which has to follow multiple, diverse, and conflicting mandates.  As a practical matter, having any but a single mandate makes it difficult to oversee and manage an agency.  

Despite these shortcomings, I would highly recommend the book to anyone looking for a short, well-written introduction to the various ethical frameworks used to evaluate policy.  

Thursday, July 17, 2014

Question: why do expatriates receive a 15% bonus for living in China?

Its the air pollution

On some days the air pollution is 25 times worse than what’s considered safe in the U.S., deaths from lung cancer have risen 465 percent over the last three decades, and arecent study showed that Beijing residents can expect to spend significant periods of their life infirm. 

This is a compensating wage differential paid to keep employees from moving to cleaner cities.  Interestingly, companies like Coke offer the bonus only to expatriates (foreigners), not to local Chinese, as they have a lower probability of moving.

Tuesday, July 15, 2014

Forget income inequality, lets go after zoning restrictions...

The Financial Times has a nice article on the causes of housing price inflation (House prices are rising as a percent of national income (from 10% to almost 60%).  

A clever 2005 study by American economists Edward Glaeser and Joseph Gyourko compares the price of an extra square foot of land attached to a house (a slightly bigger back yard, perhaps) with the average price of a square foot of land under a house in the same city. If the problem is a natural shortage of land, the two prices should both be high because it is profitable to build on the back yards until the two prices converge. 

That is not what happens, however. In the cities of coastal California, the average price of urban land is 10 times the price of land in a back yard because zoning laws make it impossible to turn one into the other. ...  

The ratio of these two figures – as much as 10 to 1 – suggests only 10 per cent of the value of land in expensive cities is due to its natural scarcity. The rest is planning restrictions.

BOTTOM LINE:  zoning restrictions transfer income from those who own houses to those who do not.

The desire to preserve open space and familiar, low-density cities is quite natural – but it is time to wake up to the enormous cost. ... If we want to make society fairer and more equal, just let people build.