Monday, April 14, 2014

Getting Mechanic Performance Pay to Work Better

C. Kirabo Jackson and Henry S. Schneider have an interesting new paper, "Reducing Moral Hazard in Employment Relationships: Experimental Evidence on Managerial Control and Performance Pay." Mechanics work on commission but do not seem to be pointing out to the customer all of the repairs that could be done. In the experiment, management provided auto mechanics with checklists of possible repairs to be filled out when a customer arrived so that possible additional repairs were not overlooked. The checklists worked - repairs and mechanic performance pay both increased. This was quite profitable for the firm. However, the additional repairs increased the mechanics' hours to the point that, when the three-week experiment ended, the mechanics abandoned using the checklists. The extra income was not worth their time.

This suggests two possible solutions for the employer to keep mechanics using the checklists. They could simply require checklists be used and monitor compliance. Or they could cut into the profits and increase the mechanics' commission rate to make it worth their while.

Why outlet stores?

I just returned from the annual IIOC meetings in Chicago, where I saw an interesting paper on outlet stores of a national retailer that sells handbags.  (I am guessing it was Coach).

Their outlet stores have lower prices, are further from population centers (consumers travel 20 miles to get to an outlet stores instead of 9 to get to a regular store), and carry older products (16 months old vs. 10 months at regular stores).

A new paper suggests that outlet raise profitability by "crimping," a kind of price discrimination that prevents cannibalization of higher priced stores by making outlet stores unattractive to high-value consumers.

Since richer people have higher demand for nearby stores that sell newer products, the retailer can make more money (19% higher profit) by selling lower priced, older handbags at outlet stores located further from population centers.

If this makes you mad (see our earlier post, Only Schmucks pay Retail), then take the time to drive to an outlet store and purchase a lower-priced handbag.

Friday, April 11, 2014

85% of public pension will go bankrupt, unless

... they earn a 9% rate of return.  Bridgewater associates released its own stress test of public pensions this week.  What it found is not pretty:

Public pensions have just $3 trillion in assets to invest to cover future retirement payments of $10 trillion over the next many decades, Bridgewater says. An investment return of roughly 9% a year is needed to meet those onerous obligations.

Unfortunately, they are expected to earn only 4%.  If this happens, 85% of them go bankrupt.  

Wednesday, April 2, 2014

FLASH: consultancy finds inefficiency in government

A government consultant has just concluded that the government's civil service system is outdated.  As we have blogged before (Managing a Government Agency), we have to
  1. figure out what the government should be doing, 
  2. measure performance towards the objective, and then 
  3. link pay to performance. 
The consultancy finds something similar:
“There also is an absence of clarity and consequence regarding individual and organizational performance. Top performers seldom receive sufficient rewards, poor performers are rarely fired or demoted, and managers are not held accountable for how well they manage employees or the outcomes of the work they oversee.”

Tuesday, April 1, 2014

Nissan Renault Alliance

It was reported last month that the two automakers have agreed to develop 70% of their vehicles jointly along a "common module family" CMF method.
Under CMF, the major categories of vehicles, by size, are developed according to common engineering of front underbody, engine, cockpit, rear underbody, and electrical/electronic architecture. For example: The wand that controls headlamps and highbeams will be the same in all future Nissan and Renault subcompacts, allowing both companies to benefit from large-scale purchases from fewer suppliers.

The supply chain can create value by eking out cost savings from scale economies in some components. To do so, would-be rivals choose to cooperate so that their suppliers can enjoy scale economies. Thus, the vertical arrangement benefits from the horizontal arrangement.

Thursday, March 27, 2014

Did UT Arlington Hold Up its Tenants?

The College Park District at UT Arlington is a 20 acre mixed use development that opened two years ago. It includes It includes our new basketball arena, student apartments, parking garages and 27,000 square feet of street-level retail space. The Star-Telegram, our local newspaper, now reports that this space was leased out to six food based on projections of attendance at games and events that were 50% higher than has materialized.
“Probably, that number was driven by an overestimation on our part as far as the ability to bring in a certain number of external events. It takes more time than we had realized,” Hall said. “I think it’s important to point out that the Dallas-Fort Worth area is a very competitive market when it comes to external events.” 

Now three of the restaurants have closed and others are behind on payments. Did they invest based on inflated customer traffic promises from the university? Maybe they needed to look ahead and anticipate being potential victims of holdup.

Monday, March 24, 2014

Why wont laid-off NY teachers take new jobs?

Its the incentives stupid:

New York is the only city in the U.S. where teachers are guaranteed pay for life even if their school closes and they no longer have a permanent job. The policy costs the DOE more than $100 million per year in salary and benefits. Those teachers go into the Absent Teacher Reserve pool, where they can be used as substitutes. The average salary for an ATR pool teacher? $82,000, with some making $100,000. Some teachers have been in the pool since 2006. 

Friday, March 21, 2014

Thwarting Innovation in Sunscreen

One consequence of strict FDA rules on drug approvals is that it is really expensive to improve sunscreen. The Washington Post has a new story titled "FDA review of new sunscreen ingredients has languished for years, frustrating advocates." The rules protect against allowing the marketing of a product that is not safe and effective, but at the expense of not allowing the marketing of some products that are safe and effective. Approvals of bad products come back to haunt an agency but denials of good products typically do not. This leads bureaucrats to tend to be over-cautious. Fortunately in this case, we can observe the product in use elsewhere.
“These sunscreens are being used by tens of millions of people every weekend in Europe, and we’re not seeing anything bad happening,” said Darrell S. Rigel, clinical professor of dermatology at New York University and past president of the American Academy of Dermatologists. “It’s sort of crazy. . . . We’re depriving ourselves of something the rest of the world has.”

Since 10,000 Americans die of melanoma every year, this delay has real consequences for consumers. How many people did the FDA kill this year?

Hat tip: Alex Tabarrok

Make the rules or your rival's will: Seattle bans ride-sharing to protect taxis

Seattle is trying to slow down innovation to protect incumbent firms
There's simply no reason for this, other than to protect the legacy taxi providers. If consumers want those app-based services, why are they being blocked? And, of course, because so few cars will be available, those services become a lot less desirable (less likely to have a car available nearby, etc.). The end result is that it sucks for everyone. People wanting to get places will have fewer options. People who might want to earn money as a driver cannot. These new innovative companies are held back. The only "winners" are the current taxi owners who have less competition.