Incentive aligning effects of property rights

Dawn raids uncover evidence of beer price fixing in India

Absent cooperation from one of the conspirators, collusion is difficult to prove because it requires evidence of an agreement between competitors.  Most executives are counseled to imagine what would happen if their correspondence and e mails were made public.  

To gather evidence, the competition authorities create a "prisoners' dilemma", by offering leniency to any cartel member willing to provide evidence against his or her co-conspirators.  In India, it appears that the leniency program lead to evidence of price fixing:

The CCI was tipped off by one of the three companies after it filed a leniency application with the regulator, revealing details of the alleged price fixing, he added. 

The regulator’s leniency program is a type of whistleblower protection offered to cartel members. 

The government source said that the raids found email exchanges showing that the companies were fixing prices. “That is smoking gun evidence,” the source said.

HT:  Matt B.

Screening on criminal background and credit history

When I was at the Bureau of Economics at the FTC, we were asked by Congress whether using credit histories to price car insurance was discriminatory.  The resulting FACTA report found that:

1. as a group, African-Americans and Hispanics tend to have lower scores than non-Hispanic whites and Asians.
2. ...scores effectively predict risk of claims within racial and ethnic groups.
3. The Commission could not develop an alternative scoring model that would continue to predict risk effectively, yet decrease the differences in scores among racial and ethnic groups.

As a result, banning the use of credit scores would result in insurers finding other, less good and possibly discriminatory methods of distinguishing high from low risks, like selling insurance only in low risk areas.  Good drivers living in higher risk areas would be "pooled" with other drivers living in the high risk area, and would have to pay higher rates.

 Previous studies (here and here) finds an analogous effect of preventing criminal background checks in employment, that doing so increases racial discrimination against African American men:

If employers are very averse to hiring ex-cons then they will seek to reduce this risk and one way of doing so is by not hiring any black men. As a result, a background check allows non ex-cons to distinguish themselves from the pack and to be hired. Furthermore, when background checks exist, non ex-cons know that they will not face statistical discrimination and thus have an increased incentive to invest in skills.

Also:

When the box [a criminal back ground check] is banned it’s no longer possible to cheaply level the playing field so more employers begin to statistically discriminate by offering fewer callbacks to blacks. As a result, banning the box may benefit black men with criminal records but it comes at the expense of black men without records who, when the box is banned, no longer have an easy way of signaling that they don’t have a criminal record. Sadly, a policy that was intended to raise the employment prospects of black men ends up having the biggest positive effect on white men with a criminal record.

See also Using credit history to price hospital care

A Rather Unique Economy of Scope

Lots of companies provide rewards to customers who recommend their products to friends. But now Tesla is offering to send any photo you want etched in glass into space for the next million years.

Perhaps most notable, though, is “Launch Your Photo into Deep Space Orbit,” a new reward for owners with one qualifying referral. The cool, fun perk involves Tesla laser-etching any photo of the owner’s choice that would be sent into deep space. Tesla did not state it explicitly on its new Referral Program page, but the laser-etched photos would most definitely be sent to orbit using rockets from Elon Musk’s private space company, SpaceX. Owners who wish to send their pictures to deep space orbit can expect a reminder on their Tesla mobile app to upload their selected photo sometime in December 2018.

Of course, they can do this because both Tesla and SpaceX were founded by Elon Musk. The best part is Musk's tweet on acceptable images.

No word on when GM or Ford will offer a similar reward.

Less of other peoples' money is funding insurance

Health insurance costs about $20,000, 3/4 of which is paid by your employer.  One way to keep costs down is to raise deductibles.  This reduces costs is two ways:

1. By reducing consumption of low value care (moral hazard); and
2. By giving consumers an incentive to shop for lower price and higher quality care

HT:  MarginalRevolution.com

Economies of scope created AWS

Amazon Web Services is one of the biggest success stories around.

Less than a decade old, ... Cloud computing — remote computing, or web services, as cloud computing is sometimes called — has been so wildly successful that it’s increased the pace of technology innovation, the rate of technology adoption, and the volume of data in the world by many fold. Today mobile startups can go global in a snap, ...

Like many innovations, it's began with a problem, that it took too long and too much effort to plug "merchants" (sellers who use their own supply chain to fill orders) into the Amazon platform.

Providing a solution for Target, for example, one of Amazon’s early merchant.com deals, was “far more painful than we thought it would be,” .... 

According to the book Machine, Platform, Crowd, Amazon stopped customizing solutions for each new merchant on its platform by "hardening" its API's, developing a standardized and well documented set of protocols that essentially decoupled parts of the web platform. For example, they separated back-end data from the presentation layer so that their merchant associates could control the consumer interface without creating more work for Amazon on the backend. Customers who used the new API increased conversion rates on their web properties by 30%.
 
Initially, hardening the API's created more work for Amazon, but when they had finished, they realized that they had a reliable, world-wide, web infrastructure that would enable developers to build their tech infrastructure on top of Amazon's cloud computing platform.  It turns out that there was a huge demand for the service:

First one, then two, then three CEOs declared infrastructure services a top priority and asked Amazon to take a hard look at helping them with data warehousing. It was too expensive, hard to manage, required too much commitment and was riddled with pricey upgrades. It seems in these early days of widespread Internet adoption, a collective grumbling emerged over how much hardware was required to operate at “web scale” — interact globally in real-time with huge user bases. No one had the stomach for the banks of servers they’d have to swallow in order to operate a global online presence.

Amazon continues to "spin off" ideas developed to solve internal problems, like "API Gateway, ... a tool for creating, publishing, scaling and securing APIs. The idea is to let enterprises get the same advantages from using APIs as Amazon does, thereby paving the way for faster development and innovation...":

"Inside your company, if you're able to offer your different services via hardened APIs that are well documented, it frees up all the other teams that want to consume your services, to use those just as building blocks, as if they're external services," Jassy said. "Once we got into that mode inside Amazon, it dramatically changed the speed with which we were able to innovate."

References:

• Andy Jassy's Trillion Dollar Baby
• Andy Jassy, Amazon's $6 billion man

Dollar strengthening against yuan

In the market for foreign exchange, the price of a dollar is appreciating relative to the Chinese yuan, nearing 7 yuan/dollar.  Either:

• the demand for dollars is increasing (more Chinese consumers want to buy US goods and services or invest in the US); or 
• the supply of dollars is decreasing (fewer US consumers want to buy Chinese goods and services or invest in China).   

According to the article, this could be due to fears of a trade war with the US:

• fewer US consumers would buy Chinese goods due to tariffs on imported Chinese goods; or 
• fewer US companies would build factories in China or source parts from China.

Both of these would lead to a decreased supply of dollars and a higher "price" of dollars.  

In terms of a broader strategy, a stronger yuan would hurt Chinese producers with plants in China and could lead to unemployment.  This could put pressure on Chinese politicians to loosen up unfair restrictions on foreign firms and/or strengthen foreign intellectual property rights.

Are we in a housing bubble?

The term "bubble" means that prices are too high.  But the question is difficult to understand unless we know what to compare them to.  We can use the ideas of Chapter 9 to measure housing prices relative to the cost of renting.  Because renters can buy, and owners can sell and rent, in the long run the prices should be comparable (a mobile asset should be indifferent about where it is used).  Here is the Fed data on the relative costs of owning relative to renting.  

Many people (some economists) think that there was a housing bubble in 2006 whose bursting lead to the subsequent recession (shaded blue area).  Currently owning is 30% more expensive than renting.  In 2006, owning was 70% more expensive than renting.  

Google measures ad effectiveness with "Ghost Ads"

PROBLEM:  How to measure Ad Effectiveness (paper link)

To measure advertising effectiveness, we want to make a simple comparison, "Did showing the ads change users' behaviour, relative to not showing them?"

This is especially hard to do when algorithms choose ads to show to consumers who are most likely to click on them and purchase.  This leads to Selection Bias, i.e., those who see the ads are those most likely to click on them.  One cannot tell whether people purchase because they were shown the ad (the "treatment effect," what we want to measure) or whether people who were going to purchase anyway were shown the ad ("selection bias," what we want to rule out)

To eliminate selection bias, Google uses Ghost Ads to make the experimental ads visible to the ad platform and experimenter but invisible to the control group, exactly as the algorithm would have chosen.  Using the algorithm to select the number and order of ads, but then "ghosting" the ads in the control group, eliminates selection bias.

Figure 4 illustrates how it work.

The treatment group (upper left) sees three Louboutin shoe ads and three ads from other advertisers. The ad platform "selects" the control group (lower right) as those consumers who would have seen an identical quantity and order of the other ads.  To create the control, the researcher simply "ghosts" the ads that would have appeared in the same order and location as the Louboutin shoe ads.

Google also can select users to match the demographics of the treatment and control groups. 

MORAL:  Carefully designed experiments can accurately measure causal relationships.  In this case, the treatment ads lifted website visits by 17% and purchases by 11%.

See simple exposition or the paper.(Ungated: https://courses.cit.cornell.edu/jl2545/adpapers/Randall%20Lewis.pdf)

HT:  Hal

REPOST: can I take credit for this?

Former student Ford Scudder (NJ state treasurer) must have been paying attention in class, as he reduced the discount rates for NJ defined benefits pension system from 7.9% down to 7%.  The move is controversial as it increases the amount that NJ must set aside for its generous retirement benefits:

The decision will likely increase what the state will have to pay into the pension system next year by $234 million, according to the Treasury Department. Instead of a $3 billion pension contribution in his first budget, Murphy [the new Governor] would likely have to make a $3.2 billion contribution under that estimate.

But it is better in the long run:

“Given the current elevated level of asset values across the board, long-run expected returns have diminished, so it is appropriate to lower the assumed rate of return,” Rijksen said. “Our actuaries have suggested doing so, and it is the unmistakable trend in public pension plans across the country, with some other 20 state pension plans having adopted or being in the process of moving to an assumed rate of return at 7 percent or below.”

Readers of this blog will know that I motivate the topics of discounting and its inverse, compounding, with use our under-funded defined-benefits pensions.  Here is a recent post about another fund, from another under-funded state, doing the same thing:

Thursday, February 2, 2017

Another pension fund lowers discount rate to 7%

If a pension fund has to pay out $100 in 30 years, and earns 7.5% on its investments, it must save 100/(1.075)^30=13.14 today.  If it earns only 7.0%, the amount that it much save increases by 15%.

Calstrs, the second biggest pension fund in the world, just admitted that it is reducing its target rate of return (also its discount rate) from 7.5% to 7.0%.  The increase in payments is split between the teachers and the State of California, the employer of the teachers.

Approximately 80,000 current members of Calstrs could see an increase in their yearly pension contributions of $200 or more as a result of Thursday’s move, Calstrs said. The state of California has already budgeted an extra $153 million for its pension contribution to cover the rate change, bringing the total contribution to $2.8 billion.