Never start a land war in Asia--or a price war!

The Washington Post reports that Fidelity seems to be starting a price war with Vanguard, by offering zero-fee mutual funds:

Fidelity’s zero-fee funds include a Total Market Index Fund, made up of 3,000 U.S. publicly held companies, and an International Index Fund, made up of several thousand companies in overseas markets. 

Ironically, Vanguard and Fidelity have been accused of reducing competition among the firms they both own, like those in the airline industry.  Apparently, however, they haven't figured out how to reduce competition among themselves.  If only they had read Chapter 15.

HT:  Mike V.

How to cut opiod prescriptions

First, make sure that clinicians know about patient overdoses! A randomized controlled trial involved 861 clinicians in San Diego:

About half of them served as the control. The other half received this letter: “This is a courtesy communication to inform you that your patient (Name, Date of Birth) died on (date). Prescription drug overdose was either the primary cause or contributed to the death.” ... The researchers hypothesized that the letter would reduce opioid prescriptions. To test that hypothesis, they compared the number of opioid prescriptions a few months before and a few months after the letter was sent. In the control group, prescriptions stayed pretty steady (actually they increased modestly). In the group of clinicians that received the letter, by contrast, prescriptions decreased significantly. And those clinicians were less likely to start new patients on opioids at all.

Incentives of Ride Sharing Drivers

Back in the old, old days, when you hopped into a cab at the airport and asked to go to your downtown hotel, the cabbie would start out and then usually ask something like, "Have you been to this city before?" If you did not know your way, he might take the long way to increase the miles and the fare. The WSJ is reporting that some ride-sharing drivers are now taking longer routes too. 

Passengers aren't on the hook for the higher fare because they pay a fixed upfront price based on the app's estimate of the ideal route. And while drivers are encouraged to go the most direct route, they can choose to ignore their digital navigators for a route that tacks on extra miles. The drivers' pay is determined by the actual trip's mileage and time, which can vary based on traffic conditions or diversions.

In the taxi example, I quiz students on how taxi companies fixed this 'long-haul' problem. The simple solution was to set the fare to a per mile rate plus a fixed fee. By driving the shortest route, cabbies could save time, pick up more passengers and thus more of these fixed fees. I love that there was a simple contractual change to address the moral hazard problem. In the ride-sharing context, the problem may be too inconsequential to fix.

An Uber spokesman said the company estimates longhauling occurs on less than 1% of trips in the U.S. 

What do physicians have in common with pilots?

They both respond to performance metrics (tests and prescriptions for physicians; fuel consumption for pilots) even without an incentive.  Another randomized controlled trial from Randomistas:

...Working with the pilots' union the researchers reassured pilots that they would not be ranked against each other:  "This is not, in any way, shoape or form, an attempt to set up a 'fuel league table'" the letter told them.  Despite knowing this, pilots who received monthly reports on their fueld efficiency ended up guzzling les gas than pilots who did not receive such reports.  The feedback was purely private, yet it lead pilots to tweak their behavior.  With an experiment that cost less than $1000 in postage, Virgin Airways cut its fuel consumption by about 1 million litres.  

Book recommendation: Randomistas

Fun book about the benefits of randomized controlled trials to evaluate medical treatments, social programs, and business practice.  For example, in 2003, CVS ran a randomized trial, stopping price promotions in 400 randomly selected stores. 

Three months later, the evidence was in.  By axing the promotions, CVS sold fewer products at higher prices [yes, demand curves do slope downwards!].  Across the 400 stores that ran the experiment, profits were up.  Not surprisingly, CVS soon put the change in place across all its 9000 stores.  A simple randomized trial likely increased the organizations annual profit by $50 million.

On Gary Loveman, an economist who left Harvard to run Harrah's, and who comes to Vanderbilt to speak, said three are three cardinal sins at Harrah's:

...you don't harass women, you don't steal and you've got to get a control group.

Article: "How health care killed my father"

Long, but good article from the Atlantic documenting the problems in an industry where consumers purchase care largely using "other peoples' money."

The average insured American and the average uninsured American spend very similar amounts of their own money on health care each year—$654 and $583, respectively. But they spend wildly different amounts of other people’s money—$3,809 and $1,103, respectively.

The author's solution (a Democrat), make consumers spend their own money, e.g., with $50,000 deductibles for insurance:

I believe if the government took on the goal of better supporting consumers—by bringing greater transparency and competition to the health-care industry, and by directly subsidizing those who can’t afford care—we’d find that consumers could buy much more of their care directly than we might initially think, and that over time we’d see better care and better service, at lower cost, as a result.

Trucking demand is procyclical!

Website from a trucking company documents the effects of a pro-cyclical increase in demand for trucking:

Well into the third quarter of 2018, the trucking industry continues to experience the highest demand and yet tightest capacity for freight services in recent memory. Unemployment is low, falling to 3.9 percent in June. The national GDP is growing—4.1 percent in the second quarter. The housing market is booming; the demand for homes—both new and lived-in—far outnumbers the supply, so prices are often too high for buyers, according to NPR.

• large and small trucking companies alike saw both revenue and profits grow
• carriers will likely continue to seek rate increases in order to compete in the tightest driver recruiting market in decades.
• June was the 15th straight month in which prices increased on an annual basis in trucking’s spot market. 
• "We believe that this is the strongest normalized percentage level of truckload pricing achieved since deregulation (normalized meaning except for extreme periods of recovery from recession)."
• Some carriers are using most of these rate increases to pay professional drivers more to attract them to their fleets—and to retain the drivers they already have. 
• By the end of 2018, Klemp predicts pay will have increased 12 to 15 percent, a significant bump but still not enough to make up for the 16 to 19 percent shortfall of driver wages when adjusted for inflation. 

For affordable housing, move away from the coasts

This map plots the ratio of an average house to average income:

And as the Brooking article notes, and as I've noted, the lack of affordability in places like California can often be blamed on state and local government measures designed to limit the construction and diversification of housing. Zoning laws and other regulatory barriers to new housing production have decimated housing affordability of housing in many coastal cities.

Cities like San Francisco and Seattle have essentially become playgrounds for the wealthy in which existing homeowners fight tooth and nail any attempt to allow sizable amounts of new housing construction. They do this, they tell us, to preserve "the character of the neighborhood." But what they're really doing is using government regulations to drive up the prices on their own real estate, while driving lower-income people further and further out into the periphery. Oh sure, these Progressive guardians of the local "quality of life" might allow a handful of subsidized housing units to be built. After all, somebody has to make your cappuccino or do your dry cleaning. But the overall effect is to ensure few people can afford to move in.

The costs of obesity

From NY Times:

This economic burden hits low-income and otherwise disadvantaged populations the hardest, exacerbating income and wealth inequality. With insulin now costing up to $900 a month, a diagnosis of diabetes can mean financial ruin for a low-wage worker, especially if it results in uncompensated sick days or underemployment. And as disposable income declines, so too does the ability to afford a nutritious diet, creating a vicious cycle of poverty and diet-related disease.
...
 The total impact of obesity and its related complications on the United States’ economic output has been estimated at between 4 and 8 percent of gross domestic product. Even on the lower end, that’s comparable to the 2018 defense budget ($643 billion) and Medicare ($588 billion).

REPOST: Kidney Hold-up

Its seems that, back in 2012, a woman was fired by her boss soon after she donated her kidney to her boss ... because she was taking too long recuperating from the donation.

“I feel very betrayed. This has been a very hurtful and horrible experience for me. She just took this gift and put it on the ground and kicked it.’’

It seems she was hired, or rehired, so as to obtain access to her kidney. She had an implicit expectation that she would have continued employment post-donation. But after the operation, the decision was sunk and created a holdup opportunity.

Of course, she sued and apparently she lost. This may not have happened if selling a kidney were legal and she could have contracted for compensation. A market would likely have other benefits as it moves assets (kidneys) from low values uses (essentially "spare parts" in healthy bodies) to higher valued uses (bodies with nonfunctional kidneys).