Monday, May 25, 2020

Bad ideas from Nashville politicians

Potential exam question:
  • QUESTION:  Nashville currently has had a ban on evictions for about two months.   In about two weeks this ban will expire. Question:  What would happen if we followed Councilman Sean Parker's call for banning "Evictions ... until Davidson County's unemployment rate returns to 2.8%..."
  • ANSWER: In the short run, it would reduce incentives for renters to pay rent in a timely manner.  This would reduce the value of owning and building housing, which would reduce the supply of housing in Nashville, which would increase price of housing and rents.  The policy would end up hurting would-be home buyers and renters, the very people that it is designed to help. 

Saturday, May 23, 2020

Marriott's changed strategy when it realized it was competing on the wrong dimension

New paper identifies a strategy mistake by Marriott:
Early in the 1980s, Marriott operated a chain of large, higher-end full-service hotels that typically had 300-500 rooms.

While attractive to higher-income tourists, these hotels were not attractive to business travelers who wanted lower-prices and larger rooms.  Marriott surveyed its business customers and learned exactly what these customers valued, and what they didn't:
...many business travelers did not value out-of-room amenities such as full service restaurants, lobbies, or meeting space as much as firms believed, and valued in-room amenities such as larger and better-appointed rooms more than they thought.
The results of this analysis were a surprise to Marriott executives ... The results indicated that some out-of-room amenities that many hotels offered were not valued by business travelers and as a result certain features, which were “often provided based on traditional hotel management beliefs were not retained [in the new chain], for example, an ‘action’ lounge, a more upscale restaurant and room service, and more meeting space.”

So they launched a new brand aimed at business travelers. 
Based on this survey, Marriott also decided that the new chain would not offer several typical out-of-room services such as bellmen or concierges.  Instead, hotels in the new chain (Courtyard by Marriott) emphasized features of the room itself. The rooms were somewhat larger than standard rooms, with room for a large desk and sofa, and had nicer d├ęcor and larger bathtubs than mid-range competitors’ rooms had. These hotels did have pools and restaurants, but the pools were mainly functional and did not have slides or diving boards, and the restaurants were small and offered only a limited menu – in part because Marriott’s customer survey indicated that the business travelers they were targeting valued having a good restaurant nearby, but not necessarily in the hotel itself.

And, of course, you can guess the rest of the story.  Competitors copied Marriott's innovation:
... “limited service” chains such as Holiday Inn Express, Hampton Inn, and Fairfield Inn, among others. 

This story illustrates several themes from the book:
  • Chapter 17 (Uncertainty): gather information to make better decisions; 
  • Chapter 10 (Strategy): do something with the information to develop a "sustainable competitive advantage;"
  • Chapter 14 (Indirect Price Discrimination):  they introduced a lower-priced brand that appeals to business travelers but does not cannibalize vacation demand for their other brand; and
  • Chapter 9 (Long-run Competition): keep innovating because imitation erodes competitive advantage.  

Friday, May 22, 2020

Causality

Many business problems are questions of causality:
  • How much will sales increase if I increase my advertising budget?
  • Will employee productivity increase, if I raise the wages to new employees?
  • Will productivity be hurt if I allow employees to work from home?
Anyone who has read this blog knows that I am huge fan of randomized control trials ("experiments") as they get rid of the "selection bias," or "reverse causality."  For example, each of the following factors would bias simple correlations so they do not reflect the implied causality:
  • When sales increase, advertising budgets typically increase
  • New employees are younger and less experienced than older ones
  • Low productivity employees may be more inclined to work from home.  
In this interview, Josh Angrist details some of experiments he ran to figure out that:
  • Allowing laptops and iPads in the classroom has a big negative effect of learning.
  • No-excuses charter schools have a positive effect.
  • Peer effects and giving laptops to kids does not improve learning.

    For businesses trying out new advertising campaigns, employment practices, or pricing strategies, design their rollout so you can learn something:  Advertise or change prices in randomly selected areas; adopt employment practices in certain plants but not others.  

    If not, you will end up making changes without ever knowing whether they made a difference. 

    BOTTOM LINE:  identifying causality is really hard, but profitable.  

    Related web app to teach regression (and causality) by showing how Type I (mistakenly inferring causality) and Type II errors (mistakenly inferring no causality) occur.  Do the learning exercises!

    Monday, May 18, 2020

    Moral Hazard: over-reporting of COVID-19 deaths

    For a variety of reasons (many asymptomatic cases, lack of random testing), it is difficult to measure the infection rate or the death rate of COVID-19.  Deaths due to COVID-19 is probably the best data we have, but there is good reason to doubt these data as well:

    ...The CARES Act adds a 20 percent premium for COVID-19 Medicare patients.  
     Incentives matter. When the government increased the disability compensation for air traffic controllers, a lot more controllers suddenly started claiming to be disabled. When unemployment insurance payments increase, more people become unemployed and stay unemployed for longer periods. When the government offers flood insurance that charges everyone the same insurance premium regardless of the risk level in their area, more people build homes in frequently flooded areas.

    Wednesday, May 6, 2020

    Density used to be green, now it kills

    Anyone who has followed this blog, knows that I was a big fan of urban density: it reduces commuting costs, pollution, urban sprawl but, most importantly, it increases the supply of housing.  I vilified NIMBY's in places like SF and NY for erecting barriers to new housing that would have increased density, and supply.  I even blamed them for homelessness, inequality, and segregation.

    One of the things I love about myself is that I can admit it when I am wrong.  Although I still believe in what I wrote, now we have a bigger problem.
    Density Kills,The coronavirus has been much more deadly in places like New York City or Boston than in rural settings. As demographer Joel Kotkin notes, Los Angeles has done much better than other big cities, because it’s less dense. “L.A.’s sprawling, multi-polar urban form, by its nature, results in far less 'exposure density' to the contagion than more densely packed urban areas, particularly those where large, crowded workplaces are common and workers are mass-transit-dependent...
    Mass Transit kills. Kotkin mentions mass transit, and an MIT study found that NYC subways were a ”major disseminator” of the coronavirus in New York. This is unsurprising: New York City subways are crowded, poorly ventilated and filthy. The city is only just now starting to clean them every night. (A bit late.) Cars come with built-in social-distancing: With a car, you’re riding in a metal and glass bubble with filtered air. Subways and buses, not so much. Whether this virus sounds the ”death knell” for mass transit or not, people will be far more reluctant to ride packed vehicles in the future. and Bureaucracy kills. 
    Bureaucracy kills. Much of the fight against the coronavirus has also involved a fight against bureaucrats dead set on making things worse. Early on, the Centers for Disease Control and Prevention declared COVID-19 a public health emergency, which raised the bar for testing requirements. As a result, hospitals and universities faced significant barriers to getting alternative tests approved by the Food and Drug Administration. Worse yet, the CDC tests turned out to be defective.
    To be fair to myself, I always knew that Bureaucracy kills, but thank goodness I don't follow my own advice. 

    Saturday, May 2, 2020

    Is it ethical to buy antibody rich blood at inflated prices?

    Alex Taborrak tells it like it is:

    The huge demand for antibody rich blood (to develop a vaccine) has driven up the price:

    From March 31 to April 22, prices asked by Cantor BioConnect for its cheapest samples — always sold by the milliliter, the equivalent of less than a quarter of a teaspoon — rose more than 40 percent, to $500 from $350.
    QUESTION:  Is this ethical?
    ANSWER:  Only if you want to save lives.  
    “I’ve never seen these prices before,” said Dr. Joe Fitchett, the medical director of Mologic, one of the British test manufacturers that was offered the blood samples. “It’s money being made from people’s suffering.”
    READ THE WHOLE POST!

    Thursday, April 30, 2020

    Musk Games High Powered Incentives

    The Daily Mail reports that Elon Musk has seemingly joined the chorus demanding the end to COVID-19 related lockdowns. But it also reports that he was about to get a large payout from Tesla linked to its stock price. Shares, which had been depressed, rose 10% just ahead of its quarterly report.
    Maybe he really believes this, but he sure has an incentive to feign belief.

    Tuesday, April 28, 2020

    Lockdowns vesus contact tracing

    Mulligan, Murphy, and Topel* have a thoughtful policy piece on "Some basic economics of COVID-19 policy." It combines a number of economic concepts (e.g., fixed costs versus marginal costs, option value, externalities, capital depreciation (physical and human)). Essentially, it compares the relative strengths of the policy alternatives of Large-Scale Social Distancing (LSSD) versus Screen, Test, Trace and Quarantine (STTQ). From their summary:

    Our analysis indicates that the features of a cost-effective strategy will depend on both current circumstances and how we expect the pandemic to play out. Some elements are common, such as the desire to use STTQ rather than LSSD when infection rates are low, and shifting the incidence of disease away from the most vulnerable. These apply whether the objective is to buy time, manage the progression of the disease, or limit the long-run impact of a pandemic that will run its course. The key difference in terms of the optimal strategy is whether our focus is on keeping the disease contained. If the objective is to buy time, then our analysis favors early and aggressive intervention. This minimizes the overall impact and allows for strong but scalable measures via STTQ. In contrast, limiting the cumulative cost of a pandemic that will ultimately run its course argues for aggressive policies later, when they will have the biggest impact on the peak load problem for the health-care system and when they will have the greatest impact on the ultimate number infected. Given the desire to protect the most vulnerable, this objective can even argue for allowing faster transmission to those that are less vulnerable, which further limits the burden on the vulnerable and also reduces the burden on the health-care system. Finally, the objective of long-run containment calls for an effective STTQ strategy applied early to keep the overall infection level low. Starting early lowers overall costs and lowers cumulative infections under the long-term containment strategy.

    *I was Bob Topel's RA over a quarter century ago.

    Wednesday, April 22, 2020

    Pandemic ==> inequality

    New Paper: Mobile phone (GPS) data shows
    1.  Richer and younger New York City residents are able to shelter in second homes and with friends and family away from the epicenter of the outbreak. 
    2.  Low-income, black, and Hispanic are likely to be frontline workers, while other populations are more easily able to work remotely. 
    3.  Similarly, they are likely to have higher frequency of visits to retail establishments instead of ordering food and groceries delivery services
    Bottom line:  these factors likely explain why the disease spreads more easily among poorer, older, and minority populations. 

    HT:  Marginal Revolution

    Tuesday, April 21, 2020

    Will the suburbs rise and the cities decline?

    From WSJ
    Indeed, the experience has the family rethinking its commitment to the city. Until the pandemic, the suburbs didn’t seem practical. But now that her husband, a lawyer, has proven his ability to work from home, they’re hoping his employer will be open to the idea. Last week, Ms. Euretig made her first call to a Hudson Valley real-estate agent.
    ...What’s the point of paying crazy rent on a cramped apartment if you can’t enjoy the city? 
    Related from MarginalRevolution:
     New York City’s multi-tentacled subway system was a major disseminator – if not the principal transmission vehicle – of coronavirus infection