Wednesday, June 30, 2010

Job openings in China for fair-faced foreigners

From CNN:
For a day, a weekend, a week, up to even a month or two, Chinese companies are willing to pay high prices for fair-faced foreigners to join them as fake employees or business partners.
Some call it "White Guy Window Dressing." To others, it's known as the "White Guy in a Tie" events, "The Token White Guy Gig," or, simply, a "Face Job."
Remember that signals are valuable only if they are difficult to mimic. In this case,the ability to mimic the signal should mean that its value as a signal will soon disappear.
...Because Western countries are so developed, people think they are more well off, so people think that if a company can hire foreigners, it must have a lot of money and have very important connections overseas. So when they really want to impress someone, they may roll out a foreigner.

Get sick, then buy insurance

This practice is raising the cost of Massachusetts health care for those who buy insurance before they get sick:
The number of people who appear to be gaming the state’s health insurance system by purchasing coverage only when they are sick quadrupled from 2006 to 2008, according to a long-awaited report released yesterday from the Massachusetts Division of Insurance.

Pharmaceutical Price Controls in the Philippines

Beware unintended consequences.

According to the WSJ, price caps on drugs are threatening the development of a strong generic drug industry and resulting in hospitals' increasing fees on other services to make up for losses on stocks of drugs.

Monday, June 28, 2010

Is Lollapalooza anticompetitive?

The Illinois Attorney General is investigating the so called "radius" clause that prevents acts from performing within 300 miles of a Lollapalooza site:
The C3 radius clause for Lollapalooza is generally six months before the festival and three months after, and extends for 300 miles outside Chicago. Local promoters and venues have complained in the past in Chicago and other cities with major festivals that restrictive radius clauses cut into the number of acts that can be booked by other talent buyers in the market.  
Interestingly, the radius clause, which reduces competition between Lollapalooza and rival concerts seems analogous to the restrictions on price discounting and advertising sought by PolyGram and Warner in the three tenors case. 
In 1997, PolyGram and Warner, two of the world’s largest music companies, formed a joint venture to distribute recordings of the 1998 World Cup concert. PolyGram independently had distributed recordings of the Three Tenors concert at the 1990 World Cup (3T1), and Warner alone had distributed recordings of the Three Tenors concert at the 1994 World Cup (3T2). The Commission found that PolyGram and Warner, concerned that the recording of the 1998 concert (3T3) would be less original and commercially appealing than the 1990 and 1994 concerts, agreed to a “moratorium” to restrict price discounting and advertising for 3T1 and 3T2 before and after the public release of 3T3.

The economic issue seems a little easier than the legal one. If the Lollapalooza concert would not be profitable without the radius restrictions, then the restrictions anti-competitive costs (rival concert output goes down) have to be weighed against their pro-competitive benefit (the Lollapalooza concert is performed).

This is similar to the economic issue in the 3 tenors case. If the third record would not be profitable without the price and advertising restrictions on the first two, then the restriction's anti-competitive costs (sales of the first two records go down) have to be weighed agaisnt their pro-competitive benefit (the third record gets made).

UPDATE:  Josh Wright weighs in by noting that the three tenors case involved restrictions between competitors (i.e. horizontal agreement) while the Lollapalooza restraints are unilaterally imposed on input suppliers. This is a classic exclusive dealing case which would require showing that Lollapalooza had antitrust market power. Not so in three tenors --- as Josh has written elsewhere.

Dont wait too long

The problem:
Americans increasingly are treated to death, spending more time in hospitals in their final days, trying last-ditch treatments that often buy only weeks of time, and racking up bills that have made medical care a leading cause of bankruptcies.
One solution:
- The average time spent in hospice and palliative care, which stresses comfort and quality of life once an illness is incurable, is falling because people are starting it too late. In 2008, one-third of people who received hospice care had it for a week or less, says the National Hospice and Palliative Care Organization.

Economics of Medical Marijuana

One of the odder experiments in the recent history of American capitalism is unfolding here in the Rockies: the country’s first attempt at fully regulating, licensing and taxing a for-profit marijuana trade.
The New York Times profiles the nascent medical marijuana industry in Colorado

Wednesday, June 23, 2010

The Cost of Protecting Ironing Board Makers

A Washington Post article yesterday discusses the 200 $15 per hour ironing board manufacturing jobs "saved" in the US from imposing 70%-150% tariffs on Chinese imports "dumped" on the US market. The article did interview someone not quite on-board with the program.

"It doesn't make much sense to force millions of U.S. consumers to pay higher prices for ironing boards to save 200 jobs," said Howard Rosen, an economist at the Peterson Institute who has organized efforts to get retraining programs for workers displaced by the offshoring of jobs. "It would make more sense to help workers move to other jobs."

Just how much do each of these jobs cost us? The company makes 720 per hour which comes to about ~1.5 million per year. It is unclear at what price the tariff is applied. The article claims a unit cost of $7 which is undoubtedly below the wholesale price. A typical board retails at Walmart for $55 which must be above the wholesale price. If one assumed the relevant price is $20 (a stab in the dark on my part) then annual revenue is about $29 million. At a tariff rate of just 70%, this would be about $12 million more than if we bought the "dumped" imports (more if there were an increase in sales). Or the higher prices paid by US consumers would imply that saving these jobs cost about $60,000 annually per job. This is about double the annual earnings of these workers. Amazing.


An anonymous commenter correctly noted that I linked to the wrong product. A better example would be this one at Amazon that retails for $25. In this case, my guestimated wholesale price of $20 is too high. If one used a $12 (or $15) wholesale price instead, the cost numbers above would be comparably scaled down by 40% (or 25%). This implies $36,000 (or $45,000) per job saved, still more than these folks earn.

A Return to Airline Regulation?

In response to the proposed merger of United and Continental, two U.S. House members say they will try to restore regulation to the airline industry if the merger is approved.
According to The Associated Press, Representatives James Oberstar (D-Minn.), chairman of the House Transportation and Infrastructure Committee, and Jerry Costello (D-Ill.), chairman of the panel's aviation subcommittee, said they will attempt to re-establish a government agency responsible for overseeing the airline industry if the merger goes through.
The likely winners? The airlines. The likely losers? Consumers, who have seen a major drop in the cost of air travel in the deregulation era.

Tuesday, June 22, 2010

What will be the effect of a rising yuan?

A higher yuan could:
... boost commodity prices, encourage U.S. exports, control Chinese inflation, and spark U.S. inflation. 
It will hurt US consumers and help US businesses

Are stock's over-valued?

Shiller's P/E ratio says "yes." 
Note that the P/E ratio can be thought of as a kind of break-even analysis:  how long do I have to hold the investment until the earnings pay for it?

The irony of banning advertising for "light" cigarettes

Tomorrow, cigarette packs no longer can feature names such as "light," "mild," "medium" or "low."  The reason is that smokers respond to the lower (health) costs of smoking light cigarettes by smoking more:
Light cigarette smokers ... are both likely to smoke more light cigarettes or inhale light cigarettes more deeply in comparison to ordinary cigarette smokers.
Most news outlets are reporting that the advertising ban will reduce deception, but it seems the better metaphor is that of moral hazard. This is another in a long line of results, beginning with the observation that seat belts caused more accidents, that people respond to incentives, even when we don't want them to.
Researchers have found that improved parachute rip cords did not reduce the number of sky-diving accidents; overconfident sky divers hit the silk too late. The number of flooding deaths in the United States has hardly changed in 100 years despite the construction of stronger levees in flood plains; people moved onto the flood plains, in part because of subsidized flood insurance and federal disaster relief. Studies suggest that workers who wear back-support belts try to lift heavier loads and that children who wear protective sports equipment engage in rougher play. Forest rangers say wilderness hikers take greater risks if they know that a trained rescue squad is on call. Public health officials cite evidence that enhanced HIV treatment can lead to riskier sexual behavior.

Is this a sign?

Monday, June 21, 2010

Why aren't people buying more fuel efficient cars?

The Cross-elasticity of demand for cars with respect to the price of gasoline is bigger than we thought:
"As the numbers show, vehicles with a rating of 30-plus miles per gallon have suffered a dramatic drop in sales. For the first five months of 2010, sales of vehicles with that 30-plus MPG rating have dropped by 10 percent compared to the same period in 2009," Loveday said.

"Overall, these high-efficiency cars accounted for four percent of the market in 2009, but now only hold a three percent share," Loveday continued.

"A few of these efficient vehicles suffered mightily: sales of the Toyota Camry Hybrid dropped 40 percent, Civic Hybrid sales plummeted by 77 percent and Honda Fit numbers fell off by 19.7 percent. Ward's Auto suggests that low gas prices have led to the decreased interest in fuel-efficient vehicles, which, can lead right into a discussion about the need for a gas tax once again."

Recognizing the Hidden Costs of Decisions

Today's Sally Forth (the best page of he newspaper is still the funnies) has an interesting take on the topic. While the manager might understand the concept, his grasp of the particulars may be lacking.

The Jones Act Keeps Assets in Lower Valued Uses

Speaking about the cleanup from the BP oil spill in the Gulf of Mexico last week, President Obama declared "But make no mistake: we will fight this spill with everything we've got for as long it takes." Then why are why turning away the skimmers offered by foreign countries that the Gulf governors have called for? The Christian Science Monitor reports:

"We are still receiving reports of foreign-flagged vessels being turned away or their offers of assistance hanging in limbo. That should not be the case," Sen. George LeMieux (R) of Florida wrote to President Obama Friday.

The culprit?

... the 1920 Jones Act, a protectionist law that prohibits foreign-flagged boats and crews from doing port-to-port duty within 3 miles of the US coast.

The alternative?

Grasping to boost the spill response as BP tries to contain a runaway wellhead spewing up to 60,000 barrels of oil into the Gulf a day, Adm. Allen announced Friday that Unified Command is outfitting 2,753 locally-owned boats with skimming equipment, a process that could take two months. That, at least, is likely to prove politically popular along the Gulf Coast, where many residents are clamoring for ways to help fight the spill – and to get paid doing it.

Hat tip: Jane Himarios

Saturday, June 19, 2010

What does the end game look like?

Watch the blue states:
Joshua D. Rauh, an associate professor of finance at Northwestern University who studies public pension funds, predicts that at the current rate, Illinois’s pension system could run out of money by 2018. He believes the funds of other troubled states — including New Jersey, Indiana and Connecticut — are also on track to run out of money in less than a decade, unless they make meaningful changes.

If a state pension fund ran out of money, the state would be legally bound to make good on retirees’ benefits. But paying public pensions straight out of general revenue would be ruinous. In Illinois’s case, it would consume about half the state’s cash every year, bringing other vital state services to a standstill.

When push comes to shove, Consequentialism trumps Deontology

What can Congress learn from North Korea?
SEOUL -- Bowing to reality, the North Korean government has lifted all restrictions on private markets -- a last-resort option for a leadership desperate to prevent its people from starving.

In recent weeks, according to North Korea observers and defector groups with sources in the country, Kim Jong Il's government admitted its inability to solve the current food shortage and encouraged its people to rely on private markets for the purchase of goods.

Friday, June 18, 2010

How do we know that Nashville is currently more attractive than San Diego?

Look at where people are moving.  Red lines indicate outflows; black lines, inflows.  

Economists call this "revealed preference." 

Advice for college freshman

From  David Brin (9 min video)

From Kurt Vonnegut (not)

Wear sunscreen.
If I could offer you only one tip for the future, sunscreen would be it. The long-term benefits of sunscreen have been proved by scientists, whereas the rest of my advice has no basis more reliable than my own meandering experience. I will dispense this advice now.
Enjoy the power and beauty of your youth. Oh, never mind. You will not understand the power and beauty of your youth until they've faded. But trust me, in 20 years, you'll look back at photos of yourself and recall in a way you can't grasp now how much possibility lay before you and how fabulous you really looked. You are not as fat as you imagine.
Don't worry about the future. Or worry, but know that worrying is as effective as trying to solve an algebra equation by chewing bubble gum. The real troubles in your life are apt to be things that never crossed your worried mind, the kind that blindside you at 4 pm on some idle Tuesday.
Do one thing every day that scares you.
Don't be reckless with other people's hearts. Don't put up with people who are reckless with yours.
Don't waste your time on jealousy. Sometimes you're ahead, sometimes you're behind. The race is long and, in the end, it's only with yourself.
Remember compliments you receive. Forget the insults. If you succeed in doing this, tell me how.
Keep your old love letters. Throw away your old bank statements.
Don't feel guilty if you don't know what you want to do with your life. The most interesting people I know didn't know at 22 what they wanted to do with their lives. Some of the most interesting 40-year-olds I know still don't.
Get plenty of calcium. Be kind to your knees. You'll miss them when they're gone.
Maybe you'll marry, maybe you won't. Maybe you'll have children, maybe you won't. Maybe you'll divorce at 40, maybe you'll dance the funky chicken on your 75th wedding anniversary. Whatever you do, don't congratulate yourself too much, or berate yourself either. Your choices are half chance. So are everybody else's.
Enjoy your body. Use it every way you can. Don't be afraid of it or of what other people think of it. It's the greatest instrument you'll ever own.
Dance, even if you have nowhere to do it but your living room.
Read the directions, even if you don't follow them.
Do not read beauty magazines. They will only make you feel ugly.
Get to know your parents. You never know when they'll be gone for good. Be nice to your siblings. They're your best link to your past and the people most likely to stick with you in the future.
Understand that friends come and go, but with a precious few you should hold on. Work hard to bridge the gaps in geography and lifestyle, because the older you get, the more you need the people who knew you when you were young.
Live in New York City once, but leave before it makes you hard. Live in Northern California once, but leave before it makes you soft. Travel.
Accept certain inalienable truths: Prices will rise. Politicians will philander. You, too, will get old. And when you do, you'll fantasize that when you were young, prices were reasonable, politicians were noble, and children respected their elders.
Respect your elders.
Don't expect anyone else to support you. Maybe you have a trust fund. Maybe you'll have a wealthy spouse. But you never know when either one might run out.
Don't mess too much with your hair or by the time you're 40 it will look 85.
Be careful whose advice you buy, but be patient with those who supply it. Advice is a form of nostalgia. 

Dispensing it is a way of fishing the past from the disposal, wiping it off, painting over the ugly parts and recycling it for more than it's worth.
But trust me on the sunscreen."
Author: Mary Schmich (USA)
First published: July 1, 1997
Copyright: Herald Tribune

Thursday, June 17, 2010

Investors want compensation for holding Greek Debt

But the probability that the a country will stop using the EURO has risen only slightly.

Can you recognize opportunity costs?

Select the Best Answer to the Following Question:
You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton?
A. $0
B. $10
C. $40

D. $50
Have an answer? Now try this one:
Select the Best Answer to the Following Question:You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the minimum amount (in dollars) you would have to value seeing Eric Clapton for you to choose his concert?
A. $0
B. $10
C. $40

D. $50
Have an answer? Scroll down.

The answer to both is (of course?) B.
A study polled PhD economists and found that only 22% got the first right, and about 40% got the second right. Year of degree, quality of school, etc., were insignificant in explaining this. Only significant finding was that micro theorists were better than all other groups, and macroeconomists were indistinguishable from undergraduates who NEVER took an econ course!

Cork Competition

Benjamin Franklin claimed that "in the world nothing can be said to be certain except death and taxes." I think we should add competition to the list. The previously cozy natural cork market is now fighting competition from plastic corks.
The story of how Nomacorc and other stopper upstarts broke the centuries-old cork monopoly is a lesson in how innovation, timing and hustle combined to exploit an opening in a once airtight market. It shows that any dominant industry can be vulnerable to competition, especially if it grows complacent about its position.

Wednesday, June 16, 2010

Governments Can Create Wealth

A new article by Galiani and Schargrodsky in press at the Journal of Public Economics examines the effects of providing land titles to squatters in Buenos Aires. They find that:

... entitled families substantially increased housing investment, reduced household size, and enhanced the education of their children relative to the control group. These effects, however, did not take place through improvements in access to credit. Our results suggest that land titling can be an important tool for poverty reduction, albeit not through the shortcut of credit access, but through the slow channel of increased physical and human capital investment, which should help to reduce poverty in the future generations.

Enforcing property rights matters.

Tuesday, June 15, 2010

When should you negotiate; and when should you use an auction?

Pat Bajari (paper, paper) and various co-authors conclude that
Auctions may perform poorly when projects are complex, contractual design is incomplete, and there are few available bidders. Furthermore, auctions may stifle communication between buyers and sellers, preventing the buyer from utilizing the contractor's expertise when designing the project.

Bottom line: use negotiation when flexibility (like change orders) is important, as is likely for large complex projects; and if you negotiate, use a reputable firm because you are subject to hold up when unforeseen contingencies arise. Contracting with a reputable firm can reduce the risk of hold-up.

Should BP Anticipate Hold Up?

A number of US Senators are calling for BP to create an escrow fund from which those affected by the spill off of Louisiana could be compensated. This very well could be a good idea. It might insure that funds will be available to all claimants and it might relieve BP from long term commitments. But how vulnerable does it leave BP to possible hold up problems?

Suppose experts estimate the price tag at $20 billion (or $30 billion or whatever) and BP funds this. What would keep the government from coming back later and claiming that the actual costs are greater? In fact, I would expect that whatever deal is reached would include contingencies under which BP would have to pony up more funds. It is just too difficult to foresee all of the costs from such a singular event. But this leaves BP vulnerable to later claimants to arguing that the conditions are met when they might not be. Anticipating this BP is likely to drag its feet. It might low ball estimates and put up more onerous conditions than optimal knowing that it will have to relax them later. In the end, it would not free them from long term commitments and they are likely to suffer continued reputation loss for decades.

Monday, June 14, 2010

How do landlords find good tenants?

One of my former students who owns and manages several rental properties sent me his favorite screening techniques:
  • Big initial deposit (first, last, and deposit, all in first check):
  • All payments by check only (dead beats are more likely to use cash)
  • All payments in one check: (does not accept individual checks from multiple renters)
  • Leases are 12+ months in duration: 
  • STP marketing: (Segmenting, Targeting, Positioining) to attract desireable renters--dont use classified ads; instead advertise in the weekly newspaper; do advertise amenities, like location, fenced yard, full appliances, proximity to schools, pets, etc.
  • It used to be that Internet literacy was important; but with the increasing popularity of the Internet, this has lost value as a screen.

Thursday, June 10, 2010

Incentives Matter - Bosomy Hitchhikers Edition

Apparently one of the incentives (see the link if you are interested in a photo of what a bosomy hitchhiker might look like) associated with picking up a female hitchhiker is appreciation of her chest. In an experiment in which the apparent breast size of a hypothetical female hitchhiker was varied from an A-cup to a C-cup, men were significantly more likely to stop for the C-Cup compared to the A- or B-cup; women drivers, however, weren't affected by this "incentive."
HT: Eric Barker

Monday, June 7, 2010

More on MLB Price Discrimination

Add the San Francisco Giants to the list of Major League Baseball teams trying to increase profits through price discrimination (we previously highlighted the Cubs and the Orioles). The Giants use a software package developed by Qcue:
[the software] helps the Giants price baseball games in much the same way airlines manage seat prices to keep planes full. Kahn's company, Qcue (pronounced "Q-Q"), crunches numbers on dozens of variables to determine prices that will get the largest number of fans into the stands. The software helps the Giants set prices based on past ticket sales, the day and time of the game, the teams' records, the pitching match-up, the weather, the going rate on resale Web sites like StubHub, and other data.

When should you sell Treasury Debt?

I have more than a few economist colleagues who lost money by betting that long term treasury rates would increase and the dollar would fall.  We know this will happen, but we don't know when:
Dan Fuss, who manages the Loomis Sayles Bond Fund, which beat 94 percent of competitors the past year, said last week that he sold all of his Treasury bonds because of prospects interest rates will rise as the U.S. borrows unprecedented amounts. Obama is borrowing record amounts to fund spending programs to help the economy recover from its longest recession since the 1930s.

Thursday, June 3, 2010

Did Cash for Clunkers work?

One theoretical objection to Keynesian stimulus is that it merely "steals" economic activity from the future. For Cash for Clunkers the future was only a couple of months away.

How long should you wait before you evict a deliquent homeowner?

This is an extent decision that uses marginal analysis to balance two opposing forces:
...too little time in the foreclosure process, [means that] some borrowers are unable to recover from relatively mild setbacks before they lose the home ..., and too much time in the foreclosure process, [means] that the borrower is incented to let the home go to foreclosure sale during which no mortgage payments are made (in essence, free rent for a significant time).

270 days is the optimal time.

Wednesday, June 2, 2010

Vertical Integration and Tax Avoidance

Vertical integration refers to the practice of a company buying a supplier (backward integration) or customer (forward integration). One of the motives for vertical integration is to avoid regulation, such as taxes. If a company has customers or suppliers located in countries with lower tax rates, it makes sense to purchase one of those companies in order to shift profits to the lower tax location.

Here's a really interesting story from Business Week on how one pharmaceutical company, Forest Laboratories, uses vertical integration to avoid taxes. As just one example, about 5 percent of the company's workers are located at its Irish facilities, yet around 70 percent of its 2009 sales were realized there (care to guess whether Ireland has high or low corporate taxes?). Follow the money as it visits the US, Ireland, the Netherlands, Bermuda, . . .

Tuesday, June 1, 2010

Do organizations "test" the decisions they make?

When his firm decided to introduce a Christmas menu into their restaurant chain, one of my students decided to test the profitability of the change by introducing it in only half the restaurants in his territory. By comparing sales changes at these restaurants (the "experimental group") to changes at restaurants that did not introduce the menu (the "control group"), he concluded that the change did little to increase overall sales, despite the apparent popularity of the menu.

This inference was possible only because my student constructed what economists call a difference-in-difference estimate of the change. The first difference is before vs. after introduction of the menu; the second difference is between the experimental and control groups.

The difference-in-difference methodology controls for other unobserved factors that might have accounted for the change. The FTC has released a number of studies following up on merger enforcement decisions to try to figure out whether they did the right thing. For two consumated oil mergers, FTC economists Dan Hosken and Chris Taylor (article) and John Simpson and Chris Taylor (article) found that prices in cities affected by the merger did not increase relative to prices in control cities. In the time series graph below, the three lines represent gas prices of the experimental city (Louisville) relative to gas prices in three control cities (Chicago; Houston; Arlington, VA) for the Marathon Ashland gasoline merger. The vertical line represents the date of the merger. By comparing prices before and after the merger, we see the merger had no effect, or that the FTC was correct to let it through without a challenge.
FTC General Counsel (now Commissioner) Bill Kovacic coined the term "Enforcement R&D" to describe the practice of government agencies following up on their decisions to improve policy (article).

I would like to hear stories from readers about how, or if, their organizations test decisions.

NOTE: This post is copied from our old, almost defunct blog, Management R&D.

Soft drink manufacturers collude to stay out of schools?

Is this anti-competitive behavior in the public interest?
Let’s face it. The real reason the competing beverage companies agreed to this campaign is because they want to preempt more onerous regulation and/or “sin taxes” on sugary drinks. (See these articles from Advertising Age.) Unlike the purported goal of enhancing output by creating goodwill, this goal is best served by concerted, rather than individual, action. That’s because voluntary action to preempt more onerous regulation is subject to a collective action problem. Any firm that voluntarily cuts back its sales to forestall regulatory action will want to sacrifice as few sales as possible. Each firm also knows that in deciding whether to impose restrictions, regulators tend to look at overall industry trends. Each firm therefore wants its rivals to cut back a lot (so that the industry as a whole appears to be acting responsibly) while it cuts back only a little (thereby minimizing the cost of its preemptive strategy). If every firm has this attitude, though, the total voluntary reduction by the industry as a whole won’t be sufficient to prevent regulatory action. Thus, rivals seeking to forestall more onerous regulation need to commit to each other that they will each achieve specified reductions.