Happy new year, start worrying now

Our grandparents are screwing our grandkids via Medicare::

... an average-wage, two-earner couple together earning $89,000 a year. Upon retiring in 2011, they would have paid $114,000 in Medicare payroll taxes during their careers. But they can expect to receive medical services -- from prescriptions to hospital care -- worth $355,000, or about three times what they put in.

And are getting screwed (slightly) via Social Security:

The same hypothetical couple retiring in 2011 will have paid $614,000 in Social Security taxes, and can expect to collect $555,000 in benefits. They will have paid about 10 percent more into the system than they're likely to get back.

Other people's money

Why do we still use car seats for older kids?

Steven Levitt wants to know.

When you run out of money, stop paying the pensioners

Pritchard, Alabama is the canary in the coal mine:

Then Prichard did something that pension experts say they have never seen before: it stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full.

After decades of fiscal irresponsibility, the only choices left are "politically impossible"

Don't define the problem as the lack of your solution, ...

...unless you want to manipulate the decision makers into accepting your solution. In this case, the Democrats on the Financial Crisis Commission have decided that the crisis was caused by a lack of derivatives regulation, not a housing bubble.

I would hazard a guess that Fannie and Freddie outbid the investment banks for this Committee. In the immortal words of Deep Throat (the whistleblower from Watergate), "Follow the money."

How to impress Goldman Sachs

One of my former Accelerator students told me about one of her college professors who brought in someone from Goldman Sachs to speak to her class. The topic of the presentation was the 360 degree performance evaluation at Goldman Sachs. Apparently, he was telling the class about how great it is and how open people are to feedback from their colleagues and how it has really improved productivity and allowed the firm to retain only the best people.

My student thought it sounded phony, so she asked him whether people's bonuses were tied to their performance evaluations. He said yes. She then asked why employees wouldn't just collude and give each other really high marks so that everyone could get a great bonus.

Some of her classmates reacted negatively, and later told her that they couldn't believe she would asked a question like that, and that it was "completely inappropriate."

But after the class ended. the speaker took her aside and told her that he has given that presentation numerous times, and she was the only student the was smart enough to look past the surface and ask such a hard question. Despite his initial enthusiasm, he conceded that she was probably right.

Elasticity of transportation demand with respect to service

The two biggest determinants of bus ridership are the hours of operation and the price.  Here is evidence from a natural experiment in Atlanta:

..in the month after it cut bus hours by 10 percent and rail by 14 percent, MARTA lost a heap of riders....In October, people took 37,000 (0.5%) fewer train trips than they did in September, and 325,000 (5.6%) fewer bus trips.

Interestingly, the size of the ridership declines were smaller than the cutbacks in hours of service.  This must mean either that MARTA cut back only during the unpopular times, or that riders substituted rides during the cancelled times to rides during the remaining times.

The article says also that prices went up, so this may not be as clean of a natural experiment because two things are changing at once, so it is hard to infer which is causing the change.

Optimal ethics

Imagine that you discover that one of your employees has done something wrong, like accessing information about clients and using it in unethical, though perhaps not illegal manner.  This puts you in the familiar dilemma of a prosecutor:

1. you can punish the employee harshly to boost morale among the "good" employees, and to deter future malfeasance; or 
2. you can offer leniency in exchange for information from the employee that will help you design better safeguards.  

Which option should you choose?

The answer depends on whether the value of the information is bigger than the "cost" leniency, in terms of lower deterrence, or morale.

Note that, just like a prosecutor, you should expect adverse selection.  Only employees who think the leniency looks like a good option will choose it, and those are the ones who have committed more bad acts.  This is just like the adverse selection associated with plea bargaining--pleas are accepted by only those who think the plea bargain looks attractive (those with low chance of winning at trial), e.g.,

Froeb, Luke, The Adverse Selection of Cases for Trial, International Review of Law and Economics, 13(3), (June, 1993) 317-324

WARNING: this post has nothing to do with Managerial Economics

If your music-loving friend lost all his music in a fire, what would you purchase to replace it? Here is a list compiled by Willy Stern's friends:

• R.L. Burnside. "Come On In."
• Bruce Spingsteen, Darkness on the Edge of Town!
• George Thorogood and the Destroyers (first album)
• Bob Marley, Exodus
• The Clash, "London Calling"
• Elvis Costello, either "My Aim Is True," "This Year's Model," "Armed Forces" or "Get Happy"
• Miles Davis, "Kind of Blue" or "In a Silent Way"
• Bob Dylan, "Blonde on Blonde"
• Ella Fitzgerald, "Best of the Verve Songbooks Vol. 1"
• Van Morrison, "Astral Weeks" or "Moondance"
• Frank Sinatra, "Sinatra Sings for Only the Lonely" or "In the Wee Small Hours"
• Bruce Springsteen, "Born to Run"
• "Stax 50th Anniversary Celebration" (50 songs on 2 discs -- essential)
• Stevie Wonder, "Innervisions"
• Robert Earl Keane's 'Gringo Honeymoon,'
• Lyle Lovett's 'Road to Ensenada,'
• Jerry Jeff Walker's greatest hits
• Screaming Blue Messiahs' 'Bikini Red.'
• Travelling Wilburys' Vol. 1 & Vol. 3.
• Delbert McClinton: Fortunate Few
• Stevie Wonder: Songs in the Key of Life
• Stevie Winwood: Back in the High Life
• Santana: Smoot
• Ali Farke Toure, "Talking Timbuktu"
• Keith Jarrett, "The Koln Concerts"
• Van Morrison, "Astral Weeks" and "Into The Music"
• The Nitty Gritty Dirt Band, "Will The Circle Be Unbroken"
• Al Green, "Greatest Hits"
• The Jayhawks, "Hollywood Town Hall"
• The Pretenders, "Greatest Hits'
• Bonnie Raitt,"Angel From Montgomery"
• Muddy Waters, "Hard Again"
• Beach Boys "Endless Summer"
• Getz/Gilberto (music by Antonio Carlos Jobim, sung by Astrud and Joao Gilberto, sax by Getz)
• Ella & Louis (the Ella Fitzerald & Louis Armstrong recording, on Verve)
• Solo Monk (Thelonious Monk)
• Beach Boys "Pet Sounds"
• The Essential Chet Atkins
• Chopin played by Arthur Rubinstein
• rust never sleeps - neil young & crazy horse
• kiko - los lobos
• anodyne - uncle tupelo
• the essential jimmie rodgers
• rain dogs - tom waits
• automatic for the people - r.e.m.
• screaming for vengeance or british steel - judas priest (in case he likes to head bang!)
• blue horse - the be good tanyas
• green river - creedence clearwater revival
• within a mile of home - flogging molly
• #1 record/radio city - big star
• modern sounds in country and western music - ray charles
• shepherd moons - enya
• the velvet underground - the velvet underground
• trace - son volt
• pink moon - nick drake
• a charlie brown Christmas, vince guaraldi trio
• light of the stable, emmylou harris.
• Junior Brown's, “Greatest hits”
• Miles--kind of blue
• Monk--solo
• Beatles--white
• Son Volt--trace
• Lambchop--is a woman
• sex pistols--never mind the bollocks.
• Resphigi: Ancient Airs and Dances Suite No. 1: I. Il Conte Orlando: Balletto (Simone Molinaro) only the Los Angeles Chamber Orchestra with Neville Marriner conducting on EMI digitally remastered in 1996.
• Richard Pryor: That Nigger's Crazy. Not really music in the strict sense, but your friend needs it.
• O'Jays: Back Stabbers.
• Bob Marley and the Wailers: Legend
• Fela Kuti: Teacher Don't Teach Me Nonsense.
• the soundtrack to coens' movie 'oh brother where art though?'
• dandys rule ok by the dandy warhols
• consolers of the lonely by the raconteurs
• space wrangler by widespread panic
• simple things by zero 7
• Time Out-- Dave Brubeck
• Gordon-- Bare Naked Ladies
• Greatest Hits-- Stevie Ray Vaughn and Double Trouble
• Lovers Rock-- Sade
• Negotiations and Love Songs-- Paul Simon
• Just Another Band from LA-- Frank Zappa
• The Way It Is-- Bruce Hornsby and the Range
• How to Dismantle and Atomic Bomb-- U2
• Let it Bleed-- Rolling Stones
• Hot Tuna-- Hot T
• Ray Charles (probably a greatest hits album, but make sure it contains "America the Beautiful")
• Charles Brown, One more for the road
• Grateful Dead: Skull & Roses
• Medeski Martin and Wood: Shack Man
• Jimi Hendrix: Electric Ladyland
• Thelonious Monk: Underground
• Los Lobos: Colossal Head
• COUNTRY NEGRO JAM SESSIONS (Arhoolie)
• PINEY WOOD BLUES -- Big Joe Williams (Delmark)
• ROLLIN' STONE: THE GOLDEN ANNIVERSARY COLLECTION -Muddy Waters (MCA)
• CHARLIE PATTON: FOUNDER OF THE DELTA BLUES (Yazoo)
• Forthcoming (Spring 2011) HOWLIN' WOLF 3-CD Collection (complete to 1960) (Hip-O)
• Elvis (Sun sides)
• Sam Cooke (Night Beat)
• Allmans Live @ The Fillmore East
• Nighthawks - Open All Night (hard to find, no doubt)
• NBRQ - Stay WIth We: Best of NRBQ
• Whiskeytown - Pneumonia
• Subdudes - Annunciation
• Robinella - Solace for the Lonely
• Bruce Cockburn - Nothing But a Burning Light

Economic effect of Virginia Court ruling: adverse selection

If the ruling in Virginia stands, that the individual mandate in President Obama's Healthcare plan is unconstitutional, then only the sick people will sign up for the insurance:

what you will get is a death spiral in the insurance markets, as the healthy people wait to buy insurance until they get sick, and the cost of insurance spikes to the point where no one can afford it.

Compensating risk differentials for prostitution are small

Past research has found that prostitutes earn about twice the weekly wage of a typical non-manual female worker and three times that of manual workers. One reason for this wage premium is the opportunity cost of foregoing marriage, though working in a foreign country reduces this cost. New research finds that Chicago street prostitutes earn roughly four times their hourly wage in other activities, but this higher wage represents relatively meager compensation for the significant risk they bear. One reason for the low compensation despite the high risk is the relatively elastic supply.

Lessons from Iceland: let the banks go bust

In past posts, we detailed the bursting bubble in Iceland, but it looks as if they are on the road to recovery:

Like Ireland and Greece, Iceland has taken a large dose of austerity measures to rebuild its economy. Unlike Ireland and Greece, however, Iceland allowed private banks to fail, and its currency, the krona, has declined by about 46 percent against the dollar since the start of 2008. ...

Iceland’s experience, he said, offered a lesson for the euro zone as it grappled with its own crisis: “This is the proper process. If you go through a bubble economy and you need to correct it, the answer is not to convert private debt into public debt. Rather it is to restructure the debt to the level of the assets.”

Cartoon intro to Co-opetition

Cooperation+Competition=Co-opetition. My coauthor made a movie for his strategy class.

Visual display of quantitative data

We have blogged about this before, but one of the biggest improvements in the past two decades has been in the visual display of quantitative information. The video below (taken from Gapminder) dramatically illustrates how easily one can "see" relationships in data that are displayed graphically. This is part of a much larger trend, where business decisions are made better and faster, by relying on easy-to-communicate performance metrics, like those presented on business "dashboards." (example)



HT: Don Marron

Unintended Consequences - Academic Standards Edition

Even university administrators must anticipate adverse selection. My fine university is working to become even finer. The university has been able to hire more and better researchers and is experiencing very impressive enrollment growth. One metric the university wants to improve is our graduation rate. Historically we have had an embarrassingly low 52% graduation rate. Many students can get admitted to the university but do not meet higher requirements for admission to a departmental major and then drop out. To boost student retention, the university has developed a degree in generic "University Studies," a catch-all for these students, administered by University College.

How would one expect departments to react? 'Low quality' students are headaches that suck up departmental resources. We set departmental admissions criteria to avoid dealing with these students. I just came from an academic standards meeting in which two of our academic units have proposed to increase departmental admission standards (GPA in the program) even further. A justification for not doing this earlier was that it was not fair to students who have made it to their senior year by taking courses in a program and then have this coursework not count toward a degree on campus. But with "University Studies" these courses can apply to a degree. The various departments are in a race to dump their 'low quality' students into "University College."

Why can't we get work done at work?

...because meetings and managers get in the way.

When will AIDS prevention work?

Only when the benefits of investing in AIDS prevention (longer life) are bigger than the cost (less sex). Emily Oster presents her research on AIDS, showing that everything we know about AIDS is wrong. My favorite part of the video is when she shows that AIDS prevention efforts fail in countries with high malaria rates. In these countries, life expectancies are so low so that investment in AIDS prevention (less sex to gain a longer life) doesn't pay off (negative NPV) because you are likely to die of malaria even if you don't get AIDS.

Price Discrimination + Yield Management + Viral Marketing

Groupons has a pretty innovative business plan. They allow firms to offer discounts to consumers who are more price sensitive, willing to take a little risk and willing to put up with a little hassle. Retailers can dump excess capacity into the system at a reduced price. The deal is only activated if enough consumers choose it. Thus, groupon users are encouraged to solicit their network of acquaintances to opt in too. This, in turn, selects consumers who might not be familiar with the product (more elastic) and they get an endorsement from a "trusted" acquaintance.

I have seen other Internet based coupon or discount sites before. Most are small shoestring operations. By combining social networking elements, this effort may become more established. At least Google thinks so.

What happens when you make it easier to shop?

High search costs make demand less elastic (lower prices attract fewer customers because not as many consumers can "find" lower prices) and this leads to higher prices in markets like gasoline. Products like SmartFuel (review) are designed to allow customers to search more cheaply. As products like SmartFuel bring search costs down, the market will become more competitive, and gas prices will fall.



DISCLAIMER:  The guy in the video, George Sibble, is a former student, and I have a financial interest in his company.

Practical Employee Screening

Following the previous post, I found this interesting article, "15 Google Interview Questions That Will Make You Feel Stupid" about tough interview questions by interviewers at Google. I did OK but I think I'll keep my day job.