Corruption vs. collusion (bid rigging) in Govt. Procurement.

The United States has rigid procurement rules, designed to prevent the government bureaucrats who oversee procurement from steering government contracts to well-connected patrons.  To a large extent they succeed, at least when compared to other countries.

However, the rules also prevent procurement officers from responding to collusion by, for example, raising reserve prices, or by promising one of the bidders a big share of the future procurement if she offers a better price.  

This trade-off is examined theoretically, in a recent paper by some middling economists entitled Horizontal Mergers in Optimal Auctions, where procurement agents have the flexibility to design auction rules in response to the threat of collusion:

Merger [or collusion] effects are ... much smaller than in open auctions because bidders compete more against an optimal mechanism than they do against each other. As a consequence, there is less competition for mergers [or collusion] to eliminate.

This implies that collusion would have much smaller effects, if the auctioneer had the ability to react to collusion, e.g., with a higher reserve.  But giving the auctioneer this ability could also lead to patronage (corruption).

Health insurance, NOT pre-paid consumption

The Republican critique of the Affordable Care Act (Obamacare) is that it is not really insurance (covering large impact, low probability events, like catastrophic illness) but rather pre-paid consumption (paying for small predictable expenses).  Singapore's Health insurance seems to validate this critique:

Singaporeans pay for much of their own care out of their own pockets, and their major insurance program is designed to cover long-term illnesses and prolonged hospitalizations, not routine care. The combination has produced genuinely extraordinary results: The island state has excellent health outcomes while spending, as of 2014, just 5 percent of G.D.P. on health care. (By comparison, a typical Western European country that year spent around 10 percent; the United States spent 17 percent.)

HT:  MarginalRevolution.com

Auto makers and AI

Auto makers have largely become auto assemblers who now purchase most of their components from suppliers rather than being completely vertically integrated. They are a long way from the famous River Rouge plant whose 100,000 employees were able to turn raw materials into running vehicles within this single complex.

But now automakers see the fabulous potential in driverless cars to reshape the industry. Ford just bought an AI firm for $1 billion. They seem to be vertically integrating into this technology as fast as they can by acquiring the firms that are producing these components.

In the last several months, Ford acquired Chariot, a start-up that ferries commuters around the San Francisco area, and invested in Civil Maps, which is developing 3-D mapping technology that can be used by self-driving cars. In August, Ford also acquired SAIPS, an Israeli company developing machine learning and computer-vision technology.

and

Other automakers are moving in the same direction. General Motors has invested $500 million in Lyft, a ride-hailing service and main rival of Uber. G.M. also acquired Cruise Automation, a maker of sensors and other gear that can enable conventional automobiles to drive themselves on highways.

Why the reversal on vertical disintegration?

Possibly for quality assurance reasons. Driverless cars rely on computers and software that comes from an industry notorious for rushing new products out the door, sometimes before all the kinks are worked out. But getting the PC’s “blue screen of death” at 80 mph might become a bit too literal. If the software in your Ford failed, you would sue Ford, not its supplier. Knowing this, its supplier might not do all the safety checks Ford might want. A solution, make them part of Ford.

"Coming Apart" author at Vanderbilt

Vanderbilt's Adam Smith Society (Free Markets, Open Minds), hosted Charles Murray at Vanderbilt yesterday who gave a talk on his book, Coming Apart, in which he documents the bifurcation of US white males aged 30-49, into a "cognitive elite," and an underclass that is much worse off:

Less than a third of its children grow up in households that include both biological parents. The men claim physical disability at astounding rates and are less likely to hold down jobs than in the past. Churchgoing among the white working class has declined, eroding the social capital that organized religion once provided.

Murray's thesis closely parallels that of Tyler Cowen's The Complacent Class, as evidenced in The New Segregation video.

Is it ethical to keep frequent flyer points for yourself?

When Jimmy & Evelyn founded Taco Love, they purchased supplies on company credit cards and used the points for personal travel. As the chain grew, they brought in a second investor, and the three of them shared the points among themselves, allowing them to purchase several business-class tickets to Europe each year.

As the chain continued to grow, two more outside investors were brought in.  The new CFO who came with them insisted that the points be used only for company approved travel.  The relationship between the founders and the new shareholders began to sour and, eventually, the new shareholders bought out the founders and terminated their employment with the company.

If anyone does not immediately see that the new CFO stopped what was essentially theft, please re-read Milton Friedman's famous NY Times editorial, "The Social Responsibility of Business is to Increase Profit."

To survive, mall food brands are changing strategies

In the past, mall food brands (like Sbarro, Cinnabon, Jamba Juice, and Panda Express) were successful as impulse purchases:

"You eat Sbarro not because you want Sbarro, but because it is the food that is available at the moment you want some food," Neil Irwin wrote at the time in The New York Times. "Other fast-food chains may offer mediocre food, but their real estate strategies are less exposed to the epic decline in foot traffic in the nation's malls." 

Cinnabon's president, Joe Guith, said Cinnabon wasn't necessarily a place you'd get in the car to go to, but more of a place you'd stop at when you're walking by. 

"We're an impulse brand," Guith told Business Insider. "We work where the people are."

To survive most of these brands are re-locating to areas of high foot traffic:

While many East Coast customers may associate Panda Express with samples of orange chicken handed out in the mall food court, for the past two decades, the chain has focused on opening more stand-alone locations — today just 2% of its locations are in malls. 

In 2015, Sbarro announced it would debut a trendy fast-casual concept with made-to-order pizzas, pasta, and salads. Cinnabon and Jamba Juice are both investing in smaller, kiosk-like locations in high-traffic areas such as college campuses, amusement parks, and airports. 

"Having a flexible store format that can translate to different geographies and store formats will somewhat help mitigate" declining mall traffic, Colin Radke, an analyst at Wedbush, told Business Insider. "But those that are heavily exposed to malls, there's not much they can do."

Due to competition, the outlook is not good:

 Even in high-traffic places like college campuses, people have more options than they would if they were within a mall. And with concerns that there are simply too many restaurants open in the US, food-court chains can't depend on customers stumbling upon locations.  

 There's also the issue of food quality. Opening new locations won't help brands that people associate with rewarmed pretzels or oversized tubs of fried mystery meat.

Is it ethical to lay off employees in need?

Jorge Pine is a restauranteur who attributes success to three elements:  great food, great operations, and enough capital to support them.  However, after opening up a new restaurant, "Taco Love," he noticed a problem with operations.  The profit margin (net income divided by revenue) was only 5%, well below the 20% required to cover the cost of capital.

After looking at the books, Jorge noticed that labor costs were unusually high.  He spoke to his manager and discovered that she was reluctant to send workers home when demand was low, as on rainy days.  "They need the money," the manager explained, pointing out several workers who supported young families, or sent money back to struggling parents in Mexico.

Jorge sat his manager down and said, "look, if you do not hold costs down, this restaurant won't earn a profit, and my investors will not fund our next one."  Jorge had plans to open three more "boxes" under the same brand name.

Jorge continued, "Think about the families of the workers that I am not going to be able to hire, and what is going to happen to them if you don't earn a profit." The manager responded positively to Jorge's talk, and now Taco Love is so successful, that Jorge plans to expand to other cities.

The moral of this story is still one of incentive alignment--successful businesses will find ways to give workers enough information to make good decisions and the incentive to do so--but incentives include more than just money.  Great managers learn what motivates employees, and use that knowledge to get them to do the right thing.

This story also illustrates: (i) the zero-sum fallacy (when the restaurant makes more, the proverbial pie gets bigger), (ii) the consequentialist morality of earning profit, and (iii) the hidden cost fallacy--the manager should have considered the hidden cost of her decision, on the workers who were not going to be hired.

New era of segregation

Summary of 7 min video below: segregation caused by artificial intelligence, e.g., software that matches job applicants to firms, and potential mates, is exacerbated by housing restrictions. http://marginalrevolution.com/marginalrevolution/2017/03/new-era-segregation.html

this is related to our blogging about how zoning restricts housing supply which raises house prices.  

Institutionalized Moral Hazard in Health Care

Q: What happens when providers post all-inclusive prices for medical services?
A: They actually have an incentive to reduce costs.
See the video at youtube here.

Barriers to trade within India, Canada, South Africa

Good story about trade barriers within India:

At the Walayar checkpoint in southern India, lines of idle trucks stretch as far as the eye can see in both directions along the tree-lined interstate highway, waiting for clearance from tax inspectors that can take days to complete.

Canada has the same problem:

(Canada, by the way, also has this problem. It’s often cheaper for a Canadian firm to ship to the US than to another province in Canada. You can find similar problems in Southern Africa where it is cheaper for South Africa to import produce from South America than from Zambia, as this excellent video discusses.)

Should you move from Connecticut to Wisconsin?

To figure out how much to save to pay off current and future retirees, public pension defined benefits plans discount future expected liabilities at 7.5-8.5%.  If they earn that much on their investments, then they will have enough to pay the retirees.  However, this year, their investments earned only 6.8%, the lowest since 2016.

On average, pension under-funding is close to 50%.  So pension fund managers have tried to earn more by investing in

... riskier, less traditional investments over the past decade. Large public pension plans had a median 11.47% of their assets in alternative investments such as private equity for the year ended June 30 and a median 4.45% of their investments in real estate.

One good solution is Wisconsin's, to turn the defined benefits plan (paying a guaranteed amount) into a defined contribution play (paying an amount that depends on how well investments do).

However, many states, like Connecticut, are leaving this problems to future generations.  The public employees union reached agreement with the governor to ignore the problem until 2046. By that time, the fund will have fewer assets generating income which makes higher taxes, reduced state services, and pension cuts more likely.

And if residents anticipate these changes, they will migrate to states like Wisconsin that don't have these problems.  If so, this may drive down the value of real estate in CT to compensate residents for living in the state.  In equilibrium a mobile asset (people) has to be indifferent about where it is used; otherwise, it will move.