Sunday, October 14, 2018

Dawn raids uncover evidence of beer price fixing in India

Absent cooperation from one of the conspirators, collusion is difficult to prove because it requires evidence of an agreement between competitors.  Most executives are counseled to imagine what would happen if their correspondence and e mails were made public.  

To gather evidence, the competition authorities create a "prisoners' dilemma", by offering leniency to any cartel member willing to provide evidence against his or her co-conspirators.  In India, it appears that the leniency program lead to evidence of price fixing:
The CCI was tipped off by one of the three companies after it filed a leniency application with the regulator, revealing details of the alleged price fixing, he added. 
The regulator’s leniency program is a type of whistleblower protection offered to cartel members. 
The government source said that the raids found email exchanges showing that the companies were fixing prices. “That is smoking gun evidence,” the source said.
HT:  Matt B.

Thursday, October 11, 2018

Screening on criminal background and credit history

When I was at the Bureau of Economics at the FTC, we were asked by Congress whether using credit histories to price car insurance was discriminatory.  The resulting FACTA report found that:
  1. as a group, African-Americans and Hispanics tend to have lower scores than non-Hispanic whites and Asians.
  2. ...scores effectively predict risk of claims within racial and ethnic groups.
  3. The Commission could not develop an alternative scoring model that would continue to predict risk effectively, yet decrease the differences in scores among racial and ethnic groups.
As a result, banning the use of credit scores would result in insurers finding other, less good and possibly discriminatory methods of distinguishing high from low risks, like selling insurance only in low risk areas.  Good drivers living in higher risk areas would be "pooled" with other drivers living in the high risk area, and would have to pay higher rates.

 Previous studies (here and here) finds an analogous effect of preventing criminal background checks in employment, that doing so increases racial discrimination against African American men:
If employers are very averse to hiring ex-cons then they will seek to reduce this risk and one way of doing so is by not hiring any black men. As a result, a background check allows non ex-cons to distinguish themselves from the pack and to be hired. Furthermore, when background checks exist, non ex-cons know that they will not face statistical discrimination and thus have an increased incentive to invest in skills.
When the box [a criminal back ground check] is banned it’s no longer possible to cheaply level the playing field so more employers begin to statistically discriminate by offering fewer callbacks to blacks. As a result, banning the box may benefit black men with criminal records but it comes at the expense of black men without records who, when the box is banned, no longer have an easy way of signaling that they don’t have a criminal record. Sadly, a policy that was intended to raise the employment prospects of black men ends up having the biggest positive effect on white men with a criminal record.

See also Using credit history to price hospital care

Friday, October 5, 2018

A Rather Unique Economy of Scope

Lots of companies provide rewards to customers who recommend their products to friends. But now Tesla is offering to send any photo you want etched in glass into space for the next million years.
Perhaps most notable, though, is “Launch Your Photo into Deep Space Orbit,” a new reward for owners with one qualifying referral. The cool, fun perk involves Tesla laser-etching any photo of the owner’s choice that would be sent into deep space. Tesla did not state it explicitly on its new Referral Program page, but the laser-etched photos would most definitely be sent to orbit using rockets from Elon Musk’s private space company, SpaceX. Owners who wish to send their pictures to deep space orbit can expect a reminder on their Tesla mobile app to upload their selected photo sometime in December 2018.

Of course, they can do this because both Tesla and SpaceX were founded by Elon Musk. The best part is Musk's tweet on acceptable images.

No word on when GM or Ford will offer a similar reward.

Thursday, October 4, 2018

Less of other peoples' money is funding insurance

Health insurance costs about $20,000, 3/4 of which is paid by your employer.  One way to keep costs down is to raise deductibles.  This reduces costs is two ways:

  1. By reducing consumption of low value care (moral hazard); and
  2. By giving consumers an incentive to shop for lower price and higher quality care


Wednesday, October 3, 2018

Economies of scope created AWS

Amazon Web Services is one of the biggest success stories around.
Less than a decade old, ... Cloud computing — remote computing, or web services, as cloud computing is sometimes called — has been so wildly successful that it’s increased the pace of technology innovation, the rate of technology adoption, and the volume of data in the world by many fold. Today mobile startups can go global in a snap, ...

Like many innovations, it's began with a problem, that it took too long and too much effort to plug "merchants" (sellers who use their own supply chain to fill orders) into the Amazon platform.
Providing a solution for Target, for example, one of Amazon’s early deals, was “far more painful than we thought it would be,” .... 

According to the book Machine, Platform, Crowd, Amazon stopped customizing solutions for each new merchant on its platform by "hardening" its API's, developing a standardized and well documented set of protocols that essentially decoupled parts of the web platform. For example, they separated back-end data from the presentation layer so that their merchant associates could control the consumer interface without creating more work for Amazon on the backend. Customers who used the new API increased conversion rates on their web properties by 30%.
Initially, hardening the API's created more work for Amazon, but when they had finished, they realized that they had a reliable, world-wide, web infrastructure that would enable developers to build their tech infrastructure on top of Amazon's cloud computing platform.  It turns out that there was a huge demand for the service:
First one, then two, then three CEOs declared infrastructure services a top priority and asked Amazon to take a hard look at helping them with data warehousing. It was too expensive, hard to manage, required too much commitment and was riddled with pricey upgrades. It seems in these early days of widespread Internet adoption, a collective grumbling emerged over how much hardware was required to operate at “web scale” — interact globally in real-time with huge user bases. No one had the stomach for the banks of servers they’d have to swallow in order to operate a global online presence.

Amazon continues to "spin off" ideas developed to solve internal problems, like "API Gateway, ... a tool for creating, publishing, scaling and securing APIs. The idea is to let enterprises get the same advantages from using APIs as Amazon does, thereby paving the way for faster development and innovation...":
"Inside your company, if you're able to offer your different services via hardened APIs that are well documented, it frees up all the other teams that want to consume your services, to use those just as building blocks, as if they're external services," Jassy said. "Once we got into that mode inside Amazon, it dramatically changed the speed with which we were able to innovate."


Sunday, September 23, 2018

Dollar strengthening against yuan

In the market for foreign exchange, the price of a dollar is appreciating relative to the Chinese yuan, nearing 7 yuan/dollar.  Either:

  • the demand for dollars is increasing (more Chinese consumers want to buy US goods and services or invest in the US); or 
  • the supply of dollars is decreasing (fewer US consumers want to buy Chinese goods and services or invest in China).   

According to the article, this could be due to fears of a trade war with the US:

  • fewer US consumers would buy Chinese goods due to tariffs on imported Chinese goods; or 
  • fewer US companies would build factories in China or source parts from China.

Both of these would lead to a decreased supply of dollars and a higher "price" of dollars.  

In terms of a broader strategy, a stronger yuan would hurt Chinese producers with plants in China and could lead to unemployment.  This could put pressure on Chinese politicians to loosen up unfair restrictions on foreign firms and/or strengthen foreign intellectual property rights.

Saturday, September 22, 2018

Are we in a housing bubble?

The term "bubble" means that prices are too high.  But the question is difficult to understand unless we know what to compare them to.  We can use the ideas of Chapter 9 to measure housing prices relative to the cost of renting.  Because renters can buy, and owners can sell and rent, in the long run the prices should be comparable (a mobile asset should be indifferent about where it is used).  Here is the Fed data on the relative costs of owning relative to renting.  

Many people (some economists) think that there was a housing bubble in 2006 whose bursting lead to the subsequent recession (shaded blue area).  Currently owning is 30% more expensive than renting.  In 2006, owning was 70% more expensive than renting.  

Wednesday, September 19, 2018

Google measures ad effectiveness with "Ghost Ads"

PROBLEM:  How to measure Ad Effectiveness (paper link)
To measure advertising effectiveness, we want to make a simple comparison, "Did showing the ads change users' behaviour, relative to not showing them?"

This is especially hard to do when algorithms choose ads to show to consumers who are most likely to click on them and purchase.  This leads to Selection Bias, i.e., those who see the ads are those most likely to click on them.  One cannot tell whether people purchase because they were shown the ad (the "treatment effect," what we want to measure) or whether people who were going to purchase anyway were shown the ad ("selection bias," what we want to rule out)

To eliminate selection bias, Google uses Ghost Ads to make the experimental ads visible to the ad platform and experimenter but invisible to the control group, exactly as the algorithm would have chosen.  Using the algorithm to select the number and order of ads, but then "ghosting" the ads in the control group, eliminates selection bias.

Figure 4 illustrates how it work.

The treatment group (upper left) sees three Louboutin shoe ads and three ads from other advertisers. The ad platform "selects" the control group (lower right) as those consumers who would have seen an identical quantity and order of the other ads.  To create the control, the researcher simply "ghosts" the ads that would have appeared in the same order and location as the Louboutin shoe ads.

Google also can select users to match the demographics of the treatment and control groups. 

MORAL:  Carefully designed experiments can accurately measure causal relationships.  In this case, the treatment ads lifted website visits by 17% and purchases by 11%.

See simple exposition or the paper.(Ungated:

HT:  Hal

Tuesday, September 18, 2018

REPOST: can I take credit for this?

Former student Ford Scudder (NJ state treasurer) must have been paying attention in class, as he reduced the discount rates for NJ defined benefits pension system from 7.9% down to 7%.  The move is controversial as it increases the amount that NJ must set aside for its generous retirement benefits:
The decision will likely increase what the state will have to pay into the pension system next year by $234 million, according to the Treasury Department. Instead of a $3 billion pension contribution in his first budget, Murphy [the new Governor] would likely have to make a $3.2 billion contribution under that estimate.
But it is better in the long run:
“Given the current elevated level of asset values across the board, long-run expected returns have diminished, so it is appropriate to lower the assumed rate of return,” Rijksen said. “Our actuaries have suggested doing so, and it is the unmistakable trend in public pension plans across the country, with some other 20 state pension plans having adopted or being in the process of moving to an assumed rate of return at 7 percent or below.”
Readers of this blog will know that I motivate the topics of discounting and its inverse, compounding, with use our under-funded defined-benefits pensions.  Here is a recent post about another fund, from another under-funded state, doing the same thing:

Thursday, February 2, 2017

Another pension fund lowers discount rate to 7%

If a pension fund has to pay out $100 in 30 years, and earns 7.5% on its investments, it must save 100/(1.075)^30=13.14 today.  If it earns only 7.0%, the amount that it much save increases by 15%.

Calstrs, the second biggest pension fund in the world, just admitted that it is reducing its target rate of return (also its discount rate) from 7.5% to 7.0%.  The increase in payments is split between the teachers and the State of California, the employer of the teachers.
Approximately 80,000 current members of Calstrs could see an increase in their yearly pension contributions of $200 or more as a result of Thursday’s move, Calstrs said. The state of California has already budgeted an extra $153 million for its pension contribution to cover the rate change, bringing the total contribution to $2.8 billion.

Randomized trial to measure Facebook ad effectiveness

In general, selection bias results in over-estimating the effectiveness of ads because ads are shown to those most likely to buy, e.g., as advertisers employ techniques like machine learning to maximize the effectiveness of ad campaigns. 

However, a new study from facebook finds a way to cleverly construct a control group that is not subject selection bias.  By comparing "conversion" rates for the winner of an ad auction, e.g., page viewing, registering, or buying, to what would have happened had the second-best bidder won the ad auction, facebook estimates the causal effect of ads (free from selection bias).  

Because facebook has "single user login" they can:
  • make sure that no one in the control group has seen the ad; and 
  • track conversions across different devices and for several weeks after ad exposure by embedding a "conversion pixel" on the checkout confirmation page.  
The study concludes that targeted ads a 73% increased likelihood of conversion.  

UPDATE FROM READER:  I think that this is the same idea as "ghost ads".   See simple exposition or the paper.(Ungated:

Book recommendation: Algorithms to Live By

Good book written by Computer Scientists.  Each chapter begins by describing how algorithms solve a class of problems, like Optimal Stopping, Sorting, Caching, Scheduling, and the Multi-arm Bandit problem. Then, the authors draw advice from the algorithms to solve analogous problems for humans.

For example, in the scheduling chapter, the authors describe early attempts to split CPU (Central Processing Unit) time among various tasks.  Scientists found that as the number of tasks increased, the CPU would start spending more and more time on the meta-task of scheduling.  When too many tasks where adding, the computer would spend all its time "thrashing," switching between tasks without getting any work done.

The metaphor to our own lives is obvious.  Set aside a certain amount of time for uninterrupted work, especially when writing, and avoid switching between lots of small tasks, e.g., answer e mail only once per day.  

Do Boys have a Comparative advantage in Math?

Nice article from Alex Tabborock suggesting that the male preference for STEM majors is driven by their comparative--not absolute--advantage in math.  Here is the difference:
... consider what happens when students are told "Do what you are good at!" Loosely speaking the situation will be something like this: females will say I got As in history and English and B’s in Science and Math, therefore, I should follow my strengthens and specialize in ... history and English. Boys will say I got B’s in Science and Math and C’s in history and English, therefore, I should follow my strengths and do ... Science and Math.
This explanation can be understood in terms of marginal analysis of two tasks, i.e., the opportunity cost of doing one is the foregone benefit of doing the other.  For boys,

which drives their revealed preference for math (or STEM) over English (non STEM).

Monday, September 17, 2018

Bribing Amazon Employees

The WSJ first reported that Amazon employees have taken bribes to provide information on product reviews and even to have negative reviews simply removed.
According to the report, middlemen use social media sites like WeChat to track down Amazon employees, offering them cash to turn over internal information or to delete negative reviews. The WSJ also reports that it costs roughly $300 to take down a bad review, with brokers “[demanding] a five-review minimum” per transaction. Amazon employees have also been asked to provide e-mail addresses of customers who left negative reviews, or to provide sales information to give sellers an edge against their competitors. To combat the behavior, an Amazon spokesperson told the WSJ that it has implemented “systems to restrict and audit what employees can access.”

This is not too different from payola in which recording studio reps paid DJ's to play their songs and thus give a boost to record sales. The problem for the station is that it undermines whatever relationship that it might have with a competing studio. Agents are not working in the principal's best interest.

$300 huh. I know that I am naive because I would have overpaid to remove the bad review.

Thursday, September 13, 2018

Investing in Theranos

Our chapter on adverse selection uses IPOs as an example where sellers are more informed than buyers and so there is an opportunity for adverse selection and, perhaps, misinformation. But rarely does it blow up as big is being reported for Theranos.
The concept was irresistible: Theranos said it could take a few drops of blood from a simple finger prick to detect everything from H.I.V. to a diabetic’s A1C level. Relying on a proprietary technology to analyze the small quantities of blood, the private company offered a wide array of tests much more cheaply than existing blood tests.

Would that it had worked. Instead, the tests never were able to prove to work as advertised. It appears that the founder, Elizabeth Holmes, was able to fool the likes of George P. Schultz, Henry Kissinger, and Jim Mattis.
In addition to misleading investors about the promise of the company, federal officials charged the two with encouraging patients and doctors to use the company’s blood tests in spite of knowing they “were likely to contain inaccurate and unreliable results.”


Prisoners' dilemma video

My students will find this amusing

6. Teens are protesting in-class presentations.  ““Nobody should be forced to do something that makes them uncomfortable,” says Ula, a 14-year-old in eighth grade, who, like all students quoted, asked to be referred to only by her first name.”


Monday, September 10, 2018

Thursday, September 6, 2018

Short videos on Demand/Supply and Elasticity

Short Microeconomics Videos from MarginalRevolution U.

Bernie Sanders' bill would lead to statistical discrimination...

Senator Sanders has introduced the Stop Bad Employers by Zeroing Out Subsidies Act, or Stop BEZOS Act, a shot at Amazon CEO Jeff Bezos:

The bill is designed to force large employers to pay back, in the form of a new tax, federal assistance their workers receive. 

Joe Biden's former chief economist suggests that it would lead to statistical discrimination against those receiving federal assistance
"If you're an employer with a job applicant who you fear is going to draw public benefits, whether you're right or wrong, you may try and avoid hiring that person," Bernstein said. 

Wednesday, September 5, 2018

Where the working class can NOT afford to live

There is a lot of recent rhetoric about socialism and class conflict (see NY Times on The New Socialists).  Housing is one reason so many young people are so disaffected (article behind the grim map above).  
  • San Antonio is the only one of the top 10 most populated cities where a working class family can enjoy a decent living without taking on more debt. Out of the top 50, only 12 qualify. 
  • Geography obviously plays a big role as well. Newark, New Jersey, Chesapeake, Va., and Jacksonville, Fla., are the only coastal locations where a worker can support his or her family. How many on the West Coast? Shocker: Exactly zero. You probably don’t need a map to tell you, but the more landlocked, the more affordable.
  •  The best place to live from a financial perspective on an Average Joe’s salary is Fort Worth, Texas, which would leave a working-class family with a $10,447 surplus at the end of the year. On the flip side, that same family would need an additional $91,184 just to break even in New York City.

Sunday, September 2, 2018

Commonly held, but mistaken, economic beliefs

From Folk-economic beliefs: An evolutionary cognitive model

FEB 1. International trade is zero-sum, has negative effects. ...This belief may take many forms. For instance, trade is said to create unemployment at home because foreigners instead of locals are making the things we need (Wood 2002, pp. 53–55). ...

FEB 5. Markets have a negative social impact ...The belief is that markets as such produce negative outcomes for most participants. ...

FEB 6. The profit motive is detrimental to general welfare. ...One version of this belief is that there is a special class of “excessive” profit that differs from the regular or fair allocation of profit to businesses (Wood 2002, pp. 10–12). ... Contra Adam Smith, the notion that private self-regard creates general welfare seems to be unintuitive (Rubin 2003).

FEB 7. Labor is the source of value. ... It is also present in opinions on the unfairness of low wages for hard or unpleasant jobs, especially those involving hard physical labor.

FEB 8. Price-regulation has the intended effects. ...For example, in the United States, many cities imposed rent-control in the 1960s – and such measures were a major item in politicians’ platforms (Dreier 1999, p. 211) – with the goal of creating an ample supply of cheap housing;

Thursday, August 30, 2018

Valuation vs. Momentum Investing

Bill Spitz (who is known to the readers of this blog for his prescient calls in the past, As Risk Increases, Spreads Widen) has written another gem documenting the "manias" leading up to the current market.  Students will learn something about about two strategies for investing:  Valuation (long run) vs. Momentum (short run).  Here is the bottom line advice:
  • There are widely accepted and time tested methods of forecasting returns on various asset classes. 
  • While we work very hard at refining the inputs to the process, you should understand that they vary considerably over time rendering the forecasts subject to error. 
  • These forecasts do actually have pretty good predictive value over 7-12 year time horizons but provide little or no insight into near term returns. 

Of course, everyone will want to know what he thinks of the current market, and here it is:
The Shiller P/E has risen from 13.3 to 32 since 2009. Note that the long term average is 17 although it is important to remember that it hit 44 during the Dot.Com bubble. An additional mitigant might be that the combination of strong earnings and a relatively flat stock market in 2018 has reduced the P/E somewhat based on current earnings. Most other asset classes are similarly expensive as compared to their historic norms. The Federal Reserve has made its intention clear to raise short term interest rates and we are already close to an inverted yield curve which has historically been an accurate predictor of recession. Finally, there is a great deal of noise on the political front with continuing discussion of Brexit, the prospect of trade conflicts, and active shouting matches with North Korea and Iran.

UPDATE FROM A VALUE INVESTOR:’s actually easier, or at least more fun, to define growth and value by caricature of the kind of people who buy each type of stock. Growth investors wear nice suits, and are charming. They are by nature optimistic and typically do not read the footnotes, because, no one else does, right? If they go to a conference, they fly first class or in a private jet. Value investors are rumpled and not as much fun to talk to. They are overly analytical and obsessed with missing something in the footnotes. They fly coach. 

Are weaker property rights behind the fall of the RAND?

In the chart to the right, denoting prices over the past six years, we see a big increase in price of Pounds measured in RAND, indicating an increase in the demand for Pounds (people who want to sell RAND and buy Pounds).  It fell, but it is going up again.  

In general, markets prices give us signals, but they can be hard to interpret.  Here is one interpretation:

In a barrage of headlines that sparked chaos in FX algo markets, The South African government proclaimed proudly that it is opposed to illegal land grabs (sparking a rally in the rand) before humans realized that this is mere statement of fact and that the entire reason for this process is to 'legalize' land grabs through reform.

This interpretation should be familiar to anyone who has read chapter two, which talks about the incentive-aligning effects of property rights, which are behind the rise of modern China and Vietnam. But in South Africa, it looks as if they are being eroded.

Here is another interpretation:

LONDON, Aug 30 — Emerging currencies sold off sharply again today after Argentina’s peso suffered its biggest one-day decline since 2015 overnight, with Turkey’s lira, the South African rand and the Indian rupee all feeling the heat.

How much you need to save to become a millionaire in 15 years

Article from CNBC:

To become a millionaire in 15 years with no savings:

  •  With a 4 percent rate of return: $4,063.55 per month 
  •  With a 6 percent rate of return: $3,438.57 per month 
  •  With an 8 percent rate of return: $2,889.85 per month 

 To become a millionaire in 15 years with $10,000 in savings:

  •  With a 4 percent rate of return: $3,249.88 per month 
  •  With a 6 percent rate of return: $2,638.21 per month 
  •  With an 8 percent rate of return: $2,105.20 per month 

 To become a millionaire in 15 years with $20,000 in savings:

  •  With a 4 percent rate of return: $2,436.21 per month 
  •  With a 6 percent rate of return: $1,837.85 per month 
  •  With an 8 percent rate of return: $1,320.54 per month 

 The average annualized total return for the S&P 500 index is more than 9 percent. So start saving!

Here are a few simple, low-stress ways to start investing:
  • Sign up for your employer's 401(k) plan and take full advantage of any company match, which essentially gives you free money
  • Contribute to a Roth IRA or traditional IRA, an individual retirement account that offers tax breaks
  • Use micro-investing apps such as Acorns, which help you begin by investing small amounts of what it calls your "spare change." The app rounds up your purchases to the nearest dollar and automatically puts your coins to work
  • Try other apps that aim to make investing simple
  • Consider automated investing services known as robo-advisors that can help you out no matter how much you have in the bank
  • Research low-cost index funds, which Warren Buffett recommends

Smart Parking Meters

One of my favorite areas of Fort Worth is getting smart parking meters. West 7th Street is quickly becoming quite the evening destination. However, once you are there, you may have to circle a bit to find a parking spot ... or park some distance away. A supply shortage means that the price is too low, especially in the evening. The city is implementing meters that will adjust price based on demand. In the longer run, more garages are also becoming available.

HT: Cindy

Monday, August 27, 2018

Econ talks that you can listen to in your car

Here are some Ted Talks I have blogged, and here are some otherpodcasts I have listened to (mostly those from Planet Money)
I would advise not trying to listen to my online lectures, as they are designed to be looked at on a computer.  (it was frustrating for me when I tried it as there are long pauses so a user can see the material). 

Saturday, August 25, 2018

How high should the minimum wage be?

Why do college graduates earn more?

Bryan Caplan suggest that college diplomas don't increase your human capital (give you new job skills), but rather are "signals" that show you are willing to drop out of the labor force (so you think you are high enough quality) and have the discipline to finish a four-year degree. 

Friday, August 24, 2018

Is this moral hazard or adverse selection, and why did BCG get it wrong?

Moral hazard can look very similar to adverse selection.  For example, if you see Volvo's running through stop signs more frequently than other cars, you could infer one of two things:

  • Moral Hazard:  the cost of running a stop sign is lower in a Volvo, so Volvo drivers run more stop signs; or
  • Adverse Selection: bad drivers are more likely to buy Volvo's so they are more likely to run stop signs.  

In the blog post below, a BCG study compares Medicare Advantage plans to traditional fee-for-service Medicare:
  • Single-year mortality rates fell from 6.8 percent in the traditional fee-for-service sample to 1.8 percent 
  • Patients in the Medicare Advantage plans had shorter average stays in the hospital (about 19 percent shorter.)
  • Patients in the managed plans were more likely to receive preventive care ...For example, diabetic patients in the fee-for-service sample had an average of 11.5 amputations per 1,000 patients; those in HMO plans with global capitation had only 0.3. 

and mistakenly infers moral hazard:
What distinguishes Medicare Advantage plans from traditional fee-for-service plans is the degree to which they use mechanisms designed to encourage the delivery of cost-effective quality care. Three critical mechanisms are financial incentives that are aligned with clinical best practices, a selective network of providers, and more active care management that emphasizes prevention to minimize expensive acute care.

 when the answer is likely adverse selection.  From colleague Larry Van Horn:

Those individuals who choose a Medicare Advantage (MA) plan are historically of a different risk profile (lower), and to the extent that results are case mix adjusted the severity of the MA population is overstated. In short, tough to make the case on the BCG study with which I am well aware.

How does health care differ from ``textbook'' industries?

The incentives are all screwed up:
  • Most of it is purchased with Other Peoples' Money:  (Stossel Video)
  • Incumbents can keep out new entrants (Managerial Econ blog post)
  • Providers can create their own demand (Managerial Econ blog post)

Thursday, August 23, 2018

Before going on a date, consult an economist.

Because they know how to develop intimacy.  Another experiment from the book Randomistas:

University students were randomly paired up.  Half the pairs were asked to make small talk, while the other half were given questions designed to build intimacy, such as "What does friendship mean to you?", "For what do you feel most grateful?", and "What one item would you save if your house was burning?".  The intimacy exercise worked so well that one pair of participants got married.

If this happens to you, we would point you to our most popular post ever, Consult an economist before buying a wedding dress.

Monday, August 20, 2018

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.

Sunday, August 19, 2018

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.

Friday, August 17, 2018

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.  

Thursday, August 16, 2018

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: 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.

Wednesday, August 15, 2018

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. 

Sunday, August 12, 2018

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.

Saturday, August 11, 2018

The costs of obesity

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).

Friday, August 10, 2018

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).

REPOST: Sales "bunching" and high-powered commissions

Ian Larkin studies the use of "high powered" quarterly sales commissions, used by virtually every firm that sells software. A typical incentive compensation scheme (as a function of sales) is highly convex: a sales person earns 2% if she sells $100,000 worth of software; 5% if $500,000; 8% if $1,000,000, ..., up to 25% if $8,000,000.

Ian finds that these high-powered (convex) compensation schedules give sales people an incentive to "bunch" sales into the same quarter. Just as concave production costs can be reduced by "smoothing", i.e., holding inventories to buffer sales shocks, so too can convex commissions be increased by "bunching" sales into the same quarter, the opposite of "smoothing."

Using proprietary data from a large vendor he finds that 75% of sales are occur on the last day of the quarter; and 5% of sales occur on the first day of the quarter, as sales people give discounts to customers to accelerate or delay purchases. These discounts cost the firm about 7% of revenue, which is about the same amount that it pays out in sales commissions.

The 7% revenue loss suggests that there is a way to make both firm and its salespeople better off: adopt linear commission schemes to eliminate the incentive to "bunch," and split the 7% savings between the firm and its sales people in the form of higher commission rates.

When asked why they use these costly incentive compensation schemes, managers say only that they need them to retain their "superstar" sales people. But surely there is a better way to retain superstars, isn't there? As always, I would like to hear from readers on whether they think this would work.

REPOST: Do environmentalists cause pollution?

Carbon credits, designed as a payment to companies who reduce pollution, instead have the opposite effect. 
So since 2005 the 19 plants receiving the waste gas payments have profited handsomely from an unlikely business: churning out more harmful coolant gas so they can be paid to destroy its waste byproduct. The high output keeps the prices of the coolant gas irresistibly low, discouraging air-conditioning companies from switching to less-damaging alternative gases. That means, critics say, that United Nations subsidies intended to improve the environment are instead creating their own damage.

The problem can easily be understood using marginal analysis: pollution credits increase the marginal benefit of producing the harmful coolant. This increases supply, which reduces the price, which encourages more coolant consumption.

When the developed world (UN & EU) threatened to cut off the pollution credits, China and India threatened to release the gas into the atmosphere.  This is an interesting bargaining ploy that works only if the developed world cares more about the pollution than India and China.   

REPOST: Get rich slowly, the power of patience

Patience makes you rich.  I tell this to my kids, my students, and anyone else who will listen.

The theory is simple.  If you have a low discount rate, it means that the future is almost as valuable as the present.  For example, a "patient" person with a discount rate of 5% is willing to invest $100 if she can earn $105 in one year, a relatively low threshold for investing.  In contrast, an "impatient" person with a discount rate of, e.g., 30% is willing to invest only in much more lucrative investments, i.e., those earning at least 30%. 

The difference between the two is that the patient person will make more investments (those with a return between 5% and 30%) which will make the patient person rich.  Patient people invest more in education, smoke less, exercise, and watch their weight.  These activities all demonstrate a concern with the future, at the expense of the present. 

 Here is some new evidence:
Patience boosts wealth by much more than marriage or religion. Respondents with discount rates more than one standard deviation above the average of the sample had 29% less net wealth, a loss of around $130,000. More impatient people—similarly controlling for religion, income, race, sex, optimism and education—were more likely to smoke, drink excessively, and miss out on their flu shots and medical examinations.

The title of this blog post is stolen from colleague Bill Spitz's terrific book

Wednesday, August 8, 2018

Larry on Healthcare/incentives/Amazon

Colleague Larry Van Horn is a gem!  When you listen to his interview, pay attention to the economic principles: how bigger deductibles, which make consumers spend their own money on health care, change incentives and firm strategy.

Tuesday, August 7, 2018

Can inequality cure poverty?

Former student Quinn Connolly's book review of Steven Pinker does not put it that way, but:

According to Pinker, this “confusion of inequality with poverty comes straight out of the lump-sum fallacy—the mindset in which wealth is a finite resource.” Helpfully, Pinker reminds us how the Enlightenment revolutionized our understanding of economics. First, by teaching us that wealth is created; and second, by showing that we can make more of it.

Can Economics teach us how to live?

Former student Quinn Connolly translates Jordan Peterson’s Rules for Life into economics:

  •  Signaling, “Stand up straight with your shoulders back.”
  •  Moral hazard. Rule No. 2 is “Treat yourself like someone you are responsible for helping.” 
  • Asymmetric information. Rule No. 9 is “Assume that the person you are listening to might know something you don’t.”
  • Short-termism. ...shortsighted thinking can be used to justify absolutely anything and therefore “breeds nothing good.”
  • Future Value.  “Pursue what is meaningful, not what is expedient.” 

Monday, August 6, 2018

Judge Leon (ATT/Time Warner) Should Have Read Chapter 16

If he had, the U.S. Dept of Justice might not have appealed Judge Leon's decision, arguing that he ignored the economics of bargaining.

The DOJ brief relies almost entirely on economics to make its case that when a vertically integrated content provider like ATT/Time Warner fails to reach agreement with a rival distributor, like Comcast or Charter, some consumers will shift to ATT's distribution (DirectTV).  This gives a merged Time Warner a better alternative which will allow it to capture a bigger share of the proverbial profit pie.

The ideas of Chapter 16,

The alternatives to agreement determine the terms of agreement

is reflected in the appellate brief:
It is fundamental to the economics of bargaining that a party derives leverage from having the ability to walk away, even if it never actually does so. If Time Warner truly could not walk away and the MVPDs knew that, it would have no leverage at all. 

All of this matters, because economics is what gives coherence to antitrust enforcement:
“To abandon economic theory is to abandon the possibility of a rational antitrust law.” Robert H. Bork, The Antitrust Paradox 117 (1978). That is what the district court has done, and why its ruling constitutes error. 

Friday, August 3, 2018

Optimal Stopping: How long should you search for a mate?

Computer scientists say that 25% of your time should be spent searching before you make an offer (propose) if you have a 50% chance of being rejected, then make an offer to the next person who exceeds the maximum of the first 25%.

Tuesday, July 31, 2018

Screening out ethical partners

In China, business people cannot rely on traditional mechanisms, like the rule of law, to facilitate wealth-creating transactions:

In a society where trust of strangers is minimal, contract law is fragile, contracts themselves regarded more as guidelines than binding commitments, and the civil courts largely swayed by personal influence rather than legal right, the shared fraternity of the night out is one route to trust between partners. It may not, as businessmen admit, be a particularly effective or reliable way, but it’s all they’ve got to work with.

So business people share alcohol, drugs, or prostitutes as a way of screening out partners who may not be trustworthy.  If the acts are illegal, it may give businesses "mutual hostages" to ensure cooperation; if not, it may screen out partners with "moral qualms about future dealings."
...It tells both sides that they’re playing by the same rules. ... Refusing to play the game, on the other hand, comes at a sharp cost. Businessmen who convert to evangelical Christianity and make a commitment to avoid vice or bribery describe sharp business losses as a result, as former partners turn away from them, fearful of their newfound probity.

The alternatives to agreement determine the terms of agreement

Rhode Island is using this principle to reduce its pension obligations:
Rhode Island officials then took the rare step of passing legislation that put bondholders ahead of other creditors and pensioners in the event of a municipal bankruptcy. Since cities and pensioners were bargaining in the shadow of bankruptcy law (if the parties did not reach agreement, a bankruptcy court would decide who gets what) the alternatives for pensioners deteriorated.

In Central Falls, Rhode Island, this shifted the bargaining advantage to the city and away from the workers, who had to get in line behind the bondholders:
After the 2011 bankruptcy, an event that received national attention amid predictions of widespread municipal failures, retirees agreed to 55% cuts because they feared facing even deeper cuts later. ... The concessions helped Central Falls emerge from bankruptcy in 2012 and create a “rainy day fund” that now holds $2 million.