Wednesday, March 25, 2020

How to Limit Hoarding

Usually, retailers want to sell as many units to a customer as possible. And we should want them to. But currently there is a social imperative against hoarding key supplies. Some retailers are willing to forgo additional profits to pursue this social goal. The Meny supermarket in Denmark set the price of a bottle of hand sanitizer at kr40 ($5.73) but two bottles at kr1000 ($143) each.

Hat tip: Carpe Diem blog

Friday, March 20, 2020

How does Ritalin and similar medications work?

By motivating:
...perceived benefits of performing a demanding task are elevated, while the perceived costs are reduced. This effect is separate from any changes in actual ability."
HT:  Rick

Thursday, March 19, 2020

Subsidies to "Flatten the Curve"

Summary: Trying to quarantine everyone until a vaccine is available doesn’t seem feasible. In addition, restrictions mainly delay when the epidemic explodes, e.g., see previous post on Flattening the Curve.   In this paper, we propose subsidies to both individuals and businesses, to better align private incentives with social goals, while leaving it up to individuals and businesses to decide for themselves which risks to take.

For example, testing would give individuals the information necessary to make the best decision about whether to shelter in place or, if they have recovered and are now immune, to come out.  But, the negative consequences of a positive test, e.g., quarantine, can deter people from getting tested. Rewards for those who present for a test and submit to isolation when they have active disease could offset such externalities.

Another problem is that many people aren’t free on their own to implement protective measures related to work. Some form of incentive for work from home, closing down production in some part, or extra protection for workers could be imagined for employers. Businesses that offer worker health care might be incentivized by sharing in the extra virus health care costs realized by workers in exchange for a health care subsidy.

Essay: In the midst of an epidemic it is evident that social policy must adjust in furtherance of the public good.  Institutions of all sorts, not the least of which government, will have to take extraordinary actions.  People should expect their relationships with these institutions to change, at least for some time.  These adjustments will need to be informed by applicable epidemiological data and models, subject to the usual uncertainties.  But the problems to be faced are not only epidemiological but economic.  There will be tradeoffs to be made between safer, restrictive rules and riskier, unconstrained behaviors.  Costs to be faced are both social and individual.  As such, we should not expect a uniform public policy to make suitable choices for all individuals, nor assume that individuals making good decisions for themselves will combine for a good social outcome.  Imagine instead an alternative, where social costs are evaluated and appropriate individual incentives are devised, allowing individuals to make informed decisions with respect to their own circumstances and the social externalities reflected in those incentives.

We are currently in the US at the beginning of the coronavirus epidemic.  This is not the flu.  It is maybe ten times as lethal as the flu, perhaps a little more lethal proportionally in the most susceptible populations.  It is new, so there is little or no natural immunity, and no vaccine available for maybe 18 months.  Like the flu, there is no really effective treatment yet for those that become sickest, particularly because the virus is most deadly through the complications it causes with existing conditions, so treatment options should not perhaps be expected to help with epidemic spread or to reduce lethality.  It is spread relatively easily from person to person, though not as easily as the measles, perhaps significantly before the infected person shows symptoms.  And it may be that people can get the virus, become contagious and spread the disease, while never showing symptoms themselves.  We now have a test for active coronavirus, though it is still somewhat hard to get in the US, and we can expect at some point in the near future to have an antibody test that will show when people either have or have had and recovered from the virus.

There are some obvious social and individual costs to people catching this virus.  First there are the deaths from the disease.  Then there are the costs of treating those ill.  Finally, there are costs from the lost productivity of those fallen ill.  If there is a sudden and extreme increase in the numbers of sick people, all of these costs can be expected to rise, perhaps significantly.  When hospitals have patients in excess of existing capacity, expanding capacity will be difficult and expensive, and death rates can be expected to rise.

An ideal public health strategy in the face of an epidemic is to keep people from falling sick.  At the beginning of the epidemic, the few people with the disease need to be found and quarantined, and those with whom they have had contact need to be traced and isolated so that any carrying the disease can be stopped from passing it on.  If there is no natural reservoir of disease that reintroduces the disease, it may be possible to eradicate the disease.  When there were few cases, this might have been practical, but that effort has clearly failed, and there are far too many carriers of the disease now to track. 

Now the emphasis must be on measures to reduce transmission of the disease.  This entails modifying behaviors that facilitate the disease passing from person to person.  If the rate of infection can be reduced enough, to the point where the number of people each infected person can be expected to infect is less than one on average, then the disease will naturally die out.  Once most people have had the disease, or have been vaccinated, most of the people an infected person would have infected are immune so the rate of new infections will naturally fall to less than one and the disease will die out.  Because so many people have immunity to many varieties of the flu, its spread can be controlled in particular through vaccination, the only difficulty being that new strains are appearing all of the time.  The difficulty with coronavirus is that simple measures for reducing the spread of the disease do not seem to be effective enough and extreme measures will be much more expensive.  Moreover, because the coronavirus is a pandemic, even if one region succeeds in reducing transmission and has the disease fade, reintroduction from other regions can be expected to relight the fire of epidemic.  Measures for reducing transmission will need to be maintained for some time, likely until a vaccine is available or natural heard immunity is established through the majority of the population having had the disease.

The flu strikes every year and we seem to tolerate it without extreme measures of social distancing.  Perhaps there’s nothing that needs to be done now, nothing worth doing now, to slow the coronavirus epidemic.  But what would the cost of such an attitude be?  The virus would spread like wildfire, infecting in a matter of months perhaps the majority of the population.  Even with an estimate of 70 to 150 million Americans, at a 1% death rate that means 0.7 to 1.5 million would die.  But that many cases all at once would overwhelm the medical system, and the intensive care required to keep the death rate even this low.  A surge in cases might mean an increase in death rate.

At the other extreme, we seem to be heading into a period where everyone is urged to shelter-in-place, or required to be locked down, so as to reduce social contacts to near zero and thereby interrupt the spread of the virus.  This may be effective, perhaps even necessary to prevent an immediate surge of demand on hospitals.  But it is also expensive in the disruptions it entails.  The number of active infections can be drastically reduced over a time scale corresponding to an individual’s course of the disease.  Removing the restrictions would mean then that the epidemic resumes from the new lower level with somewhat more of the population already immune.  It seems unlikely the disease can be eradicated by such measures because of the danger of reintroduction from other regions where the virus is active.  The strategy of holding everyone in this isolation until a vaccine becomes available isn’t likely to be palatable.  Releasing restrictions slowly so as to keep the level of the disease at an acceptable level would likely mean that most of the population would get the disease before the vaccine became available.  Even if the most at risk population remained isolated, the estimated death rate over the majority of the population implies a nontrivial number of deaths.  How do we decide how many and who to risk in order to get the economy functioning?

Consider then a system of incentives to individuals to help communicate the social externalities and guide their decisions.  If there is a high prevalence of active disease in the general population, then hospitals will see excessive demand and it will be unsafe for high risk individuals to expose themselves to even minimal social interactions.  A low prevalence of active disease can be more easily tolerated by hospitals, with a lower resulting death rate, and higher risk individuals may be more able to interact and provide for themselves.  To promote a lower level of disease, individuals should be incentivized to delay getting sick, practicing social distancing and reducing contacts in a trade-off with ordinary necessary activity and respecting their personal risk category and risk tolerance.  This lower level of disease is the “flattening of the curve”, but it also imagines the most at risk segment of the population might choose to isolate for a longer term, hoping to hold out for a vaccine.

If later disease or no disease is preferable, how do we incentivize it?  Can we at the same time incentivize more usual infection control measures?  Eventually everyone will either need to take an antibody test, to determine that they have had the disease and developed immunity and so are safe to resume all normal activities, or else need the vaccination.  People may also be tested for active disease.  We can’t penalize people for showing up with active disease, as this would mean they would skip the test and likely continue infecting other people.  We should reward those who present for a test and submit to isolation when they have active disease.  We can reward also those who submit to the antibody test and test positive (for the first time) who can then resume normal activities.  On the other hand, we want people to delay when they get sick through prudent measures.  Thus it would be a good idea to increase over time the reward for first showing up with the disease.  To avoid incentivizing delay in testing, the reward for a positive test should increase as a function of the last antibody test that was negative, i.e., the reward is more if you can prove you had avoided the disease as of your last antibody test.  The size of the rewards should be significant enough to cause a change of behavior but commensurate with the social cost savings induced.  If we are planning on giving Americans multiple $1000 checks to get the economy going anyway, then such monies could be spent on incentives alternatively.  This imagines antibody testing will be available, relatively easy and inexpensive in maybe three months, and antibody tests might be repeated maybe every three months.  And of course this assumes the trajectory of the epidemic can be controlled well enough in the short term and predicted well enough in the long term to make such a scheme possible.

HT:  Colleague Steven Tschantz

Wednesday, March 18, 2020

"Ban-the-Box" versus Alternative Screens

The “ban the box” (BTB) policies limiting an employer's ability to learn about job applicants’ criminal records are intended to improve employment outcomes for those with criminal records, with a secondary goal of reducing racial disparities in employment. However, since employees with a criminal record tend to have more workplace problems, it is valuable to employers to develop other screens to weed out these applicants. One possible screen is to reducing hiring among the demographic groups that include more ex-offenders.

In "The Unintended Consequences of “Ban the Box”: Statistical Discrimination and Employment Outcomes When Criminal Histories Are Hidden," Doleac and Hansen recently investigated this issue by examining the outcomes in about one hundred jurisdictions enacting these policies over the 2004-2014 period.
We find that BTB policies decrease the probability of employment by 3.4 percentage points (5.1%) for young, low-skilled black men.

The term for this is "statistical discrimination" because you need not dislike the young, the low-skilled or black men to discriminate against them. They need only be statistically related to the characteristic you want to screen out. The irony of a policy harming a group it was intended to help would be humorous if it weren't so tragic.

Monday, March 16, 2020

What does "flattening the curve" mean?

Policy makers are using the term to describe the effects of social distancing and travel restrictions.  In this post, we use a cellular automata model of infection to show how they might do this.


The images below are from a cellular automata model of the spread of a disease on a 100x100 grid.  White dots represent uninfected; red dots, infected; green dots, survivors; black dots, deaths.  The key parameters are:
  • death rate=1%, given that a person has been infected.  
  • r0 = 2 is the basic reproduction number, the number of people infected by each infected person, e.g., here are estimates for corona virus.   We model social distancing as reducing this number.  
  • mean distance of infection = 5.0 cells away from an infected cell, modeled as a standard normal distribution over unit distance.  We model travel restrictions as reducing this number

In the video above, the infected cells (red) spread slowly out from the center, where the outbreak began.  Most infections are on the "border" of the infected area because that is where infected cells are more likely to come in contact with uninfected ones.

Infections eventually die out because many of the people who come in contact with the infection have already developed an immunity (green) or are dead (black).  This is what Boris Johnson referred to as "Herd Immunity."

We graph the spread of the infection below.  The vertical axis represents people on the grid (10,000=100x100) and the horizontal axis represents time, denoted in periods (the life span of an infection virus).   The blue line represents the uninfected population, the green line the infected population, and the orange line, the infection rate.

In the simulation and graph below, we increase r0 (the infection ratio) from 2 to 3, and mean travel distance from 5 to 25.   We see that more people get infected (higher green line), and much more quickly (peak infections occur at period 11, instead of period 15).

What policy makers mean by "flattening the curve" is flattening the orange infection curve (compare the high orange peak in the bottom graph to the smaller, flatter peak in the one above) with social distancing and travel restrictions so that our hospital system does not get overwhelmed by infected patients.

HT:  Colleague Steven Tschantz designed and wrote the code.

Friday, March 13, 2020

Italy's moral dilemma

NY Times
Today, Italy has 10,149 cases of the coronavirus. [but] They lack machines to ventilate all those gasping for air.

In other words, they have scarce resources and must allocate them somehow.  They follow a utilitarian ethic, a type of consequentialism:
“Informed by the principle of maximizing benefits for the largest number,” they suggest that “the allocation criteria need to guarantee that those patients with the highest chance of therapeutic success will retain access to intensive care.”

Those who are too old to have a high likelihood of recovery, or who have too low a number of “life-years” left even if they should survive, would be left to die. This sounds cruel, but the alternative, the document argues, is no better. “In case of a total saturation of resources, maintaining the criterion of ‘first come, first served’ would amount to a decision to exclude late-arriving patients from access to intensive care.”

Tuesday, March 10, 2020

Optometrists tying services and products

Like most people with vision problems, I get my eyes checked (services) by an optometrist. Consumers like me could get eyeglasses or contact lenses (products) from an optician, but often our optometrists' vertically integrate into the product to provide "one-stop shopping." Such a vertically integrated optometrist may want to blunt competition in the complementary product by steering consumers to their own products. One way to do this is to not release prescription information. This effectively ties the product to the service. How much more can optometrists earn from such a tying strategy?

Norris & Timmons recently examined what happened when The Fairness to Contact Lens Consumers Act (FCLCA) of 2004 required the release of prescription information to patients. They compared states that had already had this requirement to "untie" to those that now must "untie."
We find that requiring professionals to release prescription information to patients resulted in a 13% reduction in the wages of optometrists. Our results provide some evidence that the FCLCA may have increased consumer welfare by reducing the prices of contact lenses or increasing access to contact lenses.

That ain't peanuts.

Hat tip: Marginal Revlolution

Friday, March 6, 2020

Should electricity be a right?

MarginalRevolution has the answer
In step 1, because electricity is seen as a right, subsidies, theft, and nonpayment are widely tolerated. Bills that do not cover costs, unpaid bills, and illegal grid connections become an accepted part of the system. 
In step 2, electricity utilities—also known as distribution companies—lose money with each unit of electricity sold and in total lose large sums of money. Though governments provide support, at some point, budget constraints start to bind. 
In step 3, distribution companies have no option but to ration supply by limiting access and restricting hours of supply. In effect, distribution companies try to sell less of their product. 
In step 4, power supply is no longer governed by market forces. The link between payment and supply has been severed: those evading payment receive the same quality of supply as those who pay in full. 
MORAL:  The delinking of payment and supply reinforces the view described in step 1 that electricity is a right [and leads to] a low-quality, low-payment equilibrium.

Wednesday, February 26, 2020

A simple way to combat corruption

New paper:  Does Greater Regulatory Burden Lead to More Corruption?

The paper documents that regulation seems to create opportunities for public officials to extract bribes.  It finds that the bribery rate is higher the higher the cost of regulation. 

Briber is measured as a percentage of firm sales,  so a 1% increase in regulation will cost a firm with revenue of $1M about $3,000 in bribes to avoid. 

SOLUTION: ."..deregulation offers a simple way to combat corruption."


Tuesday, February 25, 2020

“There might be some unintended consequences,” she added.

If two-thirds of voters approve the measure, San Francisco would become one of the first big U.S. cities to tax landlords for store vacancies when it goes into effect next year. Washington, D.C., imposed a similar tax in 2011, though it was on residential and commercial property vacancies, not just retail.

Predict the unintended consequences in the comments.
HT: Cramer

Friday, February 21, 2020

Homelessness, inequality, and segregation are a housing problem

NY Times article based on Golden Gates: Fighting for Housing In America
Nearly all of the biggest challenges in America are, at some level, a housing problem. Rising home costs are a major driver of segregation, inequality, and racial and generational wealth gaps. You can’t talk about education or the shrinking middle class without talking about how much it costs to live near good schools and high-paying jobs. Transportation accounts for about a third of the nation’s carbon dioxide emissions, so there’s no serious plan for climate change that doesn’t begin with a conversation about how to alter the urban landscape so that people can live closer to work.
When it was Ms. Trauss’s turn to speak, she argued that the entire notion of public comment on new construction was inherently flawed, because the beneficiaries — the people who would eventually live in the buildings — couldn’t argue their side.
What this suggests is that the real solution will have to be sociological. People have to realize that homelessness is connected to housing prices. They have to accept it’s hypocritical to say that you don’t like density but are worried about climate change. They have to internalize the lesson that if they want their children to have a stable financial future, they have to make space. They are going to have to change.

Thursday, February 20, 2020

Scale, Scope, and Law Firm Mergers

A merger between two large Philadelphia law firms led Sam Wood at the Philadelphia Inquirer to investigate why. It seems there have been quite a few law firm mergers recently.
It does not look like firms are trying to eke out efficiencies through scale economies.
“There are really no economies of scale,” said Tom Clay, a legal-industry consultant at Altman Weil. “Bigger firms are more expensive to run. The only way they save money is through a smaller real estate footprint. Anyone who tells you different is either ignorant or lying to you.”

 But there may be scope economies.
Firms want to expand their geographical scope. They want to offer clients more specialized practices and increase profits.

Practices in other geographical places are complementary to existing practices. And offering specialized practices (increased scope) is only viable if you have enough scale to justify them.

Wednesday, February 19, 2020

Adverse Selection into Privacy Protection

The recently enacted General Data Protection Regulation (GDPR) allows EU citizens various privacy protections, including the ability to opt out of data collection schemes. In a new paper, Aridor, Che, Nelson, and Salz find that a sizable fraction of the population, presumably those who are more sensitive to privacy issues, does opt out. How does this affect those that do not? They become even more "persistently trackable" because those who opt out now do not generate as much noise on those remaining.
Further in keeping with this hypothesis, we observe that the average value of the remaining consumers to advertisers has increased, offsetting most of the losses from consumers that opt-out. 
Hat tip: Marginal Revolution

Saturday, February 15, 2020

Why is real estate market so inefficient?

The US real estate market is really inefficient:
For decades the market has been characterized by low volumes and extortionate transaction costs (sales commissions, taxes, and mortgage fees total about 10% of the sales price). [As a result,] just 7% of American homes change hands each year (down from 20% in the 1950's).

PropTech firms are trying to take advantage of the inefficiency, helped by my former employer, the Antitrust Division of the Justice Department: 2008 the Department of Justice (doj) ruled that MLS listings data could not be restricted ..., and should be shared with online platforms. Zillow and Redfin now publish MLS listings.

New entrants are bringing liquidity to the market:
These firms use vast quantities of data and whizzy machine-learning algorithms to appraise homes and make an initial offer, often within hours of a seller asking for one. A couple in Covina, in greater Los Angeles, requested an offer from Zillow on Christmas Eve 2019, had their home inspected on December 26th and accepted the bid the next day. They chose to set a closing date in March 2020, but could have opted for December 28th. ... The fee is typically around 6-7%, almost the same as a seller would pay an agent—but for a much quicker and easier process. 

When does information about mergers affect stock price?

As with the other studies the paper cites in its literature review, this particular research design included a window of multiple weeks both before and after the event occured. When analyzing the T-Mobile/Sprint merger decision, we should similarly expand the window beyond just a few hours of after hours trading.
After a Judge ruled favorably on the Spint/T-mobile merger, the prices of competitors ATT and Verizon initially increased (within 3 hours), but then decreased when the market had some time to digest what the ruling meant (over the next few days). 

In general, an anticompetitive merger that raises price will benefit rivals, while a procompetitive merger that reduces price will harm rivals (substitutes).  Because the stock prices of rivals decreased, it supports the hypothesis that the merger would combine their wireless spectra and make them a viable 5G competitor to ATT and Verizon. 

TRUTH IN BLOGGING:  I worked at the DOJ during its investigation of the merger. 

Friday, February 14, 2020

Where does foreign aid go? [HINT: not where it is supposed to]

From the Economist:
When autocratic, oil-rich nations enjoy a windfall from higher crude prices, where does the money go? One place to look is Swiss bank accounts. Sure enough, an increase in oil prices is followed by a spike in deposits held by these countries in financial havens, ...
[Similarly]...infusions of aid from foreign donors ... were followed by a jump in their deposits in foreign financial havens. The leaks averaged about 5% of the Bank’s aid to these countries.
..publication [of this research] was blocked by [World Bank] higher officials. They may have been worried about how it would look if the bank’s own researchers said that a chunk of its aid ended up in Swiss bank accounts and the like.

The lessons I take from this:
  • Institutions are primarily concerned with preserving themselves as institutions, and secondarily with doing what they are supposed to do. 
  • The cover-up is often worse than the crime:  when the World Bank tried to suppress the research, the Chief Economist resigned, which had the ironic effect of publicizing the research much more widely than if they had not tried to cover it up.  
  • Economics gives institutions a moral compass:  Kudos to Professor Goldberg for resigning.  I suspect her resignation will result in reforms to fix the problem.
  • 5% may be the "cost" of distributing aid:  if this is all they lose, the Bank may be doing a good job.  

MBA's need econ as it teaches you how to think, not what to think

Business majors performed very poorly across the board, including in economics.  Econ majors did the best overall.  Economics is a broad field by nature, and econ professors have been shown to apply the reasoning principles they've learned to problems outside their area.  Chemists, on the other hand, are extraordinarily bright, but in several studies struggled to apply scientific reasoning to nonchemistry problems.  

"When he recounts his own education at the University of Chicago...[Flynn] raises his voice. "Even the best universities aren't developing critical intelligence," he told me. "They aren't giving students the tools to analyze the modern world, except in their area of specialization. Their education is too narrow." He does not mean this in the simple sense that every computer science major needs an art history class, but rather that everyone needs habits of mind that allow them to dance across disciplines. departments rush to develop students in a narrow specialty area, while failing to sharpen the tools of thinking that can serve them in every area. This must change, he argues, if students are to capitalize on their unprecedented capacity for abstract thought. They must be taught to think before being taught what to think about. Students come prepared with scientific spectacles, but do not leave carrying a scientific-reasoning Swiss Army knife."

HT:  Quinn

Thursday, February 13, 2020

Valentines Signals

Two trends in how Americans celebrate Valentines Day seem to be at odds with each other. The National Retail Federation reports a steady decline in adults who are participating (51% in 2019 versus 63% in 2009) but a steady increase in average spending ($162 in 2019 versus $103 in 2009).

This would be consistent with high quality suitors sending a stronger signal to their romantic partners so as to further differentiate themselves from low quality suitors. It seems to be working because the drop in participation suggests that low quality suitors are dropping out of this arms race.* This is consistent with the unhinging of the market or sex from the market for marriage.

*Poor Mrs. Ward will reap only a fraction of this amount. But the quality of her suitor was revealed so long ago that there is little value in additional signals.

Tuesday, February 11, 2020

Is this underlying cause of rising inequality?

From David Brooks' Atlantic article,
If you want to summarize the changes in family structure over the past century, the truest thing to say is this: We’ve made life freer for individuals and more unstable for families. We’ve made life better for adults but worse for children. We’ve moved from big, interconnected, and extended families, which helped protect the most vulnerable people in society from the shocks of life, to smaller, detached nuclear families (a married couple and their children), which give the most privileged people in society room to maximize their talents and expand their options. The shift from bigger and interconnected extended families to smaller and detached nuclear families ultimately led to a familial system that liberates the rich and ravages the working-class and the poor.

Seems to explain the increase in inequality that economists have attributed to a variety of factors like assortive mating (educated individuals marrying each other) or education (huge returns to education, which increases intergenerational stickiness between income deciles)
Finally, over the past two generations, families have grown more unequal. America now has two entirely different family regimes. Among the highly educated, family patterns are almost as stable as they were in the 1950s; among the less fortunate, family life is often utter chaos.

Monday, February 10, 2020

Hidden Costs of Social Media Marketing

Michael Farmer cautions advertisers to be aware of the hidden costs of exploiting online and social media. Advertisers in traditional media, such as print, radio or TV, were familiar with what a campaign entailed. But the online scopes of work expanded into "banner ads, email marketing, Facebook posts, Instagram posts, mobile marketing efforts, and website development." The big advantage of online campaigns is the near instantaneous and increasingly granular feedback that can inform the refinement of campaign messaging to different niches. This advantage, though, requires exponentially more interaction between the client and the ad agency.

Agencies and their clients are overwhelmed by the need to communicate and deal with one another — to plan, obtain approvals, carry out work, calculate ROIs, and readjust after results have been analyzed. It's talk, talk, talk, negotiate, approve, reconsider, talk, talk, talk.

Working with an online media agency is less of the one-off, arms-length ad purchase contract and much more of an ongoing relationship. To get the most out of the relationship, clients need to make investments in the relationship, such as possibly recruiting digital/social experts. These are costs not all those new to online advertising will foresee.

Friday, February 7, 2020

Why does it cost only $10,000 to own a Chick-fil-a franchinse?

Good puzzle posed by an article:

  • For KFC, the cost of opening a franchise is $2M dollars, but you get to keep a 95% of your sales.
  • For Chick-fil-a, the cost of opening a franchise is only $10K (Chick-fil-a buys the land and equipment), in exchange for 50% of revenue and only 15% of net profit.

Why the difference?
In lieu of wealthy investors, Chick-fil-a selects franchisees who are involved in their local communities. The company’s aim, says a spokesperson, is to find people who are willing to be “highly involved” in day-to-day operations. (While not a stated requirement, adhering to “Christian values” also doesn’t hurt an applicant’s chances). 
“You run every aspect of the restaurant six days a week,” says Jeremiah Cillpam, a Chick-fil-a franchise owner in Los Angeles. In return for 60-hour work-weeks, an operator might take home 5-7% of revenue (around $150-$250k per year). ...
In essence, Chick-fil-a operators aren’t truly business owners — or even franchisees in the traditional sense. 
“When people start a business, they want flexibility and real ownership,” says Kenny Rose, CEO of Semfia, a firm that educates people on franchise investing. “But as a Chick-fil-a franchisee, you’re basically just working a traditional management job.”

Wednesday, February 5, 2020

Pay-How-You-Drive Insurance Works

A new paper by Reimers and Shiller documents the effects of Pay-How-You-Drive (PHYD) insurance. The idea is to use telematics to monitor driver behavior and to reward better drivers with discounted premiums. While Progressive initiated monitoring driver behavior for insurance purposes, other companies are getting in on it too. Reimers and Shiller cleverly exploit the staggered rollout across states to observe company profitability and driver fatalities.

First, they find that the first mover earns a profit boost. But this is temporary and dissipates with entry. That is, PHYD offers no sustainable competitive advantage to the first-mover. This seems to meet our expectations as there are few barriers to other insurers implementing PHYD systems. But  profit erosion with four or five firms also suggests that auto insurance markets are pretty competitive.

Second, they find that driver fatalities fall. PHYD could affect either the adverse selection problem (better drivers sign up) or the moral hazard problem (you drive better when it is rewarded). If it was just adverse selection, then good drivers drive no better and bad drivers drive no worse. They are just sorted into insurance plans more efficiently. But if it works on moral hazard too, drivers who sign up drive better and collectively we are likely better off because driving has become safer.

Third, by examining PHYD, Reimers and Shiller have documented one of the many ways that information technology, in this case telematics, is improving market efficiency and saving lives.

Saturday, February 1, 2020

Seattle commits the hidden cost fallacy

In Seattle, if you have a spare room to rent, you cannot conduct a criminal background check and you have to rent to the first person who shows up.  The new laws will reduce supply, or encourage black-market rentals, as they make renting to strangers more costly:

Landlords aren’t the only victims. Renters will suffer too. As owners like Ms. Yim and Ms. Lyles flee the housing market because they can’t bear the regulatory burden, the contraction in supply will further inflate rents. Remaining landlords will raise prices even more to underwrite the risks they face because they can’t adequately vet rental applicants.
HT:  Cramer


Monday, January 27, 2020

Marijuana legalization increases cigarette consumption

Econ Paper:  
... marijuana and cigarettes are complements and legalizing recreational marijuana is associated with an increase in cigarette consumption by about 4-7%.

So, beware the hidden-cost fallacy:  
We advise caution in passing [marijuana legalization] laws since we estimate the nationwide health care costs associated with such an increase in tobacco consumption will be about $10 billion and may equal or exceed the touted monetary benefits of marijuana legalization in many states.


Friday, January 24, 2020

China's coming population collapse

... it’s staggeringly hard to grow an economy when you lose a fifth of your working-age population in a single generation. ... Demographics will slow America’s economy, but they’re a five-alarm fire for other countries. So even assuming equal levels of productivity growth, the U.S. is head and shoulders better off than other developed nations, just given its demographics alone. 

(Article link) HT: Lamar

Thursday, January 23, 2020

Does this help or hurt Ex-Felons?

The city of Oakland recently voted unanimously to bar landlords from conducting background checks before renting to tenants.
Supporters say the measure will help ensure residents released from prison are able to reintegrate back into society, hold down a job and provide for their families, instead of adding to Oakland’s homeless population. But some landlord groups worry the measure will sacrifice residents’ safety.

Sure, in the short-run ex-felons will be on a more equal footing relative to law-abiding renters. But it is hard to imagine that, on average, they are not worse tenants. That they are more likely to be late with rent, cause faster depreciation of they property, and possibly make other tenants more uncomfortable. Landlords screen out these higher cost individuals with a criminal background check. The absence of the background check does not magically remove the expected costs.

This means landlords will seek out additional screening mechanisms (or law-abiding renters will provide more signals). An easy screen would be to require an even larger security deposit, something ex-felons might have a harder time scraping together. Another might be to more fully scrutinize prospective renters' social media accounts. Landlords might glean troubles with the law but also other behaviors they want to avoid (political or religious affiliation?).

Suppose these alternative screens and signals do not work as well as criminal background checks. This means that the cost to a landlord of doing business in Oakland just went up. Over the longer run, we would expect them to withhold some maintenance until the value of the property is more closely equated with the cost.  Also, with more ex-felons in Oakland, I expect the value of home ownership will fall.

See also, Screening on criminal background and credit history

Tuesday, January 21, 2020

What domestic cause unites the presidential candidates?

From the Atlantic:  zoning restrictions on supply make housing unaffordable
...Booker, Castro, Klobuchar, and Warren propose a combination of financial carrots and sticks that the federal government could use to induce local governments to reform their zoning. Indeed, a larger federal role in reducing local barriers to development appears to be one area with potential for bipartisan cooperation: President Donald Trump recently created a task force to address this issue.

In NYC, why are homeless shelters full, and luxury condos vacant?

Good article in The Atlantic focusses on several factors

1. Declining demand for luxury condos:
Developers bet huge on foreign plutocrats—Russian oligarchs, Chinese moguls, Saudi royalty—looking to buy second (or seventh) homes. ... But the Chinese economy slowed, while declining oil prices dampened the demand for pieds-à-terre among Russian and Middle Eastern zillionaires. It didn’t help that the Treasury Department cracked down on attempts to launder money through fancy real estate.

2. Developers are building larger, higher-cost, housing:
First, the typical new American single-family home has become surprisingly luxurious, if not quite so swank as Manhattan’s glassy spires. Newly built houses in the U.S. are among the largest in the world, and their size-per-resident has nearly doubled in the past 50 years. And the bathrooms have multiplied. In the early ’70s, 40 percent of new single-family houses had 1.5 bathrooms or fewer; today, just 4 percent do. The mansions of the ’70s would be the typical new homes of the 2020s.

 3. Restrictions on supply (restrictive zoning) slow supply responses and make it more costly to build:
Third, and most important, the most expensive housing markets, such as San Francisco and Los Angeles, haven’t built nearly enough homes for the middle class. As urban living has become too expensive for workers, many of them have either stayed away from the richest, densest cities or moved to the south and west, where land is cheaper. This is a huge loss, not only for individual workers, but also for these metros, because denser cities offer better matches between companies and workers, and thus are richer and more productive overall. Instead of growing as they grow richer, New York City, Los Angeles, and the Bay Area are all shrinking.

The result is excess demand for cheap housing, and excess supply of expensive housing.
Young adults today are one-third less likely to own a home at this point in their lives than previous generations. Among young black Americans, homeownership has fallen to its lowest rate in more than 60 years.

So why doesn't the luxury price decline to where quantity demanded = quantity supplied?
...developers have been reluctant to slash prices too suddenly or dramatically, lest the market suddenly clear and they leave millions on the table.

Monday, January 20, 2020

No institutions are seen as both competent and ethical

WSJ survey shows mistrust of all major institutions, but particularly Government.  Business seems to be responding.  
When it comes to looming societal challenges, 92% of people said it was imperative for their employers’ CEOs to speak out on issues from the ethical use of technology to climate change, and three-fourths said they believed chief executives should be the drivers of change, rather than waiting for government intervention. 
Some CEOs have picked up on this already. Lawrence Fink, chief executive of BlackRock Inc. has been outspoken on topics like slow wage growth and jobs lost to automation. His widely read annual letter to investors, released earlier this month, said that BlackRock would take a tougher stance against corporations that aren’t providing a full accounting of their environmental risks, part of a slew of moves by the investment giant to show it is doing more to address investment challenges posed by climate change. Days later Microsoft Corp. said it would take more carbon out of the air than its operations and those of its supply chain produce by 2030.

Saturday, January 18, 2020

Old people taking from the young

WSJ has an interview with Prof Ed Glaeser on how old people are using government to enrich themselves at the expense of the young:
Consider the housing market. “In the 1960s and earlier,” Mr. Glaeser says, “America basically had a property-rights regime that meant that anyone who had a plot of land could pretty much put up anything reasonable on that plot of land.” Since then, cities and towns have circumscribed the areas where homes can be built, capped numbers of units, and imposed strict requirements on developers—all of which raise prices. “So there’s this intergenerational redistribution that’s occurred by restricting housing supply.
People who bought homes while the rules were lenient, or who are wealthy enough to have bought lately, have seen their values soar. Meanwhile, “younger people just don’t have housing wealth.” By 2013, a 35- to 44-year-old person at the 75th percentile had less than half as much home equity (adjusted for inflation) as his counterpart did 30 years earlier.

Glaeser suggests that such exploitation of young people is leading to a political backlash:
Yet Mr. Glaeser cites polling that suggests most young people’s vision of socialism might be better described as “hyperredistribution.” They don’t seek state control of the means of production, but punishing taxes on the rich to fund programs like free college for all. “They say, ‘Well, there are a whole bunch of projects—a whole bunch of government spending that helps old people. I want mine. If we’re going to spend a huge amount on Medicare, why aren’t we spending a whole lot on education for me?’ ”

Thursday, January 16, 2020

What to make of the China trade deal

The answer from

Prediction market: Who will be the Democratic Nominee?

 Each contract pays off $1 if the event occurs, e.g., Joe Biden wins the Democratic Nomination. The price of the contract can be interpreted as the probability of the event, Price=probability*$1.  For example, the Joe Biden contract is trading at $0.39 suggests a 39% that he will win the nomination. 

 These kinds of prediction markets can be used by firms to, e.g., predict future sales or profitability.

Monday, January 6, 2020

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

DC Teacher Incentives

Michelle Rhee's tenure as Washington DC's Chancellor of Public Schools was controversial mostly because she instituted reforms designed to hold teachers accountable for classroom performance. This episode provides the backdrop for studying the role of high-powered incentives linked to multiple measures of teacher performance. The effectiveness of one of these reforms have recently been analyzed by Thomas Dee and James Wyckoff in their paper "Incentives, Selection, and Teacher Performance: Evidence from IMPACT." So how did it do? From the abstract:
Our RD [Regression Discontinuity] results indicate that dismissal threats increased the voluntary attrition of low-performing teachers by 11 percentage points (i.e., more than 50 percent) and improved the performance of teachers who remained by 0.27 of a teacher-level standard deviation. We also find evidence that financial incentives further improved the performance of high-performing teachers (effect size = 0.24).

So screening mitigated both the adverse selection and the moral hazard problems and not by small amounts.