Saturday, November 21, 2020

Price discrimination

Economists take care to differentiate between direct price discrimination (where you set different prices to different groups by identifying members of each group and charging them different prices) and indirect price discrimination (where you offer products or packages tailored to each group at different prices and have buyers self-select).

Admittedly, I'm not sure which one this is.



Thursday, November 19, 2020

The real meaning of Thanksgiving

Peter Klein gives us the story of the first Thanksgiving that you never learned in school:
Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. While not a complete private property system, the move away from communal ownership had dramatic results.

 This year I am giving thanks for private property. 

 Related:  Good short video on the how private property saved the Pilgrims, China and Vietnam from our friends at MarginalRevolution University

Hospital Cost Containment Gone Awry

Or installment #753 on unintended consequences. In a new paper in the Journal of Political Economy, Diane Alexander studies how physicians responded to a new bonus program for reducing total hospital costs. From her abstract:
Doctors respond to the bonuses by becoming more likely to admit patients whose treatment can generate high bonuses and sorting healthier patients into participating hospitals. Conditional on patient health, however, doctors do not reduce costs or change procedure use. These results highlight the ability of doctors to game incentive schemes and the risks of basing nationwide health care reforms on pilot programs.

Designing an appropriate incentive scheme is difficult.

Tuesday, November 17, 2020

Removing a noisy signal improves decision making: Army removes photos from promotion sheets

 From The Army Times:

The Army will no longer include official photos for officer selection boards, beginning in August, to help eliminate unconscious biases in the promotion process...

To their credit, the Army first ran an experiment to determine the consequence of the change and found that when the photo was removed:

...there was less variance between voters’ scoring, meaning voters ranked candidates more similarly across the board. After removing the photo, voters also took less time to make decisions on each individual file, and the outcomes for minorities and women improved.

A similar change, Ban the Box, a ban on employers asking about criminal background, saw some employers turn to race as a proxy for criminal background.  The difference seems to be in the value of the signal:  removing a noisy signal results in better decisions; but removing a valuable one does not.  

One student uses questions about criminal background to screen for honesty, which results in better hiring decisions at his firm.  Unsurprisingly, honesty seems like a valuable signal.  

HT:  Evan W.

Tuesday, November 10, 2020

Did Warren Buffett finally read Chapter 9?

He is applying the "indifference principle" to criticize high tax states with unfunded pensions.  From Zero Hedge:

“If I were relocating into some state that had a huge unfunded pension liability, I’m walking into liabilities. . . And those are big numbers. Really big numbers. . . They will come after corporations. They will come after individuals. . . They’re going to have to raise a lot of money.”
BOTTOM LINE:  A mobile asset, like labor, will move to where it can earn the most.  Consequently, young, wealthy, and productive people will be drawn to states like Tennessee, Texas and Florida (which have low income taxes and relatively healthy pensions).  

I am sending the Pope a copy of my textbook


From the Pope's Encyclical "Fratelli Tutti" ("Brothers All"):
The Pope also makes no secret of his opposition to the global capitalist free market economy. He proposes instead that wealthy countries form a seamless bond with the have-not peoples of the global south. ... The problem with redistribution, of course, is, as Margaret Thatcher famously said, "Soon you run out of other people's money." After everyone has been made equally medium-poor, then where, without incentives for hard work and production, are further disbursements supposed to come from?  

Hopefully, the Pope will at least read Chapters 1 and 2 as he makes the implicit assumption that no one will respond to the perverse incentives he proposes, but I am not hopeful.  When I sent a free copy of the 3rd Edition to President Maduro (I even signed it), his country went into freefall (past posts about Venezuela).

Saturday, November 7, 2020

Nice summary of the affordable housing crisis

in the Stanford Law Review:

[the cause of the affordable housing crisis] is uncontroversial among urban economists but not broadly understood by low-income families, advocates for low-income families, housing activists, and their allies in academia, policy, and government—in short, the housing advocacy community. In the face of higher housing costs, the housing advocacy community tends to argue for a “kludgy” set of policies that can actually prevent new development and end up increasing housing prices— campaigns to impose building moratoria, for example, or downzonings, community benefits agreements and other exactions, lengthy approvals procedures that disadvantage developers relative to NIMBYs, various forms of rent control, and a focus on affordable housing to the exclusion of other types of development. …. 
In the suburbs, the politics of exclusionary policies are hopeless: the cartellike interests of suburban “homevoters” are well-served by current exclusionary policies, state and federal courts for the most part won’t intervene, and there is very little interest among state legislators to impose regional or state-wide solutions.11 The picture is less bleak in exclusionary cities: renters, who would directly benefit from lower housing prices, are a majority in many of these cities, and advocates for affordable housing already form a politically influential bloc—but they use their power to ends that are often counterproductive.12 While there are other serious obstacles to expanding housing supply, the housing advocacy community could and should become an important part of the fight against urban land use regimes that systematically privilege a city’s wealthiest and most powerful residents. … 
A city’s ability to remain affordable depends most crucially on its ability to expand housing supply in the face of increased demand. Among the people who care most about high housing costs there is a lack of understanding of the main causes and the policy approaches that can address them. The central message of this Article is that the housing advocacy community—from the shoeleather organizer to the academic theoretician—needs to abandon its reflexively anti-development sentiments and embrace an agenda that accepts and advocates for increased housing development of all types as a way to blunt rising housing costs in the country’s most expensive markets.
HT: Campbell

Thursday, November 5, 2020

No free lunch: insurance premiums go up in response to lower insulin co-pays

News from Colorado:

A new law, signed by Gov. Jared Polis earlier this week, caps co-payments of the lifesaving medication at $100 a month for insured patients, regardless of the supply they require. 

Insurance companies will have to absorb the balance. 

 While the Colorado out-of-pocket caps will likely provide financial relief for diabetes patients, she noted "the costs will kick back to all of the insured population" whose premiums are likely to go up as a result. 

"Nothing is free," Hernandez said.

The saying "there is no free lunch," refers to the the economic idea of opportunity cost.  When Colorado tries to make life better for insulin patients, they also raise the cost of offering health insurance, reducing the number of people with insurance.  

HT:  Thomas B.