Nursing Home Quality Improvements through Merger

A successful merger creates wealth by moving an under-performing asset into a more valuable use. But does this wealth derive from the ability to extract more consumer surplus through higher prices for the same product? Or is it from the better management of poorly performing assets that generates more total surplus that need not decrease consumer surplus? Determining where on this spectrum a specific deal lies is the crux of economic antitrust policy. 

Chatterji, Ho and Li, have a new paper, "Mergers and Quality Provision in Healthcare: Evidence from Nursing Homes," that finds evidence of increased total surplus. Specifically, purchases of "independents" by "chain-owned" Skilled Nursing Facilities (SNFs) reduce health deficiency citations by 5% two years post-merger. New management improves quality. Looking deeper, this result is larger for acquiring chains that are smaller, chains with a higher-quality track record, and chains that make more acquisitions. Notably, the wealth creation appears to be from increased quality, and not from reduced costs, or increased market power.

My experience with this industry is that smaller, independent facilities may have begun with the best of intentions, and performance, but the founders were not able to keep this up indefinitely. Larger chains have processes, and especially succession plans, in place that allow facilities to maintain quality. 

CA min wage goes up ==> CA employment declines

The classic book, Economics in One Lesson reduces all of economics to a similar lesson:

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

The lesson of Chapter 3 is similar:

• Consider all costs and benefits that vary with the consequences of a decision:
• If you miss some, that is the "hidden cost fallacy"
• If you take account of irrelevant ones, that is the "sunk-cost fallacy"

 This hidden-cost fallacy comes from California, via Instapundit.com:

California raised the minimum wage statewide for “fast food restaurant employees” to $20 per hour last April following the passage of a ballot proposition in September the year before.

Analysis of unadjusted data from the Quarterly Census of Employment and Wages, the NBER found “that employment in California’s fast food sector declined by 2.7 percent relative to employment in the fast food sector elsewhere in the United States from September 2023 through September 2024 … Our median estimate translates into a loss of 18,000 jobs in California’s fast food sector relative to the counterfactual.”

The fast food sector has also cut workers’ hour and increased automation to avoid paying rising employment costs.

Any econ student could have predicted this using a shift in the supply curve, but someone at UC Berkeley predicted the opposite:

A new study published by UC Berkeley’s Institute for Research and Labor Employment confirmed that California’s $20 minimum wage for fast-food workers has led to significant benefits for workers, without the devastating consequences that critics predicted.  

Fortunately for us, we have an adversarial system, so that mistakes by one side are usually brought to light by the other.  

FOOTNOTE: a middling economists' take on weighing the benefits of our adversarial system. (link)

Monetizing Attractiveness

Many people like to be around attractive people. They will patronize a business more often if they know they might "rub elbows" with people way out of there league. Business might want to pay attractive people to patronize their establishments so as to attract these "normies." But how? Well, there is an app for that. Neon Coat vets models and influencers so that businesses can barter free goods and services to these bonafide pretty people. As the WSJ reports, content creator Lauren Karwoski 

... grabbed a green juice from gourmet eatery Mangia (normally $9) in the morning, then took a workout class at Barry’s (about $40 in New York City). Afterward, she got her eyebrows laminated at Nampa by Himalayan Salon (“I do this monthly anyways, so [I saved] myself 100 bucks right here”). That evening, she met another Neon Coat user for a glass of wine at Paros, a Greek restaurant in Tribeca. She estimated she saved $200 that day. “My favorite thing is that it’s stuff that I would do normally,” she said of the app. 

 Alas, neither my friends nor I are suppliers or demanders of this form of attractiveness.

“𝗜 𝘄𝗮𝗻𝘁 𝘆𝗼𝘂 𝘁𝗼 𝗰𝗹𝗼𝘀𝗲 𝘆𝗼𝘂𝗿 𝗰𝗼𝗺𝗽𝘂𝘁𝗲𝗿, 𝗰𝗼𝗺𝗲 𝘀𝗶𝘁 𝗯𝘆 𝗺𝗲, 𝗮𝗻𝗱 𝘁𝗲𝗹𝗹 𝗺𝗲 𝘄𝗵𝘆 𝗜 𝘀𝗵𝗼𝘂𝗹𝗱 𝗶𝗻𝘃𝗲𝘀𝘁 𝗶𝗻 𝘆𝗼𝘂.”

It was the most terrifying moment of my entrepreneurial journey. 

I was 31 - a farm kid from Mississippi, sweating through my suit jacket at Rockefeller Center in New York. I’d already been rejected by Nashville investors: “Too young, too risky, too small to compete.” This felt like my last shot.

Ten minutes into my polished pitch, Ted McCourtney, Senior Partner at Venrock, asked his team to leave. Then he told me, “I'm already an investor in your biggest competitor. Why should I bet on you?”

I knew the deck wouldn’t save me. So I just told the truth.

I shared how I grew up on a rural farm. Joined the Army to pay for college. And then I said:

“Mr. McCourtney, I’ve mortgaged my home and my family farm to start this. If I fail, I lose everything. If I fail, you lose a fraction of a percent of your holdings. I’m all in. This cannot fail.”

He listened quietly. Then he brought his assistant back in and said, “We’re going to back Michael.”

Years later, after we’d successfully sold the company, I asked him why.

He said “Michael, I rarely see such naive honesty in New York. Given your story and what you had on the line, I knew you were a good bet.”

LESSON: Venture Capital investing is inherently uncertain. Investors like Ted McCourtney have to guard against moral hazard (will the entrepreneur act in the best interests of the investor) and adverse selection (if other investors turned him down, am I missing something). But the entrepreneur's revelation that if he failed, he would lose everything, assured the investor that his goals were aligned with those of the investor.

CREDIT: Professor Michael Burcham

Mowing Your Own Lawn

Roland Fryer has a nice opinion piece in the WSJ about "The Economics of DIY." He points out that even wealthy people tend to do household chores that they could affordably outsource. He relates an incident:

When a friend invited me to play golf and I declined because the yard needed mowing, he didn’t hide his disbelief. “You can pay someone to cut your lawn,” he said, “but you can’t pay someone to have fun for you.”

At first blush, it seems as though the tenured Harvard economics professor mowing his own grass needs a refresher in cost-benefit analysis. But he points out that many of the benefits of DIY are often hidden and ill-defined while the costs are fixed and precise. Three economic concepts help to better understand some hidden benefits.

Diminishing Marginal Utility - The value of an activity falls as you do more. In his example, when time with his kids is short, he frees up time by outsourcing more - cooking, cleaning, ride-sharing, etc. The cost of the meal, the maid, or the ride is fully observable. The value of the time shared is less amenable to an accounting ledger.

Experiential Utility - There is often pride in doing. We value our ability to do things and we recognize these talents in others.We admire the craftsmanship in DIY car restoration, woodworking, quilting, or calligraphy.  Hobbies can be fun. Moreover, there can be joy in seeing yourself improve. And the nostalgia of learning from an elder can bring back fond memories. 

Signaling - Cutting the lawn sends a signal to your neighbors and yourself. You are the kind of person who takes care of things, who others can look on with admiration for the care you take. You provide positive externalities.

The zero-sum fallacy: trade, immigration

 MarginalRevolution explains much of our current political conflict as a mistaken belief in the zero-sum fallacy:

Zero sum thinking fuels support for trade protection: if other countries gain, we must be losing. It drives opposition to immigration: if immigrants benefit, natives must suffer. And it even helps explain hostility toward universities and the desire to cut science funding. For the zero-sum thinker, there’s no such thing as a public good or even a shared national interest—only “us” versus “them.” In this framework, funding top universities isn’t investing in cancer research; it’s enriching elites at everyone else’s expense. ...

Technologies that Drastically Alter Costs Could also Drastically Alter Processes

Austin Vernon has posted an amazing analysis of how AI is transforming logistics. Even before he gets to the implications of AI, there is lots of information about current cost structures. 

Autonomous trucks and last mile delivery by drone don't need drivers, which reduces costs. They also don't need systems to sustain drivers, e.g., climate control, rest periods, meals, etc. which reduces costs further. To fully appreciate the savings, the way that things get from manufacturer to consumer may drastically change.

• Truck drivers are a fixed cost meaning you want defray these costs with big shipments often with agglomerations of items. Without the fixed costs of drivers, the efficient vehicle size could be smaller and agglomerating packages into shipments is no longer necessary. This means there may be much less need for warehousing as smaller robot vehicles can ship directly from producer to retailer.
• Likewise, last mile delivery is currently drone by trucks with many packages to many customers, a logistical challenge. Smaller drones are quickly becoming cost effective alternatives that deliver to a single location and return, representing simpler logistical processes.

Vernon claims that both the direct costs reductions and the indirect cost savings from re-engineering the delivery process could eventually reduce logistics costs as much as 90%.