Halloween Candy Markets

Know the rules of Halloween candy trading

What happens when States incur too much debt?

The NY Times takes a look at Illinois:

For years, Illinois has racked up billions in public debt to plug budget holes, pay overdue bills, and put money into its mismanaged pension funds. And for the people who live there, this has resulted in decrepit commuter trains and buses, thousands of unsound bridges, 200 hazardous dams and one of the most inequitable public school systems in America.

Stossel on subsidizing risks

The video illustrates a couple of ideas:

1. From Chapter 2:  subsidies destroy wealth, in this case, by encouraging activities whose cost is bigger than their benefit. 
2. And from Chapter 20:  If you make things safer, people take more risks. 

Aussies Find Cosmetics Firm Guilty of RPM

The Australian Competition and Consumer Commission (ACCC) has clamped down on so-called "resale price maintenance" (RPM) by Eternal Beauty Products. In this case, the cosmetics maker pressured online retailers to either sell goods at certain prices or risk being cut off altogether. Most countries have had some sort of anti-RPM law on the books. At first blush, it seems quite obvious that that a manufacturer requiring a retailer to set higher prices must not be in the public interest. Until, you ask a simple question, "Why would manufacturers do this?"

1. If the manufacturer was a monopolist, it might be a way of getting higher final prices. But, why not simply raise the wholesale price? Given the wholesale price, the manufacturer should want as low a retail price as possible to sell as many units as possible. Anyway, in this this case, like most, the manufacturer was one of many competitors.
2. If the industry was oligopolistic, the manufacturers may be collectively using retailers to enforce higher prices. This could be a way to reduce rivalry. But then all cosmetic firms would be party to the deal and they would have to impose price restraints on all retail channels. This appears to have been far from the case.
3. If the product was new or differentiated and the target market was poorly informed about the product's characteristics relative to competitors, the manufacturer may want to encourage point-of-sale (POS) services. Retail sales associates may be uniquely positioned to demonstrate why this product might be preferred. But this imposes costs on the retailers who perform these POS services. They may be willing to do so for a higher margin. But not if some online retailer offers the same product without the POS services at a discount. Customers will may make an initial purchase with the full service retailer and then shift orders to the cheaper online vendor. In this case, no retailer will be willing to offer the POS services and suffer the free-riding by online discounters. Without POS services, the product fails. To counter this, the manufacturer bans discounting by setting a minimum retail price that includes enough of a margin that retailers want to offer the POS services. In this theory of RPM, customers benefit from small manufacturers bringing new and innovative products to the market. Too bad the ACCC got in the way.

Group Incentives: Teacher pay

An interesting application of group incentives was examined in a new working paper by Scott A. Imberman and Michael Lovenheim called "Incentive Strength and Teacher Productivity: Evidence from a Group-Based Teacher Incentive Pay System." The incentive scheme was for groups of teachers teaching the same subject within a grade and school. One problem with group incentives is free-riding. But different teacher assignments means that the incentive can be stronger for teachers who are responsible for the outcomes of more of the students. So, as a teacher's share of students in a particular school, grade, and subject combination, the incentives get stronger. From their abstract:

We find that student achievement improves when a teacher becomes responsible for more students post program implementation: mean effects are between 0.01 and 0.02 standard deviations for a 10 percentage point increase in share for math, English and social studies, although mean science estimates are small and are not statistically significant. 

While these effects seem small, they are bigger than are found in many previous studies. So, if the incentive dissipates for larger groups, why use group incentive rather than measuring performance at the individual level? I can think of a few reasons (and maybe you can think of more):

1. Individual incentive would lead teachers to try to "cherry-pick" students. These could just be the better students if raw test average is the performance measure or those thought to be able to improve the most if change in score is the metric.
2. To better sort students into classes. Students differ in abilities as well as other characteristics (e.g. unruly versus well-mannered). Some teachers are better with one type of student than another (e.g., former drill sergeant). The group of teachers all benefit from better matching students to teachers.
3. Spillovers within a group. Teachers have heterogeneous abilities and no one likes to be 'corrected' by a colleague. But now there is a stronger incentive for the better teachers to share their methods with those who can improve.
4. Demonstration effects across teacher groups. Other groups of teachers can observe the successful groups and learn.

 So it might be worth weaker group incentives so as to address these issues.

Using patient satisfaction as a performance metric

One of the biggest problem with the US medical system is cost:  every time you put a patient in front of a provider, the provider does stuff.  Sometimes it is what we want the provider to do; many times it is not.  See our earlier blog post:  What do tonsilectomies have in common with auto repair?

The problem, of course is the incentives:  our fee-for-service payment scheme rewards physicians and hospitals for doing stuff to patients, regardless of whether it is the cost-effective thing to do. 

To try and fix the problem, the government is evaluating hospital performance using patient satisfaction scores.  The Wall St. Journal has a funny piece about its obvious shortcomings:

"Donna Barnett, a senior nurse at Grady [Hospital], cites a patient who had a hemorrhagic stroke and recovered swiftly enough to walk out of the hospital about a week later. On the survey the patient complained that meals were served cold and gave Grady low scores. 'It makes you want to throw your hands up,' said Ms. Barnett."

When Vanderbilt asked patients what they wanted, it was easy and free parking, which explains the valet parking and unsightly parking structures all over campus.  Patients didn't seem to care too much about the quality of care, and not at all about the cost because other people (you and I) pay for their care. 

And lets not forget the placebo effect, which means that patients are not satisfied unless providers do something to them.  

Arbs attack the presidential betting markets

There are several political betting markets: Intrade; Iowa Electronic Market, Betfair, Paddy Power, and, Predictwise.com, which averages Intrade, Iowa and Betfair in real time.

What happens when the market prices diverge?  The arbs start betting:

PS: So right now it's October 4, 2012 at 12:50 pm EST. President Obama's got 66 percent odds [of winning the election] on Intrade, 69 percent on Iowa and 73 percent on Betfair. If you were trying to make money right now, what do you do?

AJG: Well, I would if I could -- Betfair is locked for U.S. persons -- sell President Obama's contracts on Betfair and buy President Obama's contracts on Intrade, and wait, because eventually the prices on these two contracts would have to converge. They just predict the same event happening, so they will have to be worth the same once the event happens or doesn't. So come November 6th, both of these contracts will expire at the same value, but because I sold one high and I bought the other one low, I will pocket the 8 points difference between the 2 contracts.

HT:  Merle Hazard

When is inequality bad?

The lead article in the Economist purports to be about income inequality.  It starts out with the reasonable proposition:

... some measure of inequality is good for an economy. It sharpens incentives to work hard and take risks; it rewards the talented innovators who drive economic progress. Free-traders have always accepted that the more global a market, the greater the rewards will be for the winners. 

But then it argues that inequality has reached a stage where it can be inefficient and bad for growth:

That is most obvious in the emerging world. In China credit is siphoned to state-owned enterprises and well-connected insiders; the elite also gain from a string of monopolies. In Russia the oligarchs’ wealth has even less to do with entrepreneurialism. In India, too often, the same is true.

In the rich world the cronyism is better-hidden. One reason why Wall Street accounts for a disproportionate share of the wealthy is the implicit subsidy given to too-big-to-fail banks. From doctors to lawyers, many high-paying professions are full of unnecessary restrictive practices. And then there is the most unfair transfer of all—misdirected welfare spending. Social spending is often less about helping the poor than giving goodies to the relatively wealthy. In America the housing subsidy to the richest fifth (through mortgage-interest relief) is four times the amount spent on public housing for the poorest fifth.

 These examples are strategies employed by firms and individuals to manipulate government policy to their own advantage, which readers of this blog will recognize as examples of "make the rules or your rivals will." 

If this is the problem, I am not sure why the Economist proposes income re-distribution to address it.  Why not attack the problem directly by eliminating too-big-to-fail subsidies, regulatory barriers to entry, and misdirected welfare spending.

 HT:  Cassie

Theatre of the Absurde: banning achievement in France

France's socialist president wants to ban homework in school:

He doesn’t think it is fair that some kids get help from their parents at home while children who come from disadvantaged families don’t. It’s an issue that goes well beyond France, and has been part of the reason that some Americans oppose homework too.

This concern for equality has been satirized by Kurt Vonnegut in his story, Harrison Bergeron:

...In that brave new world, the government forced each individual to wear "handicaps" to offset any advantage he had, so everyone could be truly and fully equal. Beautiful people had to wear ugly masks to hide their good looks. The strong had to wear compensating weights to slow them down. Graceful dancers were burdened with bags of bird shot. Those with above-average intelligence had to wear government transmitters in their ears that would emit sharp noises every 20 seconds, shattering their thoughts "to keep them…from taking unfair advantage of their brains."

I have nothing to add, except to remind people that the story does not have a happy ending,  Harrison breaks free of his device and performs a beautiful dance, the likes of which had never been seen before.  But then, the Handicapper General, Diana Moon Glampers shoots Harrison and his partner, and equality is restored.

HT:  JC

Taxes destroy wealth: France's capital gains tax rises to 62.5%

French businesses are outraged at a proposal by the government to raise the capital gains taxation rate from 34.5% to 62.2%.  This compares with 21% in Spain, 26.4% in Germany and 28% in Britain.

...the Socialist government of François Hollande has yet to understand the “extreme gravity” of the crisis.  ...the policies border on economic illiteracy: “The idea of aligning taxes on capital with those on wages is a profound economic error. It is scandalous that the French have been left in such economic ignorance for years.”

Here is the analysis behind the outrage.  The new tax rate raises the cost of capital (the return you have to promise investors in order to get them to invest in France) by a factor of 1.74.  Suppose, for example, investors were willing to invest in a project that returns 10% under the lower tax rate.  Under the higher tax rate, the same project would now have to earn 17.4% in order to get the investors to invest.  From chapter five, we know that a higher cost of capital means that fewer investment projects will be undertaken (because they have a lower NPV). 

So, the Socialist (deontological) justification for higher taxes is that they re-distribute money from those who have it (rich investors) to those who don't (poor non-investors).

The Capitalist (consequentialist) critique of higher capital gains taxes is that they raise the cost of capital, which reduces investment, which makes us all poorer.

As Winston Churchill said:   

The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of Socialism is the equal sharing of miseries.