Alex Tabarrok

Competition Compounded

by on October 23, 2015 at 7:28 am in Current Affairs, Economics, Law, Medicine | Permalink

ArsTechnica: Turing Pharmaceuticals, the company that last month raised the price of the decades-old drug Daraprim from $13.50 a pill to $750, now has a competitor.

Imprimis Pharmaceuticals, Inc., a specialty pharmaceutical company based in San Diego, announced today that it has made an alternative to Daraprim that costs about a buck a pill—or $99 for a 100-pill supply.

Good news. Competition is working. But I was puzzled. In Generic Drug Regulation and Pharmaceutical Price-Jacking, I argued that competition was slow because the FDA makes it expensive and time consuming to get a generic drug approved for sale in the United States. Was I wrong about the difficulty of generic entry? No.

The drug that Imprimis Pharmaceuticals is selling is not FDA-approved. A bit of background is in order. Even today some drugs need to be tailor-made. A patient, for example, might not be able to swallow a pill so a licensed pharmacist may create for a specific, individual patient a small batch of the drug in liquid form. A pharmacy that does this kind of work is called a compounding pharmacy.

Compounding pharmacies have a long and tendentious history with the FDA. The FDA has always claimed that a new drug is a new drug, even one created only for a specific individual. Thus, the FDA has always said that it has the right to regulate compounding pharmacies just like manufacturers of new drugs. In practice, however, the FDA allowed the industry to proceed with little regulation.

In the 1990s some compounding pharmacies began to create large batches, especially of drugs in short supply, as a way of avoiding the FDA process. The FDA worried about quality control, however, and it re-evaluated its traditional hands off approach. A political battle then ensued in which Congress and the Supreme Court also had their say. In 2012, fungal meningitis outbreaks caused by poor quality control at the New England Compounding Center brought these issue to public attention and resulted in greater regulation of compounding pharmacies, albeit with clearer regulations on when a compounding pharmacy may sell large quantities.

Imprimis Pharmaceuticals did not apply for approval to sell a generic version of Daraprim. As I argued earlier, that would take years and cost millions of dollars. Instead, it is doing an old-style end-run of the FDA process by offering its alternative under the compounding pharmacy laws. That means that it can only sell to order, on a patient by patient, prescription by prescription basis. Since Daraprim is not widely used this may work. Indeed, I hope this end run works but my reading of the act is that compounders can only supply drugs in large quantities if they are on the FDA’s shortage list. Perhaps the FDA will look the other way, however, in order to send Turing and similar firms a message.

Gender Gaps in Performance: Evidence from Young Lawyers

Abstract:  This paper documents and studies the gender gap in performance among associate lawyers in the United States. Unlike other high-skilled professions, the legal profession assesses performance using transparent measures that are widely used and comparable across firms: the number of hours billed to clients and the amount of new client revenue generated. We find clear evidence of a gender gap in annual performance with respect to both measures. Male lawyers bill ten percent more hours and bring in more than twice the new client revenue than do female lawyers. We demonstrate that the differential impact across genders in the presence of young children and differences in aspirations to become a law firm partner account for a large share of the difference in performance. We also show that accounting for performance has important consequences for gender gaps in lawyers’ earnings and subsequent promotion. Whereas individual and firm characteristics explain up to 50 percent of the earnings gap, the inclusion of performance measures explains a substantial share of the remainder. Performance measures also explain a sizeable share of the gender gap in promotion.

Payday Lending

by on October 19, 2015 at 12:08 pm in Economics | Permalink

Here is the opening to a delightfully combative post on payday lending at Liberty Street Economics, the blog of New York Fed:

Except for the ten to twelve million people who use them every year, just about everybody hates payday loans. Their detractors include many law professors, consumer advocates, members of the clergy, journalists, policymakers, and even the President! But is all the enmity justified? We show that many elements of the payday lending critique—their “unconscionable” and “spiraling” fees and their “targeting” of minorities—don’t hold up under scrutiny and the weight of evidence. After dispensing with those wrong reasons to object to payday lenders, we focus on a possible right reason: the tendency for some borrowers to roll over loans repeatedly. The key question here is whether the borrowers prone to rollovers are systematically overoptimistic about how quickly they will repay their loan. After reviewing the limited and mixed evidence on that point, we conclude that more research on the causes and consequences of rollovers should come before any wholesale reforms of payday credit.

Read the whole thing.

Personalized Medicine and the FDA

by on October 16, 2015 at 11:07 am in Economics, Medicine | Permalink

In my post A New FDA for the Age of Personalized, Molecular Medicine I wrote:

Each patient is a unique, dynamic system and at the molecular level diseases are heterogeneous even when symptoms are not. In just the last few years we have expanded breast cancer into first four and now ten different types of cancer and the subdivision is likely to continue as knowledge expands. Match heterogeneous patients against heterogeneous diseases and the result is a high dimension system that cannot be well navigated with expensive, randomized controlled trials. As a result, the FDA ends up throwing out many drugs that could do good.

The Manhattan Institute has today taken out a full-page ad in the New York Times calling for a discussion about how to integrate personalized medicine with the FDA. The ad reads in part:

A new era in science and medicine calls for a new approach at the federal Food and Drug Administration, which determines whether any new treatment is safe and effective.

Every American has a stake in this change – because everyone will be a patient someday.

Congress should lay the foundation for a 21st century FDA by creating an external advisory network drawing on the expertise of the scientific and patient communities to assist the FDA in setting standards for how biomarkers can be better integrated into the drug development process.

This is a call for collaboration on an unprecedented scale to help the FDA chart a safe path for advancing biomarkers from discovery in a lab to your doctor’s office. We echo previous recommendations made by the President’s Council of Advisors on Science and Technology, the National Institutes of Health, a report from the National Research Council – and senior staff at the FDA itself.

The ad is signed by former FDA commissioner Andrew von Eschenbach, Peter Huber, (whose excellent book The Cure in the Code lays out the science and policy of biomarkers), Eric Topol, and myself among others.

See Project FDA for more.

In The Atlantic I present the case for open borders. Here is one bit:

No standard moral framework, be it utilitarian, libertarian, egalitarian, Rawlsian, Christian, or any other well-developed perspective, regards people from foreign lands as less entitled to exercise their rights—or as inherently possessing less moral worth—than people lucky to have been born in the right place at the right time. Nationalism, of course, discounts the rights, interests, and moral value of “the Other,” but this disposition is inconsistent with our fundamental moral teachings and beliefs.

Freedom of movement is a basic human right. Thus the Universal Declaration of Human Rights belies its name when it proclaims this right only “within the borders of each state.” Human rights do not stop at the border.Today, we treat as pariahs those governments that refuse to let their people exit. I look forward to the day when we treat as pariahs those governments that refuse to let people enter.

Read the whole thing.

Addenda: I was asked to write this piece for a forthcoming volume called How to Save Humanity that will feature essays by Steven Pinker, Martin Rees, Nick Bostom and others.

Open Borders seems to be having a moment. Time also featured a piece on migration by Bryan Caplan.

The comment section at The Atlantic reminded me of how good the comment section at MR can be. Amusingly, I was called both a zionist Jew and an anti-semite out to destroy Israel. On the other hand, my article has 31,000 likes and counting so I can’t complain.

Angus Deaton wins the Nobel

by on October 12, 2015 at 7:48 am in Uncategorized | Permalink

Angus Deaton of Princeton University wins the Nobel prize. Working with the World Bank, Deaton has played a huge role in expanding data in developing countries. When you read that world poverty has fallen below 10% for the first time ever and you want to know how we know— the answer is Deaton’s work on household surveys, data collection and welfare measurement. I see Deaton’s major contribution as understanding and measuring world poverty.

Measuring welfare sounds simple but doing it right isn’t easy. How do you compare the standard of living in two different countries? Suppose you simply convert incomes using exchange rates. Sorry, that doesn’t work. Not all goods are traded so exchange rates tend to reflect the prices of tradable goods but a large share of consumption is on hard-to-trade services. The Balassa-Samuelson effect tells us that services will tend to be cheaper in poorer countries (I always get a haircut when in a poor country but I don’t expect to get a great deal on electronics). As a result, comparing standards of living using exchange rates will suggest that developing countries are poorer than they actually are. A second problem is the cheese problem. Americans consume a lot of cheese, the Chinese don’t. Is this because the Chinese are too poor to consume cheese or because tastes differ? How you answer this question makes a difference for understanding welfare. A third problem is the warring supermarkets problem. Two supermarkets each claim that they have the lowest prices and they are both right! How is this possible? Consumers at supermarket A buy more of what is cheap at A and less of what is expensive at A and vice-versa for B. Thus, it would cost more to buy the A basket at store B and it would also cost more to buy the B basket at store A! So which supermarket is better? Comparing standards of living across countries isn’t easy and then you want to make these comparisons consistently over time as well! Deaton, working especially with the World Bank, helped to construct price indices for all countries that measure goods and services and he showed how to use these to make theoretically appropriate comparisons of welfare. Deaton’s presidential address to the American Economic Association in 2010 covers many of these issues.

I see Deaton’s work on world poverty as a tour de force, he made advances in theory, he joined with others to take the theory to the field to make measurements and he used the measurements to draw attention to important issues in the world.

Earlier in his career, Deaton developed tools to bring theory to data on consumption. A key contributions is the Almost Ideal Demand System. We all know that demand curves slope down which means that a fall in the price of the good in question increases the quantity demanded but in fact economic theory says that the demand for good X depends not just on the price of good X but at least potentially on the prices of all other goods. If we want to estimate how a change in policy will influence people’s choices we need to allow demand curves to interact in potentially many ways but we still want to constrain those reactions according to economic theory. In addition, economic theory tells us that an individual’s demand curve slopes down but it doesn’t necessarily imply that the aggregation of individual demand curves must slope down. Aggregation is tricky! The Almost Ideal Demand system, due initially to Deaton and Muellbauer, in 1980 and further developed since then shows how we can estimate demand systems on aggregates of consumers while still preserving and testing the constraints of economic theory.

The study of consumption leads naturally to the study of savings, consumption in future periods. Here we have Keynes’s famous propensity to consume theory (consumption is a fraction of current income), Milton Friedman’s permanent income hypothesis (consumption is a fraction of estimated lifetime income), Modigliani’s Life Cycle Hypothesis (borrow young, save when middle aged, dissave when old). Robert Hall, building on the work of Ramsey, showed in the 1970s that rational expectations implies the famous Euler equation that bedevils graduate students, which shows that suitably discounted changes in marginal utilities should follow a random walk. Deaton played a big role in testing the new theories, mostly finding them wanting.

Deaton’s book, The Great Escape, on growth, health and inequality is accessible and a good read. A controversial aspect of this work is that Deaton falls squarely into the Easterly camp (Deaton’s review of Tyranny of Experts is here) in thinking that foreign aid has probably done more harm than good.

Here is Deaton on foreign aid:

Unfortunately, the world’s rich countries currently are making things worse. Foreign aid – transfers from rich countries to poor countries – has much to its credit, particularly in terms of health care, with many people alive today who would otherwise be dead. But foreign aid also undermines the development of local state capacity.

This is most obvious in countries – mostly in Africa – where the government receives aid directly and aid flows are large relative to fiscal expenditure (often more than half the total). Such governments need no contract with their citizens, no parliament, and no tax-collection system. If they are accountable to anyone, it is to the donors; but even this fails in practice, because the donors, under pressure from their own citizens (who rightly want to help the poor), need to disburse money just as much as poor-country governments need to receive it, if not more so.

What about bypassing governments and giving aid directly to the poor? Certainly, the immediate effects are likely to be better, especially in countries where little government-to-government aid actually reaches the poor. And it would take an astonishingly small sum of money – about 15 US cents a day from each adult in the rich world – to bring everyone up to at least the destitution line of a dollar a day.

Yet this is no solution. Poor people need government to lead better lives; taking government out of the loop might improve things in the short run, but it would leave unsolved the underlying problem. Poor countries cannot forever have their health services run from abroad. Aid undermines what poor people need most: an effective government that works with them for today and tomorrow.

One thing that we can do is to agitate for our own governments to stop doing those things that make it harder for poor countries to stop being poor. Reducing aid is one, but so is limiting the arms trade, improving rich-country trade and subsidy policies, providing technical advice that is not tied to aid, and developing better drugs for diseases that do not affect rich people. We cannot help the poor by making their already-weak governments even weaker.

Here is Tyler’s post on Deaton.

Addendum: Chris Blattman offers a very good perspective and appreciation.

Chiara Criscuolo at HBR discusses a new research report from the productivity group at the OECD.

Our research shows that the slow productivity growth of the “average” firm masks the fact that a small cadre of firms are experiencing robust gains. OECD analysis shows that the productivity of the most productive firms – those on the “global productivity frontier” in economic terms—grew steadily at an average 3.5% per year in the manufacturing sector, or double the speed of the average manufacturing firm over the same period. This gap was even more extreme in services. Private, non-financial service sector firms on the productivity frontier saw productivity growth of 5%, eclipsing the 0.3% average growth rate. Perhaps more importantly, the gap between the globally most productive firms and the rest has been increasing over time, especially in the services sector. Some firms clearly “get it” and others don’t, and the divide between the two groups is growing over time.


What this means is that the problem is not a lack of innovation it’s a lack of innovation diffusion. Note that a failure of innovation diffusion is also consistent with the argument that much of the rise in income inequality can be attributed to greater inequality among firms.

Why this is happening is unclear. Patents and other intellectual property being locked up in the frontier firms is one possible answer. Greater diffusion of ideas and people could thus increase innovation.Another possibility is that innovations are embedded in capital so you need new investment to diffuse innovation and business investment has been low for some time perhaps for “cyclical” reasons.

In one sense, these views provide some grounds for optimism. It’s easier to spread good ideas than to create good ideas. My Australia report discusses many levers we can pull to increase innovation diffusion.

If the future is here just not evenly distributed then increasing the speed of diffusion holds the promise of a highly productive catch-up period in which the average advances to the frontier.

The New York Times covers a controversy about a Texas history textbook:

Coby Burren, 15, a freshman at a suburban high school south of here, was reading the textbook in his geography class last week when a map of the United States caught his attention. On Page 126, a caption in a section about immigration referred to Africans brought to American plantations between the 1500s and 1800s as “workers” rather than slaves.

textbook caption

The black lives matter movement is upset that slaves are referred to as workers.

I am upset that the caption is factually incorrect even if rewritten not to use the word worker. In particular, it is not true that millions of slaves were brought from Africa to the southern United States. In fact, less than half a million came to the United States.

Here is Henry Louis Gates  Jr:

The most comprehensive analysis of shipping records over the course of the slave trade is the Trans-Atlantic Slave Trade Database, edited by professors David Eltis and David Richardson. (While the editors are careful to say that all of their figures are estimates, I believe that they are the best estimates that we have, the proverbial “gold standard” in the field of the study of the slave trade.) Between 1525 and 1866, in the entire history of the slave trade to the New World, according to the Trans-Atlantic Slave Trade Database, 12.5 million Africans were shipped to the New World. 10.7 million survived the dreaded Middle Passage, disembarking in North America, the Caribbean and South America.

And how many of these 10.7 million Africans were shipped directly to North America? Only about 388,000. That’s right: a tiny percentage.

Here is the primary database for what we know about the Atlantic Slave Trade which lists 305,326 slaves brought to the USA. Gates goes on to note that some 60-70 thousand slaves initially brought to the Caribbean ended up in the United States so he estimates that perhaps 450,000 African slaves in total were brought to the U.S. over the course of the slave trade.

If you want to understand the slave trade it’s important to understand that the vast majority of the slaves taken from Africa were shipped to the Caribbean and South America. If you want to understand slavery in America it’s important to understand that most slaves in the United States were born into slavery. Also, as Gates notes, it’s a rather striking and amazing fact that “most of the 42 million members of the African-American community descend from this tiny group of less than half a million Africans.”

Regardless of whether you think that slaves are workers or not the textbook failed its students by getting the facts wrong. In a better culture, that failure would make for a controversy and a story in the New York Times.

Hat tip: Arthur Charpentier on twitter.

Ayn Rand and The Martian

by on October 5, 2015 at 7:25 am in Books, Film, Philosophy, Science | Permalink

The Martian is the most Randian movie in years, perhaps in decades. Ayn Rand is best known for her defense of capitalism but her defense of reason was even more fundamental to her thought. The Martian has no bearing on politics but it reminded me of Rand’s essay on Apollo 11 and the moon landing, the launch of which she witnessed Apollo 11 - 2from Kennedy Space Center.

Rand wrote that the Apollo 11 mission “conveyed the sense that we were watching a magnificent work of art – a play dramatizing a single theme: the efficacy of man’s mind.” The  efficacy of man’s mind and the power of reason is exactly the theme of The Martian.

As Rand continued:

That we had seen a demonstration of man at his best, no one could doubt…And no one could doubt that we had seen an achievement of man in his capacity as a rational being–an achievement of reason, of logic, of mathematics, of total dedication to the absolutism of reality.

The difference is that Apollo 11 gave the sense that we were watching a magnificent work of art but it was real. While the Martian gives the sense that we are watching something real but it is a magnificent work of art. Have we not been diminished? Nevertheless, the sense of life of the event and the movie are the same and the movie is gripping, thrilling and uplifting, a triumph for Ridley Scott and the author, Andy Weir.

Addendum: See Tyler’s review as well.

Corporate Prediction Markets Work Well

by on October 2, 2015 at 7:27 am in Economics | Permalink

Prediction markets predict public events such as election outcomes better than do polls or other forecasting mechanisms. Internal corporate prediction markets in events such as sales forecasts, product launch times, and product feature demand have been less well studied. Internal corporate markets tend to have fewer participants than public markets and the participants often have strategic interests and biases. Thus, it has been an open question how well these markets operate.

Cowgill and Zitzewitz report on a number of different types of prediction markets run by Google, Ford and Firm X and although they find evidence for some biases they also find that corporate prediction markets also work better than alternative forecasting methods.

Despite large differences in market design, operation, participation, and incentives, we find that prediction market prices at our three companies are well calibrated to probabilities and improve upon alternative forecasting methods. Ford employs experts to forecast weekly vehicle sales, and we show that contemporaneous prediction market forecasts outperform the expert forecast, achieving a 25% lower mean-squared error (p = 0.104).

…The strong relative predictive performance of the Google and Ford markets is achieved despite several pricing inefficiencies. Google’s markets exhibit an optimism bias. Both Google and Ford’s markets exhibit a bias away from a naive prior (1/N, where N is the number of bins, for Google and prior sales for Ford). However, we find that these inefficiencies disappear by the end of the sample. Improvement over time is driven by two mechanisms: first, more experienced traders trade against the identified inefficiencies and earn higher returns, suggesting that traders become better calibrated with experience. Secondly, traders (of a given experience level) with higher past returns earn higher future returns, trade against identified inefficiencies, and trade more in the future. These results together suggest that traders differ in their skill levels, they learn about their ability over time, and self-selection causes the average skill level in the market to rise over time.

Addendum: It’s an interesting commentary on academic publishing that Marginal Revolution first covered this paper in a working version in 2008! An extended version was received by the Review of Economic Studies in 2010 which accepted a final version in 2014 and then published the paper in 2015.

Transport for London is preparing to launch a crackdown on Uber, proposing a series of new rules that will hit the popular minicab-hailing app in one of its most popular cities.

…The proposals include a minimum five-minute wait time between ordering a private hire vehicle and it arriving, and banning operators from showing cars for hire within a smartphone app – a hallmark of the American company’s service.

No, this is not from an Ayn Rand novel.

These proposed rules so nakedly protect rent-seekers and make life worse for consumers that I don’t think they will succeed. Even if the rules fail, however, we shouldn’t be complacent about the dangers to innovation.

What made Uber different and controversial is that their Ayn Rand loving CEO followed the adage that it’s better to ask for forgiveness than permission. Uber skirted the law and went to consumers directly about whether they wanted transportation innovation. Consumers around the world responded with a resounding Yes to the Uber-referendum so regulators and rent-seekers who want to control Uber now must also fight Uber-consumers. That genie won’t go back into the bottle.

In the usual scenario, however, innovation can be quashed before consumers have a chance to know what they are missing. Had the taxi companies had an inkling of what was coming it would have been easy to to pass stricter laws in advance that would have made Uber impossible to get off the ground. Of course, in many industries today the old guard does have an inkling of what is coming and that should frighten anyone who wants to see greater innovation.

Asymmetric Information and Signaling

by on September 29, 2015 at 7:25 am in Economics, Education | Permalink

MRUniversity now has its own video production team! We are continuing to work with the artists at Tilapia films to produce outstanding videos for teaching economics–these videos work great with our textbook, Modern Principles. Our in-house production team will be working to polish our “regular” videos in a way that enhances the learning experience. You can see an example of the new style in the video below featuring Tyler on signaling.

Our Principles of Economics course is now complete. You can guess what is coming soon!

The drug Daraprim was increased in price from $13.60 to $750 creating social outrage. I’ve been busy but a few points are worth mentioning. The drug is a generic and not under patent so this isn’t a case of IP protectionism. The story as I read it is that Martin Shkreli, the controversial CEO of Turing pharmaceuticals, noticed that there was only one producer of Daraprim in the United States and, knowing that it’s costly to obtain even an abbreviated FDA approval to sell a generic drug, saw that he could greatly increase the price.

It’s easy to see that this issue is almost entirely about the difficulty of obtaining generic drug approval in the United States because there are many suppliers in India and prices are incredibly cheap. The prices in this list are in India rupees. 7 rupees is about 10 cents so the list is telling us that a single pill costs about 5 cents in India compared to $750 in the United States!

drugs India

It is true that there are real issues with the quality of Indian generics. But Pyrimethamine is also widely available in Europe. I’ve long argued for reciprocity, if a drug is approved in Europe it ought to be approved here. In this case, the logic is absurdly strong. The drug is already approved here! All that we would be doing is allowing import of any generic approved as such in Europe to be sold in the United States.

Note that this in not a case of reimportation of a patented pharmaceutical for which there are real questions about the effect on innovation.

Allowing importation of any generic approved for sale in Europe would also solve the issue of so-called closed distribution.

There is no reason why the United States cannot have as vigorous a market in generic pharmaceuticals as does India.

Hat tip: Gordon Hanson.

A new paper from Fernandez, Gohmann and Pinkston shows that counties in Kentucky that forbid alcohol have more meth labs than otherwise similar counties. I like the research but in truth any paper with both Breaking Bad and Justified references is a winner in my book.

Abstract: This paper examines the influence of local alcohol prohibition on the prevalence of methamphetamine labs. Using multiple sources of data for counties in Kentucky, we compare various measures of meth manufacturing in wet, moist, and dry counties. Our preferred estimates address the endogeneity of local alcohol policies by using as instrumental variables data on religious affiliations in the 1930s, when most local-option votes took place. Alcohol prohibition status is influenced by the percentage of the population that is Baptist, consistent with the “bootleggers and Baptists” model. Our results suggest that the number of meth lab seizures in Kentucky would decrease by 24.4 percent if all counties became wet.

The authors suggest that alcohol users who buy alcohol in places where it is banned become acculturated and familiar with illegal networks making it easier for them to buy meth. In a reverse of the usual story, alcohol prohibition becomes the gateway to other illegal activities.

In my interpretation, however, the association of meth labs and alcohol prohibition is due more to supply side factors than demand side factors. In particular, a long history of moonshine production in dry Kentucky counties leads to an accumulation of knowledge about where to hide the labs, how to evade the law and who to bribe. In this version of the theory, lifting alcohol prohibition doesn’t necessarily reduce meth production because the knowledge and the networks remain in place.

A modified version of the theory can combine demand and supply factors. If there are economies of scope between alcohol production and meth production (such as bribes to local police) then a reduction in the demand for moonshine will raise the costs of producing meth.

Understanding which of these theories holds would make an important contribution to the industrial organization of illegal goods and would also have implications for how best to combat illegal good production.

Open Borders and the Welfare State

by on September 22, 2015 at 7:22 am in Economics, Law | Permalink

Milton Friedman famously said that you can’t have a welfare state and open borders. I disagree. In many respects (not all), you can have open borders and a welfare state.

What we think of as the welfare state encompasses many different programs, many of which are not handouts. Social Security for example is mostly a forced savings program. For these types of insurance programs there is no problem at all as, for the most part, a person has to work and pay into the program to get money out of the program. For programs like schooling there is also no problem–even if the schooling is provided free to immigrant children–because the schooling leads to higher wages later in life which are taxed. In these cases, the immigrant children are really just receiving a loan which they will have to pay back from their own earnings later in life. The story for basic health is similar. Thus, the only cases where there is a worry about excessive transfers from citizens to immigrants is in pure handouts or health benefits to say the elderly. In these cases, I would simply say that such benefits are not available to immigrants or only available after five years or some such time period.

Addendum: I gave this answer in an interview for a Brazilian newspaper. You can read the full interview here although it is in Portuguese.