Month: February 2008

Why not increase this penalty?

The headline reads: "Health Insurer Must Pay $9 Million for Canceling Sick Woman’s Policy." 

The article has gory details about company employees being given cancelation quotas and bonuses, apparently regardless of whether the cancelations were merited under the terms of the initial policy.

If you think that health insurance policies are unjustly canceled fairly frequently (and yes I can believe this), surely this penalty should be much higher.  The cancelers are rarely caught, so a simple application of law and economics suggests severity not leniency.  For a large health insurance company a $9 million fine is peanuts.

As far as I can tell, credibly stiffer fines have not been tried.  In other words, the government does a poor job at enforcing the health insurance contract.

You might hold a theory that the government judiciary will malfunction in such a way but a health care government bureaucracy would not make mistakes of comparable importance.

I do not hold such a theory.  When it comes to health care reform, I would like to start with the enforcement of contracts based on rational and just penalties.

How poor does Cuba look?

The question is why anyone might think Cuba is doing OK, relative to northern Mexico.  Megan McArdle offers (more than) two points:

3) Deep poverty is much more picturesque than moderate poverty. Poor
countries have their old colonial buildings still standing, because no
one had the money (or the reason) to tear them down and put up
something bigger. The countryside is dotted with adorable houses made
out of natural materials and natives wearing colorful traditional garb.
Animals graze in verdant fields, besides teams of sowers and reapers.
Middle income countries are smoggy, and almost everything looks like a
cheaper, shabbier version of what you get in the US. Scenic landscapes
are despoiled by cinderblock buildings with hideous tin roofs, or
trailers; cities are choked with boxy modern buildings that look
something like our housing projects. The genteel decay that looks
gothic and intriguing on an old Victorian mansion just looks seedy when
it’s eating away at badly poured concrete. Affluent Americans
underestimate the utility value of things like having personal space,
or an automobile.

4) Cuba was relatively wealthy in 1959; it therefore has more
of the markers, like old majestic buildings, that we associate with

I found the most evident signs of Cuban poverty to be the unceasing supply of articulate and sometimes weakly sobbing mendicants, none of whom sounded like con men, all of whom needed money to buy food and clothes for their families.  The most shocking part is what small sums of money they would ask for or be made happy by.  Or the numerous women — and I mean ordinary women in the streets — who would offer their bodies to a stranger (handsome though I am) for a mere pittance.  Yes in Cuba there is good access to doctors but anesthesia is in short supply and the health care system stopped improving long ago.

If you want to understand northern Mexico, get out of the Tijuana tourist strip and visit Hermosillo.  Count the number of new housing developments, and then count how many of them are inhabited by fairly dark-skinned, previously dirt poor, Mexican mestizos.  Put that number over the number of buildings in Havana that do not have serious maintenance problems and see if you can divide by zero.

It’s quite possible that a lower middle class Mexican eats better food than you do, but there is no chance of that for anyone in Cuba except the top elite.  Powdered milk is a luxury there

I’ve long thought that Prague looks much richer than it is, and that the ugly northern Virginia or Houston looks poorer than it is.  Where else looks deceivingly rich or poor?

Shout it from the Streets

This is Fred Krupp president of the Environmental Defense Fund interviewed in Wired who after noting the success of markets in acid rain avoidance says this about approaches to carbon avoidance and global warming:

…I know that capitalism works, that American entrepreneurialism works,
and we can damn well expect that private capital – not government money
– will actually solve this problem.

Gun Buyback Misfires

Oakland’s recent gun buyback was especially ridiculous.  The police offered up to $250 for a gun "no questions asked, no ID required."  The first people in line?  Two gun dealers from Reno with 60 cheap handguns.  Fortunately the buyback did manage to get some guns off the street, too bad they were turned in by a bunch of senior citizens from an assisted living facility.   Whew, the streets are safe at last.

Even putting aside the obvious nonsense, gun buybacks simply don’t work.  In technical terms the supply of guns to Oakland is perfectly elastic so buybacks won’t reduce the number of guns in Oakland.  Here is an analogy from my op-ed in the Oakland Tribune.

Imagine that instead of guns, the Oakland police decided, for
whatever strange reason, to buy back sneakers. The idea of a gun
buyback is to reduce the supply of guns in Oakland. Do you think that a
sneaker buyback program would reduce the number of people wearing
sneakers in Oakland? Of course not.

All that would happen is that people would reach into the
back of their closet and sell the police a bunch of old, tired, stinky

Gun buybacks won’t reduce the number of guns in Oakland. In fact, buybacks may increase the number of guns in Oakland.

Imagine that gun dealers offered a guarantee with every gun:
Whenever this gun gets old and wears down, the dealer will buy back the
gun for $250.

The dealer’s guarantee makes guns more valuable, so people will buy more guns.

But the story is exactly the same when it’s the police offering
the guarantee. If buyers know that they can sell their old guns in a
buyback, they are more likely to buy new guns. Thus the more common
that gun buybacks become, the more likely they are to misfire….

The guns bought in this buyback are destined to be melted down to create a monument.  It’s a shame that this monument will be the only lasting effect of the buyback.

Tim Harford’s chapter eight, a contribution from Sahar Akhtar

Harford writes that voters aren’t fooled into thinking their
votes affect the outcome and that most people vote because it makes them feel
good. These ‘expressive’ explanations
help us preserve the idea that people are rational (a great book is by Brennan
and Lomasky).  But is this an actual account of why people
vote? Until we have better survey data, anecdotal evidence will have to do.

Go to a diner, bus stop, retirement home or even a college
campus and almost invariably people will tell you that their vote counts. What
does ‘count’ mean here?  It might mean
they think their vote is important because it satisfies a civic duty to support
democracy (but why would so many think this
is the best way to discharge that duty unless they think their vote counts in
the more literal sense). Or maybe it means they think their vote somehow
encourages more people to vote (but why isn’t lying more efficient? And why
would people get influenced into voting, unless they think it matters? ) Isn’t
it possible to think that people actually believe their votes count?  But if this were true, how could we best make
sense of it? One way is to bite the bullet and accept that (a lot of) people
might just be irrational.

Voting does of course increase with education level, but
this doesn’t defeat the claim that voters might be irrational. Most of our civic/political
education in high school and college centers on the details of how democracy
functions and why voting is important, and not on the trivial impact of our

And remember the way that voting works in the U.S. at least—through some freaking inscrutable thing known as the electoral college.
On my not so good days, I still have no idea how this works and, like most MR
readers, have above average education. Does my vote count more in states with
fewer delegates, or not at all in some locations, or because this is a
republican state does this mean my vote for a democrat wouldn’t matter or would
it matter more, and where is this school? My neuronal synapses die just a little.

Also, without voter irrationality it’s hard to make sense of
the success of campaigns such as “a vote for Nader is a vote for Bush” in resonating
with potential voters—the aim of these kinds of slogans is to encourage people
to vote in a particular way. If people don’t believe their votes count,
why would these slogans be effective and why would the slogan designers
anticipate they would be effective? Harford seems to hint at this kind of
problem when he points out that while voters don’t go to the polls to impact
results, they don’t realize that what they do once they get to the booths
doesn’t matter—but I wish he gave us his thoughts on this sort of inconsistency.

The fact that people don’t simply vote, but vote for a
particular candidate, at best suggests that if people feel duty-bound it’s not
to some abstract ideal but to particular parties and groups, which raises another,
and not incompatible, potential motivation for voting.

Some might think that their votes count not individually,
but as part of a group. Harford and other economists aside (including this
one), people don’t always act on their (individual) self-interests.  (for just some examples, see Fehr and Fowler on
altruistic punishment)

There are good evolutionary reasons to think that we
frequently adopt the perspective of “what is good for us”.  You don’t have to believe in the
group-selectionist theories of people like Sober and Wilson.

If that makes you feel dirty—selfish
gene will get you there if there are enough genes shared in common among a
group. And, a la Robert Frank, what
starts out as emotional incentives to act on behalf of a fairly specified,
narrowly defined, and kin-based group gets co-opted and extends (irrationally?)
to larger, less cohesive groups. The group in this case would simply be the
class of people thought to share the same values and beliefs.

Of course, like all evolutionary explanations, this is a
just-so story and needs to be tested, but so does the rational voter idea. We still don’t have very good insight into
the motives of voters, and until we do we should remain skeptical of any one

I’m not a hater–in many (maybe most) areas of life, the rational
choice model makes damn good sense. In
some areas of politics, however, emotions run high and irrationality can be
bliss, and these may be areas where dynamic writers like Harford should resist the
model a little.

Back to TC: Readers, do tell us what you think…

The personality traits of liberals and conservatives

This topic does not die easily:

Dr Wilson and Dr Storm restricted their study to white, Protestant
teenagers, in order to eliminate confounding variables. However, their
volunteers came from two different traditions–Pentecostal, which tends
to the conservative, and Episcopalian, which tends to the liberal.

The researchers conducted the study by giving each volunteer a
beeper that went off every two hours or so. When it beeped, the
volunteer answered a questionnaire about what he was doing at that
moment, and how he felt about it.

Dr Wilson and Dr Storm found several unexpected differences between the
groups. Liberal teenagers always felt more stress than conservatives,
but were particularly stressed if they could not decide for themselves
whom they spent time with. Such choice, or the lack of it, did not
change conservative stress levels. Liberals were also loners, spending
a quarter of their time on their own. Conservatives were alone for a
sixth of the time. That may have been related to the fact that liberals
were equally bored by their own company and that of others.
Conservatives were far less bored when with other people. They also
preferred the company of relatives to non-relatives. Liberals were
indifferent. Perhaps most intriguingly, the more religious a liberal
teenager claimed to be, the more he was willing to confront his parents
with dissenting beliefs. The opposite was true for conservatives.

Here is Storm’s doctoral thesis, a source for some of the material.  This Wilson blog post is a useful summary; nonetheless it emphasizes the weaker part of the results, namely the claim that conservatives are more conformist.

Surely someday we will make progress on this question; it is unlikely that any two non-random groups will have exactly the same personality traits.  But what is the correct comparison?  By looking only at religious Protestants, we are holding some factors constant, but perhaps choosing atypical members of each political ideology.  For instance maybe all we are doing is comparing Pentecostals to Episcopalians.

Further thoughts on a carbon tax

I saw you had a post up about some work I did with Bob Gordon, and I
found your comments very interesting.  I have a couple questions that I
hope might help clarify your thoughts on the subject.

First, you
seem to argue that we would expect a CEO to be paid her marginal
product.  As you point out, there is ample evidence that a CEO adds far
more to the value of a company than she is generally paid.  I’m
curious, though, what you mean when you say we would expect the CEO to be paid her marginal
product.  Models in this literature often assume that
each firm must hire one CEO.  The concept of a marginal product breaks
down at this point.  The firm can’t hire a second CEO.  There is no
marginal value.  It’s possible that we can look at marginal products in
terms of the skill a CEO brings to the firm, but in that case, we would
be mixing up marginal and average products if we were to simply look at
the total contribution a CEO makes to firm output.

I think you’re correct to point out the institutional factors
holding down CEO pay pre-1970.  That said though, why didn’t we see CEO
pay rising much faster than market cap during the 80’s in order for it
to catch up to where it should be?  There is a period where the
pay-market cap elasticity may have been higher than 1, but it’s only for a few
years in the 90’s.  Looking at the full 1976-2005 sample, the
relationship is nearly unitary (.935, according to Frydman and Saks).  So I guess I’m surprised there is no
catch up in pay.

I think you’re right to be skeptical of the Bebchuk-Grinstein
results.  To me, the most interesting result
from Gabaix and Landier, no matter what one thinks about their model as a
whole, is that the cross-section and time series may show very
different patterns.
So one wouldn’t necessarily expect the cross-sectional results from Bebchuk and Grinstein to predict the time-series.

of my biggest concerns with Gabaix and Landier’s model is that it does
not display decreasing returns to scale.  An analogous
example is Berk and Green’s model of mutual funds.  They assume that if
a manager all of a sudden
sees the size of his fund double, he will see lower average returns.  I
think this is reasonable.  When there are not diminishing returns, it
is difficult to make models function.  Gabaix and Landier are forced to
do it by assuming firms never merge.  That concerns me in this
setting.  Dixit-Stiglitz competition is often a reasonable
assumption because the models using it do not actually care about firm
or mergers.  In the case of CEO pay, however, firm size is clearly

The question about the marginal product of a CEO is a tricky one.  I can imagine the following definitions which either express marginal product or some modified version thereof:

1. How much better the highly-paid guy is than a less-well-paid substitute would be.

2. How much better the highly-paid guy is than the next best person (in stochastic terms, that is) the firm would get for that same sum.

3. How much a bit of extra pay causes the CEO to improve effort and thus performance.

4. The complex econometric definition offered by Jensen and Murphy, read pp.33-38 here.

5. Some number between the CEO’s value of leisure and how well the firm would do with no CEO at all.

None of these quite make sense in pure theory, and it is even harder to say which is the most important variable for practice.

Why is popcorn so expensive at the movie theater?

There is now some data for the price discrimination hypothesis:

Looking at detailed revenue data for a chain of movie theaters in Spain,
Wesley Hartmann … and Ricard Gil … compared concession purchases in weeks
with low and high movie attendance.

The fact that concession sales were proportionately higher during
low-attendance periods suggested the presence of "die-hard" moviegoers willing
to see any kind of film, good or bad–and willing to purchase high-priced
popcorn to boot. "The logic is that if they’re willing to pay, say, $10 for a
bad movie, they would be willing to pay even more for a good movie," said
Hartmann. "This is underscored by the fact that they do pay more, even for a
bad movie, as is seen in their concession buying. So for the times they’re in
the theater seeing good or popular movies, they’re actually getting more
quality than they would have needed to show up. That means that, essentially,
you could have charged them a higher price for the ticket."

Should theaters flirt with raising their ticket prices then? No, says
Hartmann. The die-hard group does not represent the average movie viewer. While
the film-o-philes might be willing to pay, say, $15 for a movie ticket, a
theater that tried such a pricing tactic would soon find itself closing its

"The fact that the people who show up only for good or popular movies
consume a lot less popcorn means that the total they pay is substantially less
than that of people who will come to see anything. If you want to bring more
consumers into the market, you need to keep ticket prices lower to attract
them." Theaters wisely make up the margin, he says, by transferring it to the
person willing to buy the $5 popcorn bucket.

Here is more.  The data are the data, but this doesn’t strike me as a very general explanation.  Specifically it requires that the high-value movie demanders are also the high-value popcorn demanders.  If anything I would expect the casual movie fans to be the ones who want to buy the concessions; the seasoned moviegoer will have some other, better plan worked out in advance.  For other explanations for high popcorn prices, you might look at the research on "shrouding," or consider that ticket revenue is shared with the studio but concession revenue usually is not.

Should the IMF behave like a Sovereign Wealth Fund?

Stephen Jen says yes, here is one media story on his new paper:

With many of its members having already repaid their
debts, the IMF’s annual income from interest repayments has slumped to
new lows recently, forcing it to make major cutbacks. New managing
director Dominique Strauss-Kahn has announced a 15pc cut in staff
levels and an overhaul of its non-core activities.

Mr Jen said such drastic cutbacks were unwise, since the IMF’s role as a monitor of the world economy could be compromised.

now is tantamount to downsizing a fire department when there is a low
incidence of fire," he said, adding that the Fund should sell some of
its gold to reinvest in instruments with a reliable income. The Fund
owns 103.4m ounces of gold, worth around $92bn (£47bn) at current
prices – up from just $23bn five years ago. But while the cache of
metal has appreciated in value, it does not bring in a regular flow of

"The IMF has a great deal of scope to enhance its investment returns without exposing itself to undue market risk," said Mr Jen.

result could be the creation of a supra-national fund worth as much as
$100bn. Mr Jen predicted that it could be worth $130bn in 10 years’
time. This would be of a size similar to Russia and Singapore’s funds.

Here is a previous post on the IMF’s funding problems.  Here is a previous post on whether we should abolish the IMF.  Jen’s idea may not appeal to many people; the question is whether you can come up with something better.

My favorite things Spain, literature

Again lots of peaks but lots of patches too; the distribution is uneven.  Here are a few offhand remarks:

1. Cervantes: Book two of Don Quixote is much better than book one, just in case you never got that far.  The Trials of Persiles and Sigismuda is a nice try but ultimately it fails at being the undiscovered classic.

2. Calderon: Life is a Dream.  The piece of Spanish literature you are most likely not to have read that you should read.  Every smart, well-educated person should know this book.

3. Lope de Vega: If not for the commies he wouldn’t be nearly so well-known.  He is still a good dramatist, though.

4. El Cid: More readable than you might think, and it makes you realize how close they came to being an Arabic society.

5. Miguel de Unamuno: I have some sympathies for him, but if someone tried to write this stuff today, could it even get published?  You could say the same about Jose Ortega y Gasset.  Some people say the two are polar opposites, but who outside of Spain really cares?

6. Federico Garcia Lorca: It might be wonderful on stage but I find it unreadable.

7. Javier Cercas: Soldiers of Salamis.  One of the best novels on wartime guilt, collective memory, and the ambiguous role of the author in a narrative.  Recommended, if you are willing to give it a suitably careful read.

8. Pérez-Reverte: It’s fun stuff, but I don’t know if it will draw attention twenty years from now.  Same with Shadow of the Wind.  If anything it is symbolic of the Americanization of European literature and I don’t mean that in a favorable way.

9. Albert Sanchez Piñol: I loved Cold Skin, originally written in Catalan.  His book on the Congo awaits me.

10. Javier Marias is good, especially A Heart so White

The bottom line: Call me provincial, but I see 1660-1980 as a slow patch, at least for a country of Spain’s historic stature. 

Maybe some will call for counting Orwell, Hemingway, and others inspired by Spain.  Will you argue for Pio Baroja?  Or perhaps The Family of Pascal Duarte?  In any case literary culture is strong here and I see the future as bright.  By the way, I’m always looking for recommendations in Spanish contemporary literature.  Is Julian Rios worth reading?

Payday loans

This afternoon, let’s just do "Control-C" from Craig Newmark:

Paige Skiba (Vanderbilt Law School) and Jeremy Tobacman (Oxford), "The Profitability of Payday Loans":

Payday loans provide households
with expensive, short-term liquidity. This paper studies the
profitability of payday lending using standard financial data from CRSP
and SEC filings and loan-level data from a payday lender. Despite
charging e¤ective annualized rates of many percent, we find lenders’
firm-level returns differ little from typical financial returns. The
data are consistent with an interpretation that payday lenders face
high per-loan and per-store fixed costs in a competitive market.

I’d bet a similar analysis applies to the rent-to-own industry.

Library of Lost Dreams

Dutch, a kind of archaelogist of recent America, takes us through the abandoned Detroit School Book Depository.


This is a building where our deeply-troubled public school system once
stored its supplies, and then one day apparently walked away from it
all, allowing everything to go to waste. The interior has been ravaged
by fires and the supplies that haven’t burned have been subjected to 20
years of Michigan weather. To walk around this building transcends the
sort of typical ruin-fetishism and "sadness" some get from a beautiful
abandoned building. This city’s school district is so impoverished that
students are not allowed to take their textbooks home to do homework,
and many of its administrators are so corrupt that every few months the
newspapers have a field day with their scandals, sweetheart-deals, and
expensive trips made at the expense of a population of children who can
no longer rely on a public education to help lift them from the cycle
of violence and poverty that has made Detroit the most dangerous city
in America. To walk through this ruin, more than any other, I think, is
to obliquely experience the real tragedy of this city; not some
sentimental tragedy of brick and plaster, but one of people.

Pallet after pallet of mid-1980s Houghton-Mifflin textbooks, still unwrapped in their original packaging, seem more telling of our failures than any vacant edifice. The floor is littered with flash cards, workbooks,
art paper, pencils, scissors, maps, deflated footballs and frozen
tennis balls, reel-to-reel tapes. Almost anything you can think of used
in the education of a child during the 1980s is there, much of it
charred or rotted beyond recognition. Mushrooms thrive in the damp ashes of workbooks. Ailanthus altissima, the "ghetto palm" grows in a soil made by thousands of books that have burned, and in the pulp of rotted English Textbooks. Everything of any real value has been
looted. All that’s left is an overwhelming sense of knowledge unlearned
and untapped potential.

More pictures here.

Naughty tourism

I could use a more explicit three-letter word in the post title but I fear the software censors employed by our federal government will again block this web site from its bureaucratic readers.  On this topic, I was quite taken by this passage:

"Ingrid," I commented, "If you really think she [the Haitian woman who was propositioned for money] needs a choice then I suggest you give her one.  Why don’t you offer to pay her thirty dollars not to come to my hotel room, but to go back to her son and cigarette stand?"

That is from Naked in Haiti: A…Morality Tale About Tourists, Prostitutes and Politicians, by Dan King.  This book has received very little notice but it’s a more interesting look at human commodification than anything you’ll find coming out of Harvard or Princeton.  I can only say that the author really seems to know what he is talking about, if you get my drift.  This work would not have been approved at university institutional review boards.  It’s also one of the best books on "life on the ground" in Haiti, at least provided you can tolerate the author’s numerous salacious yet nonetheless totally anti-erotic descriptions of his activities.

The author goes to Haiti, of course, not for the art, but because he wants to buy from women who are not (otherwise) "selling."  Of course that means that the level of poverty is quite desperate, as in Cuba, where the same phenomenon is common.  And often the women sell to benefit their children or parents, not themselves; surely some percentage of them are disgusted by what they end up doing.

If you’re wondering about my point of view on the whole question, I am sufficiently Paretian that I don’t find the exchange aspect of the relationship, or the passing of money, objectionable per se.  (Assuming, of course, that neither age nor coercion is a concern, and often both are.)  But it is still better, on the buying side, not to do it.  Once you are aware of the kind of human stories behind the other side of the market, I would think it is hard to maintain an unflagging interest in the proceedings at hand.  Nor do I think it would improve what happens in your life next.  Yes the transaction does benefit the seller in many cases, but apply the Modigliani-Miller theorem and rebundle your action into a different blend of charity and erotic self-satisfaction, all toward The Greater Good.

Or so I think.  If you offer your thoughts, please be polite in your rhetoric.

I thank an anonymous MR reader for the pointer to the book.