Competition and Concentration in Health Insurance
Many people have bandied about numbers suggesting that the market for health insurance is highly concentrated. Here is the President:
But these statistics only include people insured by "insurance companies" even though nationally just over half of all employees get their health insurance from a firm that self-insures. In other words, as John Lott points out, over half of the market for insurance is being left out of these concentration statistics.
Since about half of employees are insured by a self-insurer, concentration statistics–as typically presented –should be cut roughly in half (precise numbers vary by state). Firms that self-insure typically outsource benefits management and claim
administration to highly competitive third party administrators. A key fact according to this paper (which is outdated although I wouldn't expect the basic finding to have changed) is that the populations served, the benefits paid and the premiums paid are about the same for firms that self-insure and firms that buy insurance from a health insurance company. Thus, concentration among that part of the market served by health insurance firms appears to be well disciplined by the larger market for self-insurance.
The Devil Wears Fake Prada
It's no surprise that people who buy fake merchandise are more likely to cheat in other ways but in this video Dan Ariely, author of Predictably Irrational, explains another one of his ingenious experiments. Ariely was able to show that randomly inducing people to choose or wear fake merchandise can make them significantly more likely to cheat on a subsequent task. You are what you wear, or another example of the fundamental attribution error.
Hat tip Freakonomics.
Krugman’s Simplified History
One of the themes of Paul Krugman’s theya culpa is that the economics profession was so entranced by efficient markets theory that “Discussion of investor irrationality, of bubbles, of destructive speculation had virtually disappeared from academic discourse.” Alan Greenspan comes in for particular criticism:
Finance theorists continued to believe that their models were essentially right, and so did many people making real-world decisions. Not least among these was Alan Greenspan, who was then the Fed chairman and a long-time supporter of financial deregulation whose rejection of calls to rein in subprime lending or address the ever-inflating housing bubble rested in large part on the belief that modern financial economics had everything under control..[and]… a general belief that bubbles just don’t happen.
It’s a good story–not the least because there is some truth to it–but there are also many omissions which cast doubt on the thesis. Hardly anyone wants to recall today, for example, that it was Alan Greenspan who popularized the term “irrational exuberance,” in a speech in December of 1996. At the time, Greenspan’s remarks were covered around the world and they created a sell off in stocks. In a NYTimes article titled Irrational Exuberance, Louis Uchitelle wrote:
That sort of optimism cannot last; stocks that are too highly priced will inevitably fall, perhaps over a long period, as they did in the mid-1970’s. Mr. Greenspan, who is 71, lived through that painful downturn as a top economic adviser in the Ford Administration.
This time, a falling stock market might have a broader impact. Many more Americans own stocks today than in the past, and a downturn could cut deeply into their sense of well-being. The result could be a severe cutback in spending, hurting the economy. For that reason, the stock market has become increasingly important in the deliberations of the Federal Reserve over interest rates — whether to raise them to slow the economy or lower them to encourage spending and growth.
Greenspan in Uchitelle’s piece is the one raising questions about market prices. Furthermore, no economist in Uchitelle’s piece says that prices are always correct or that markets are perfectly efficient or that bubbles are impossible–the mainstream view according to Krugman. Robert Shiller is quoted not Eugene Fama. And, of course, it was Robert Shiller who would later author two bestsellers warning of bubbles, another discomforting fact for those who argue that dissenting economists were marginalized.
The point is not to defend Greenspan. Indeed, in some sense Greenspan was as wrong about stocks in 1996 as he was about housing in 2004 but the errors were of opposite signs–this in itself is a telling point and a key element of a more nuanced story about how economists got things wrong and the difficulties of getting things right.
The point is that if we are to understand recent history it’s neither true nor useful to argue that Greenspan and other economists thought the price was always right.
My Favorite Review of Modern Principles
I have been reading your book and I must say I am most impressed. The layout is clear, the examples good but the writing is great! It is clear, concise, logical and interesting. I have to say I found it good reading. Congratulations.
Love Mum.
If you are interested in a review less tangled with the bonds of affection, Robert Whaples is teaching his principles of economics class using a pre-pub version of our textbook (micro and macro; fyi, more on micro in a few weeks) and he is is blogging his thoughts as he covers each chapter. Whaples conveys the flavor of our book very well.
First debug the child, then the computer
The idea of computers as liberators appealed to Silicon Valley philanthropists and Nicholas Negroponte could certainly tell a compelling story but, as Timothy Ogden explains, today the one laptop per child project seems to be in technical and financial trouble, the evidence that computers increase learning either in the classroom or at home is weak and the demand for the computers (as opposed to say cell phones (pdf)) in the developing world is low. Meanwhile, simpler, cheaper approaches with proven evidence are not being fully exploited. Here's Ogden.
The simplest and least costly of these programs is deworming. Nearly 2 billion people around the world are affected by parasitic worm infections, with children disproportionately affected. While each variety of parasitic worm affects a person differently, they all take a substantial toll on growth, energy and attention, with entirely predictable impacts on school attendance and learning. Harvard economist Michael Kremer has studied the impact of mass deworming in Kenya and India. Delivering deworming medication costs 50 cents per child per year in Kenya but yielded a 25 percent increase in school attendance; a similar program in India cost $4 per student per year and yielded a 20 percent attendance gain. "This is a simple, cost-effective and yet tragically not-done program. It's a scandal that [deworming] hasn't been addressed," Kremer says. There are spillover effects as well. "The most surprising thing about the study in Kenya was the widespread impact," Kremer says. The program drove down infection rates for several kilometers around the schools, he says, and there were significant improvements in attendance for untreated students, in the treatment schools as well as in nearby schools not in the program.
Read the whole thing. Help to deworm the world.
Hat tip to Alanna Shaikh via Chris Blattman and also to Dan in the comments.
The Power of the Poor: Blog Contest
On October 8, PBS will be showing, The Power of the Poor, a new documentary featuring the great Hernando de Soto and from the team that brought you Free to Choose. You can see a preview below. To increase awareness, Free to Choose Media is sponsoring a blog contest on the question:
What institutions can enable the world’s poor to realize their power
and achieve prosperity?
The best blog post–under 500 words–on this theme will receive $250 and a DVD of the show. See the rules for more information. Yours truly will be one of the judges.
Nose jobs
According to a number of sources, Iran is the "nose job capital of the world" probably because other signals of beauty are shrouded (by law). Iran also has plenty of well-educated doctors. Gene Expression has some links and a few alternative hypotheses.
The Politics of Bearing Arms
Historian David Beito, writing at The Beacon, reminds us:
The controversy about carrying guns in public is not new. In 1967, however, the political alignments on this issue were completely different. Many conservatives (and others) objected when the Black Panthers insisted on exercising this right. In response, Governor Ronald Reagan signed the Mulford Act banning the carrying of guns in public.
The Fatal Conceit
Here is a bit more on insurance and states of nature. In the language of economics a rational, utility maximizer allocates income to equate the marginal utility of income across all contingent-states. Thus, a rational, utility maximizer moves income from states where the marginal utility is low to states where is high, e.g. home insurance moves money from the state in which your house doesn't burn and transfers it to the state in which your house does burn - that's good because if your house burns the marginal utility of money will be high. Usually, the marginal utility of money is high in the "bad" state but not always. The classic case is that it's not generally a good idea to buy death insurance for your kids. If your kids die you are going to be miserable and more money won't help much – better to not buy the insurance and take the kids to the movies. Bertram and Dworkin are probably right that more money doesn't buy you much more utility if you are a vegetable, thus you don't want big transfers of income to this state. Summarizing, the first notion of insurance is transferring money across states.
The second notion of insurance is using money to avoid the bad outcome. It doesn't make sense to buy death insurance for your kids but it does make sense to buy them health insurance. Similarly, you don't want to win the lottery when you are a vegetable but you might be williing to use lottery winnings to avoid becoming a vegetable.
Arrow and especially Hirshleifer laid this all out in the 1960s.
More Assorted Links
Austin Frakt reviews Modern Principles: Macroeconomics. Austin's blog, The Incidental Economist, covers game theory, investment planning and health economics among other topics.
Here is an updated version of my paper Life Savings Incentives: Consequences, Costs and Solutions to the Organ Shortage. Did you know that it is legal to offer compensation for donating a whole body (e.g. for research purposes) but not legal to compensate an organ donor to save a life? Crazy. Alvin Roth links to a survey of transplant surgeons indicating increasing support for legalizing some forms of compensation (Roth also links to a recent radio interview with yours truly.)
House built from Lego, yes really.
A Theory of Beautiful Russian Women
Anne Applebaum, author of the excellent Gulag: A History, asks where did all the gorgeous Russian women, now gracing Vogue covers and tennis courts everywere, come from? "Whatever you may say about the Soviet Union in the 1970s and '80s," she writes, "it was not widely known for feminine pulchritude."
The answer, of course, is that the beautiful women were there all along (Russia is a big country) but
…they didn't have the clothes or cosmetics to enhance their looks, and, far more important, they couldn't use their faces to launch international careers…
Instructive, in this light, is the career of a real Vogue cover girl, Natalia Vodianova. Born in Nizhny Novgorod to a single, impoverished mother, Vodianova ran away from home at 15 to run a fruit stall in the local street market (successfully, according to her official biography). At 17, she was spotted by a French scouting agent and told to learn English in three months. She did–after which she moved to Paris, married a British aristocrat, and went on to become "the face" of a Calvin Klein perfume and to earn $4 million-plus annually.
The deeper point is about not about fashion but about markets and globalization:
Ultimately, what goes for the fashion world goes for other spheres of human activity…what open markets do for beautiful women they also do for other sorts of genius. So, cheer up next time you see a Siberian blonde dominating male attention at the far end of the table: The same mechanisms that brought her to your dinner party might one day bring you the Ukrainian doctor who cures your cancer or the Polish stockbroker who makes your fortune.
See also my theory of why Latvian women are beautiful, Tyler's simple theory of where the women are beautiful and my TED talk which has no beautiful women but does discuss other benefits of globalization.
Hat tip Daniel Lippman.
A Theory for Why Latvian Women are Beautiful
Recently a colleague returned from a trip to Latvia and remarked on how beautiful the women were. A discussion ensued at which it was agreed that women in a number of other countries were also very beautiful but markedly less outgoing than the Latvians. As you may recall, beautiful Latvian women like to parade their beauty. My colleague further informed us that the latter event was not unique, having witnessed something similar himself.
Is my colleague's observation a mere statement of prurient preference? Does this kind of thing belong in a family blog? Don't worry, at Marginal Revolution we never serve our prurience without a little theory.
Sociosexuality is a concept in social psychology that refers to how favorable people are to sex outside of commitment. It can be measured by answers to questions such as "I can
imagine myself being comfortable and enjoying "casual" sex with
different partners" (agree strongly to disagree strongly) or "Sex without love is ok," as well as with objective measures such as the number of sexual partners a person has had. A low score indicates subjects who favor monogamous, long-term, high-investment relationships. A high score indicates subjects more favorable to sex for pleasure's sake alone. with less regard to commitment. On average, males have higher sociosexuality scores than females but sociosexuality scores for females vary widely across countries.
Why might female sociosexuality scores vary? One hypothesis is that in cultures with low operational sex ratios (the number of marriageable men/number of marriageable women) female sociosexuality will be higher. The argument is that when the relative supply of males is low, competition for mates encourages females to shift towards the male ideal, i.e. when supply is scarce the demanders must pay more. (Note that this theory can also explain trends over time, e.g. Pedersen 1991).
Ok, where does this get us? Well in Sociosexuality from Argentina to Zimbabwe, Schmitt (2005) surveyed some 14,000 people on sociosexuality and he correlated female sociosexuality with the operational sex ratio. Here are the results:
Notice that Latvia has one of the highest rates of female sociosexuality in the 48 nations surveyed and the lowest sex ratio.
Thus, the theory is that Latvian women appeal more strongly to the male ideal because the number of marriageable men in Latvia is low relative to the number of women. Is it any wonder that my colleague found the Latvian women beautiful?
Antitrust and Marginal Revolution
Bryan Caplan asks under what conditions would the antitrust authorities prosecute me and Tyler? When we raise our price? When we require MR readers to promise not to read any other blogs? When we merge with a competitor? Or when we predate by producing so many high-quality posts at such a low price that it forces other blogs out of business? (heh, isn't that what we are doing right now?)
As Bryan points out, raising price wouldn't cause legal problems but all the other actions would. Why?
The Inheritance of Education
Economix posted a graph showing a strong positive correlation between SAT score and parental income. Greg Mankiw pointed out that the effect is unlikely to be purely causal because there may be an omitted variable bias, IQ for example. Paul Krugman and Matt Yglesias both attack Mankiw and point to graphs showing that income matters for college completion and enrollment, respectively, holding various achievement scores constant. Brad DeLong crunches the numbers on IQ and income correlation to estimate that half the effect is due to IQ and half to something else.
All this is good but none if it gets at the heart of the matter because there are a lot of way that heredity/genes could explain the income/education correlation; IQ is only one possible mechanism, personality (e.g. conscientiousness) is another possibility.
The type of evidence that we need to resolve this question is adoption studies. Fortunately, such studies have been done and indeed I have presented the data before in my post Nature, Nurture and Income. Let's do so again.
The graph below is from What Happens When We Randomly Assign Children to Families?, by Bruce Sacerdote.
Holt's International Children's Services places children, primarily
Koreans, with families in the United States. Holt has an interesting
proviso to their adoption contract, conditional on being accepted into
the program, children are randomly assigned. Sacerdote has collected
data from children who were adopted between 1970-1980, and thus who
today are in their mid 20's or 30's, and their adoptive parents.
The graph shows how parent income at the time of adoption relates to
child income for the adopted and "biological" (non-adopted) children.
The income of biological children increases strongly with parental
income but the income of adoptive children is flat in parent income.
What does this mean?
The graph does not say that adopted children necessarily have low
income. On the contrary, some have high and some have low income and
the same is true of biological children. What the graph says is that
higher parental income predicts higher child income but only for
biological children and not for adoptees.
Now what about education? Sacerdote looks at that as well. He doesn't have a child SAT-score, parent-income correlation but he does find:
Having a college educated mother increases an adoptee's probability of
graduating from college by 7 percentage points, but raises a biological
child's probability of graduating from college by 26 percentage points.
The effect for father's years of education is even larger; about a ten times larger effect on biological children than on adoptees. Similarly, parent income has a negligible effect, small and not statistically significant, on an adoptee completing college but an 8 times larger and statistically significant effect on a biological child completing college (Table 4, column 3).
Darwin, Magic and Evolution
I believe that Darwin would have enjoyed this video of a chimp being dazzled by a magician; it reveals much about our place in the natural universe.