More on Contingent Fees
The ABA Journal Report has an article on my study of contingent fees (with E. Helland). I liked this:
"I’m actually a proponent of tort reform," Tabarrok says. "But I also believe in freedom of contract. What some reformers propose interferes with how plaintiffs reward their attorneys, and when I see interference with contract, I want there to be a high bar before it’s allowed.
The funniest line, however, was this:
Critics dispute the authors’ fundamental assumption that restrictions on contingent fees increase the incentive of lawyers to charge hourly fees. Despite Tabarrok’s assertion that the assumption is "trivial economics" and that "no economist would disagree with it," economists and legal scholars do.
Imagine that tips for waiters were banned. What would happen to wages? They would increase. No big surprise but apply the same idea to lawyer contingent fees and we get lots of objections.
I’m not fixated on the critics, however, because the main results of the paper are empirical. When contingent fees are restricted the number of dropped cases increases as does the time to settlement. The theory that this occurs because lawyers are shifting toward hourly fees is consistent with the empirical findings but there could be other explanations as well.
Late breaking news on housing vouchers
From the WSJ Storm News Tracker:
2:32
p.m.: U.S. Homeland Security Secretary Michael Chertoff and Housing
Secretary Alphonso Jackson announced a program to pay for three-month
rental costs anywhere in the country for homeowners or renters whose
residences were destroyed by Katrina.
I agree with John Palmer, who sent me the clip, "This Is So Sensible, I Can Hardly Believe It!"
Congratulations to Ed Olsen!
Trailers Trashed
FEMA’s plan to house hurricane evacuees in trailers is already looking like a disaster:
Federal Emergency Management Agency officials complain of a drastic
shortage of sites suitable to state and local officials for the huge
trailer parks that FEMA hopes to establish for evacuees. Local and
parish leaders say FEMA’s plans to supply the trailer parks with water,
sewer, electricity and other services are haphazard or nonexistent, and
the encampments — some of which could include 15,000 units — are
bigger than any the agency has ever established.
Fortunately, Ed Olsen’s plan to expand the already existing housing voucher program is receiving a lot of support. The Senate has already passed a plan, a House plan is pending, only the administration lags. See also my previous post on Rotting in FEMA City.
Give the Lawyer his Cut
The latest issue of Forbes (Oct. 3) has an article by myself on contingent fees. (It’s based on a short AEI book, Two Cheers for Contingent Fees with Eric Helland).
Contrary to popular argument, contingent fees serve a social purpose. A lawyer paid by contingent fee will only take those cases that have a decent probability of winning – thus contingent-fee lawyers act as screeners, saving the court system and everyone else the trouble of examining frivolous cases. That’s right, contingent-fee lawyers reduce the number of frivolous cases! When contingent fees are restricted, lawyers naturally turn to alternatives such as charging by the hour. But a lawyer paid by the hour has little incentive to screen. Helland and I find evidence consistent with the screening function of contingent fees.
In states that restrict contingent fees,
plaintiffs dropped 18% of cases before trial without getting a
settlement. In states where lawyers were free to take their usual 33%
cut, they dropped only 5% of cases. This tells us that lawyers had
already screened out the junk suits and were pursuing those with merit.Our study also shows that the time to
settlement in medical malpractice cases is 22% longer in states that
restrict contingent fees. In Florida, in the 300 days after contingent
fees were restricted in 1985, settlement time increased by 13%. Why?
When lawyers are paid by the hour, they have little incentive to settle
quickly.
By the way, one of the fun things about doing an article for Forbes is that they always send out a professional photographer – which for an academic like me can be quite a thrill as they really do primp and preen over you.
Turn to the right, oh yes, that’s it, hold it, hold it, Great! The camera loves you! Now lean back a little, good, good, good. Be like a Cheetah, a Cheetah. No a Lion, yes, a Lion. Hold it, Hold it. Yes. Wonderful! Wonderful!
I exaggerate, but it was fun. Unfortunately, the photo is not online so you will have to go to the newsstand to see the result. It’s arty, but I’d say they captured the lion. Yeah, baby.
The Vioxx Hex
It’s a real thrill when the editorial page of the Washington Post starts to sound like, well, me (e.g. here and here).
Politicians and regulators should be asking themselves whether a system of
massive cash awards to people who may or may not have been adversely affected by
Vioxx is a logical, fair or efficient way to run a drug regulatory system. They
should also be asking whether juries that scorn medical evidence are the right
judges of what information should or should not have been on a prescription
label. After all, Vioxx was produced and sold legally. The drug was approved by
the Food and Drug Administration, and its label did warn of coronary side
effects. It is possible, even probable, that Merck was negligent in its decision
to ignore early warnings of the cardiovascular risks of Vioxx. But the company
has already paid a price for that negligence, in the losses it has suffered
after abruptly taking Vioxx off the market. Fair compensation for the injured
needn’t entail disproportionate financial punishment as well.In the long term, using the courts to "send a message" to Merck isn’t going
to help consumers. If the result is an even more cautious FDA approval system
and a more cautious pharmaceutical industry, that will keep innovative drugs off
the market for much longer. More people will die waiting for new treatments. The
cost of producing new drugs will rise dramatically. Already, there are whole
areas of medicine — women’s health during pregnancy, for example — that are
made so risky by liability issues that companies may stop doing research in
them.The first principle of reforming this system should be that a company that
follows the FDA’s rather extensive guidelines should be protected from punitive,
if not compensatory, damages.
The Soul of a New Machine Shoe
The costs of a shock tend to fall when people have time to adjust and markets have a chance to do
their work.
I saw a nice illustration of this while shopping for shoes recently – manufacturers are producing and advertising a new feature: Airport Safe.
Rotting in FEMA City
The Bush administration and FEMA are planning to house Hurricane Katrina evacuees in some 300,000 trailers and "mobile" homes. What an awful idea. Mobile home cities are nothing but public housing built on the cheap – why must we revisit that disaster?
In Florida some 1,500 people left homeless by Hurricane Charley are still living in "FEMA City," a desolate subdivision of trailers and mobile homes built on 64 acres between a county jail and Interstate 75. Located far from jobs, real schools and ordinary amenities like restaurants and grocery stores, FEMA City has become another public housing failure.
There are no trees, no shrubs, and only two small playgrounds for several hundred children.
Teenagers have been especially hard-hit – drug use, vandalism,
break-ins and fights are widespread. Young people regularly call FEMA
City a prison.The troubles got so bad in the spring that the entire camp was
fenced in, a county police substation was set up, and armed security
guards were stationed at the one point where residents were allowed to
enter and exit. Even with that, the number of calls to the county
sheriff’s office was at an all-time high last month – 257 calls that
resulted in 78 police reports, many of them involving domestic
violence, fights, juvenile delinquency and vandalism. In January, there
were just 154 calls and 40 official actions.
FEMA City has only 1,500 residents. Can you imagine how bad things will get if "vast towns of 25,000 or more mobile homes" are built, as is being planned?
Why are we interring people in government camps? Housing vouchers are a much better policy. Let evacuees use their vouchers in any city in the United States. Let them begin to rebuild their lives with decent housing in places where they can find jobs, schools and community.
Sexual Healing
The Danish government pays for the disabled and elderly to watch porn and have sex with prostitutes.
Caregivers in Copenhagen have found that pornography and prostitutes
have a greater calming effect on their elderly patients than
traditional medical treatment such as drug therapy.Staff at the Thorupgaarden nursing home in the Danish capital have
been broadcasting pornography on the building’s internal videochannel
every Saturday night for several years. And if videos and dirty
magazines don’t relieve the tension, residents can ask the staff to
order a prostitute for them.The caregivers have told Danish media that pornography is healthier,
cheaper and easier to use than medicine, Lars Elmsted Petersen, a
spokesman for the Danish seniors’ lobby group Aeldresagen, said.Earlier this year, the Danish government released a report stating
that sexuality is an integral part of life for the elderly and the
disabled. It recommended that caregivers help elderly residents satisfy
their sexual needs.
All this sounds very reasonable to me. My only objection? Government intervention could lead to shortages.
To Serve and Protect Whom?
Last week I wrote:
According to this stunning account
local law enforcement officials prevented refugees, at gun point, from
leaving New Orleans and then stole their food and water to boot.
The story seemed so incredible that I cautioned readers but the Washington Post is now verifying the main account:
A suburban police chief is defending himself against
accusations of racism for ordering the blockade of a bridge and turning
back desperate hurricane victims… Police Chief Arthur Lawson Jr. ordered officers to block a bridge
leading into the community [of Gretna], which is almost two-thirds white. New
Orleans is two-thirds black.
Thanks to Robin Hanson for the pointer.
Fear of Floating
The Washington Post has a good article on an interesting email scam.
Typically, here’s what happens: You advertise a car for sale
online. A fraudster posing as a buyer responds via e-mail agreeing to
purchase the car for the asking price…Next, the scammer persuades the buyer to
accept a cashier’s check or personal check for significantly more than
the agreed-upon price. The excess is allegedly to cover the cost of
shipping the car abroad. Or the check’s too big, he claims, because it
had already been cut for a car deal that fell through. Or the buyer
simply apologizes for the mistake.The key to the
scam is duping the seller to deposit the check and, once it clears in
the seller’s account, return the excess money via an irreversible wire
transfer, such as Western Union.
Now what always confused me about this scam is that it seems very easy to avoid. Just wait for the check from the scammer to clear, right? Wrong.
The scam turns on most people’s misunderstanding of the
check-clearing process. Bank clerks and managers usually aren’t experts
at identifying counterfeit checks. So they deposit the check and tell
the seller it requires 48 hours to "clear." Then the money appears on
the seller’s account statement and can be withdrawn.Most
people assume that means the check is valid. But the real
check-clearing process can take weeks. Phony checks generally aren’t
nabbed until after the seller has wired the overpayment to the scammer.
And after the wire transfer is picked up, it’s gone.
Bryan Caplan Nails It
If you want to grow, you can learn a lot more from Hong Kong than Harvard.
More here.
Seth Roberts in NYTimes
Seth Roberts may soon be waking up to see his own face on television. That ought to make him happy! Roberts, as you may recall, is the Berkeley psychologist whose novel self-experiments have led to some strange but important new ideas. Stephen Dubner, who read about Roberts on MR, and Steve Levitt have just profiled him in the NYTimes Magazine; they do an especially good job of explaining Seth’s theory of weight loss:
[Roberts] had by now come to embrace the theory that our bodies are
regulated by a "set point," a sort of Stone Age thermostat that sets an
optimal weight for each person. …But according to Roberts’s
interpretation of the set-point theory, when food is scarcer, you
become less hungry; and you get hungrier when there’s a lot of food
around.This may sound backward, like
telling your home’s furnace to run only in the summer. But there is a
key difference between home heat and calories: while there is no good
way to store the warm air in your home for the next winter, there is a
way to store today’s calories for future use. It’s called fat….During an era of scarcity –
an era when the next meal depended on a successful hunt, not a
successful phone call to Hunan Garden – this set-point system was
vital. It allowed you to spend down your fat savings when food was
scarce and make deposits when food was plentiful. Roberts was convinced
that this system was accompanied by a powerful signaling mechanism:
whenever you ate a food that was flavorful (which correlated with a
time of abundance) and familiar (which indicated that you had eaten
this food before and benefited from it), your body demanded that you
bank as many of those calories as possible….So
Roberts tried to game this Stone Age system. What if he could keep his
thermostat low by sending fewer flavor signals? One obvious solution
was a bland diet, but that didn’t interest Roberts. (He is, in fact, a
serious foodie.) After a great deal of experimenting, he discovered two
agents capable of tricking the set-point system. A few tablespoons of
unflavored oil (he used canola or extra light olive oil), swallowed a
few times a day between mealtimes, gave his body some calories but
didn’t trip the signal to stock up on more. Several ounces of sugar
water (he used granulated fructose, which has a lower glycemic index
than table sugar) produced the same effect. (Sweetness does not seem to
act as a "flavor" in the body’s caloric-signaling system.)The results were astounding. Roberts lost 40 pounds and never gained it back.
I can verify the appetite suppressing properties of the fructose water. A glass of fructose water and I can easily go without lunch. The only problem is that the sophists lure the unsuspecting to lunch anyway.
UHaul Pricing and Free Drinks for Women Nite
Here is my analysis of UHaul pricing and the larger implications for not only ‘women drink free nites’ but many other markets.
Why is it so more expensive to rent a UHaul van to travel from LA to Las Vegas ($454) than from Vegas to LA ($119) (more here). Since the direct cost is similar the first thing an economist might think of is price discrimination. But the rental market is highly competitive, especially when we take into account substitutes such as train, private car etc., so that seems like a non-starter. A good answer needs to recognize that UHaul operates a network with significant inter-customer externalities.
Let us suppose that as the day dawns UHaul has the optimal number of trucks at each of its locations. At the end of the day, UHaul would like the same number of trucks at each of its locations. But this is possible only if departures equal arrivals and to help achieve that balance UHaul lowers the price on the low demand Vegas to LA trip and raises it on the high demand Vegas to LA trip. (It’s more complicated than this because there are many more than bi-directional considerations but you get the idea.)
Put differently, a customer who travels from Las Vegas to LA reduces the cost to UHaul of running its network because it lets UHaul sell an LA to Las Vegas trip. The direct costs may be similar but the indirect costs related to running the network are very different. UHaul’s pricing strategy reflects both the direct and indirect costs.
Network economics has some similarities to platform economics. A bar, for example, is a platform which mediates transactions (pecuniary and non-pecuniary!) between two sorts of customers, men and women. If men have a higher demand for going to a bar with many women (LA to Las Vegas) than women have of going to a bar with many men (Las Vegas to LA) then in a competitive market the bar must set a higher price for men than for women. In this context, far from being an example of monopoly power, differential pricing is a result of competition.
More generally, there are many examples of platform markets. The developer of a mall has as customers shoppers and shops. A video game console sells itself to players and programmers. A credit card must have users and merchants. In some places differential pricing for men and women at nightclubs is illegal. But in a platform market such differential pricing can make both men and women better off. Similar things can be said about practices in other platform markets which look anti-competitive at first glance but in fact are the result of competition in the context of a platform.
More on platform economics, also called two-sided markets, in Rochet and Tirole.
Bonus points to Larry White, Mark Weaver and Michael Stack for sending in answers and double bonus points to Larry for suggesting that some of theory could be tested by looking at drink pricing at gay bars.
Today, I am an American
On Friday, I took the oath and became an American citizen. I can’t claim to be escaping an authoritarian regime or hopeless poverty. Indeed, the security guard at the INS saw my passport and said "What you doing here? Why you want to be American? Free medical care, free welfare. I want to be Canadian." So why did I make the leap? There are plenty of pragmatic reasons. I have a home here, a job, a life. The United States has been good to me.
But the deciding factor in my choice was emotional. Four years ago when I awoke to the devastation, I felt that my country had been attacked. And if that is how you feel then what more needs to be said?
UHaul 2
Inspired by my earlier post, Chris Robinson has written some clever code to query UHaul prices which he then analyzes. Also, like a true statistical gentleman, he makes the data available to all.
Steve Levitt chimes in on whether this is freaky enough – no, it’s encouraging. but not quite there yet.
Me? I am still hoping that someone will follow up on my suggestion that these prices explain why women drink free nights are a good idea.