Many public goods and club goods exhibit increasing returns.  A lighthouse, for example, is useless unless complete.  It’s difficult to get voluntary contributions to these types of good not only because of the free rider problem but also because contributors fear that their contribution will be wasted if others do not also contribute.  An assurance contract makes contributions contingent on some level of total contribution being reached.

Assurance contracts can help to solve coordination problems.  I agree to contribute to build the lighthouse if and only if enough others also agree so that production is guaranteed.

Fundable.org is making assurance contracts easier to implement.  If you want to raise money for a cause you can set up a Fundable group.  Contributions to the group goal are held by Fundable in escrow.  All money is returned unless the group goal is met.  If the group goal is met the funds are paid to the group leader.

It’s a cool idea but even more is possible.  In a paper published a few years ago, I show that the idea of assurance contracts can be extended to what I call dominant assurance contracts.  In a dominant assurance contract if the group goal is not met then everyone who offered to contribute is given their money back plus a bonus.  It turns out that it then becomes a dominant strategy to contribute and the public good is always provided!

Matt Yglesias responds to my post The Canary is Dead as follows:

Nononono, no, no! ‘E’s resting!

Well, I paraphrase but you get the gist.  Will Wilkinson and Jane Galt offer some more serious comments.  Or you could just have a laff.

United Airlines, which is operating in bankruptcy protection, received
court permission yesterday to terminate its four employee pension
plans…The federal agency that guarantees pensions, the Pension Benefit  Guaranty Corporation,  will assume responsibility for the plans, which cover about 134,000 workers.

Some
retirees could see sharply lower pension payments as a result; others
will see little change in benefits, depending on a variety of factors.
Some retirees at US Airways, which has terminated its plans, have seen
benefits drop by as much as 50 percent….United plans to switch its current employees from traditional
retirement programs, which are called defined-benefit plans, to
defined-contribution plans like 401(k) programs

Now, let’s review.  A large organization counts on its younger workers and continuing high revenues to fund the pensions and medical care of its retired workers but finds that rising health care costs, longer life-expectancy, and its own inability to control spending force it to cut pension benefits and switch to personal accounts.

Kinda makes you go hmmm…doesn’t it?

The Justice Department may file suit against the National Association of Realtors (NAR) to prevent them from excluding discount brokers from access to the regional MLS systems.  I’m hardly a fan of antitrust but the market for realtors is a racket.  Six percent to sell a house?  Outrageous!

Putting aside the outrage the market for realtors is terribly wasteful.  Consider, house prices are much higher in California than in Idaho but commissions are stable at around six percent.  Thus, even though the realtor’s job, brokering a deal, is the same in California as in Idaho, a realtor in California will make much more per-house.  As a result, there are far too many realtors in California and many of them will spend an entire year selling only a handful of houses.  Indeed, many realtor’s spend most of their time prospecting for clients rather than actually selling houses – this is a huge waste of resources. 

The same relationship holds over time as over space.  That is, when house prices go up we don’t see a fall in commission rates.  Instead, we see more entry.  Since the same number of houses are being bought and sold, the extra realtors don’t make the buyer or seller better off and sadly the realtors aren’t better off either – instead the excess return is siphoned off in wasteful prospecting for clients.

Unfortunately, no one really understands why commissions are stable.  The answer is not monopoly.  It’s very easy to enter the market for realtors.  So why don’t commissions fall?  One can certainly point to some restrictive practices by the NAR but I don’t think that is the whole or even the major part of the story.

A clue to the puzzle is that we also see stable commission rates in law (contingency fees) and in services (tipping).  Why is the appropriate tip 15% at an expensive restaurant and at a cheap restaurant?  Does the tuxedoed waiter really have a harder job than the diner waitress?  Maybe (indeed, I have argued along these lines elsewhere) but the commonality across these very different markets tells me something else is going on.

Is it signaling?  Would you distrust a realtor offering lower commissions?  Again, maybe, but it’s hard to believe that with so much money at stake there aren’t enough people willing to take a risk on a discount realtor for long enough for reputations to be established.  I think part of the problem in the realtor market is that other realtors can easily discriminate against discount brokers by pushing their clients one way or the other – that says the antitrust actions will probably not be very effective.  But this doesn’t explain stable commissions in law or waiting.

It’s a puzzle and one worth solving.  Comments are open.

The graph of marginal tax rates that I posted earlier has some regions of zero marginal rates and a larger version has negative marginal rates at low income.  How is this possible?  It helps to know that the graph is based on a four member family with one young child and one older child attending college.  Assumptions must also be made about 401ks, IRA contributions, education plans etc.  Kevin Hassett, one of the authors, lays out all the assumptions here.  Basic story – the earned income tax credit gets you negative marginal rates; zero rates are possible at higher incomes if you save some money for retirement and take advantage of education tax credits.  Of course, families in different situations would face different graphs but that too demonstrates that the tax system is a hodge-podge.

Thanks to John F. Eckstein for pointing me to the more detailed explanation.

A recent 60 Minutes segment took a look at medical tourism.  The spanking-new hospitals in Thailand and India look like truly wonderful places to be sick.  The technology is cutting-edge, the doctors American trained, and the nurses are cheap.

    Many of the doctors interviewed by 60 Minutes worked in the United States before they returned to their home country.  Ten years ago these same doctors would not have left the United States.  These doctors are returning to their home countries precisely because they now have the opportunity to work in spanking-new hospitals with the latest technology.  The outsourcing story is thus more complex than it at first appears.  Ten years ago the foreign radiologists we now use to read X-rays might not have been foreign at all – they would have been living and working in the United States.   The world is flattening.

Hal Varian has a short article on tax reform in his NYTimes column.  I agree with him that one of the most desirable but also achievable reforms would be to expand and simplify "the current messy system of tax-deferred savings, including I.R.A.’s,
401(k)’s, 403’s and Keough plans. We do not really need all those
different plans and having one, simple tax-deferred savings plan would
make a lot of sense."

The graphic below shows how under the current system the marginal tax rate rises and falls arbitrarily.

Here is Brad DeLong’s reason number 4 to favor private accounts for social security:

We need to raise our national savings rate. But if we just raise Social
Security taxes, Congress will treat these taxes as general revenue and
spend them. Only by funneling Social Security contributions into some
vehicle that Congressional representatives cannot interpret as a
resource available to fund current spending can we raise the national
savings rate. And private accounts are the best vehicle we can find to
(a) accumulate contributions without (b) allowing Congressional
representatives to seize them as resources available to fund current
federal spending.

That reason receives new support from Nataraj and Shoven who present evidence that:

…the trust fund build-up may not help future generations due to the
adoption of the Unified Budget in 1970. The Unified Budget includes
trust fund receipts as income and trust fund payments as expenditures.
The empirical evidence suggests that attempts to balance the Unified
Budget while the trust funds were generating surpluses has led to
increased government spending and personal and corporation income tax
cuts within the rest of the federal government. There is no evidence of
increased government saving as a result of the trust fund accumulations.

During his Daily Show appearance Steve Levitt said that in estimating the effect of abortion on crime he controlled for other variables like police and prisons.  Jon Stewart pressed Steve for an explanation of how someone could "control" for other variables – amazingly, Stewart seemed genuinely interested in an answer but, wisely, Steve demurred.  The exchange got me to thinking, What is the shortest, non-technical, yet reasonably accurate explanation of how this is done?

I think the way to go is to use the Frisch-Waugh-Lovell Theorem.  Here’s my attempt:

Suppose you want to figure out the effect of weight on life expectancy.  Heavy people tend to be tall so you have to control for height.  You can do this with a two-step procedure.  First, calculate how height correlates with weight.  Let’s say that you discover that every 1 inch increase in height above say 5’7 correlates with a 5 pound increase in weight; you now subtract from each person’s weight that portion which can be explained by height.  For example, you would subtract 5 pounds from everyone in the data of height 5’8 and 10 pounds from everyone who is 5’9.   Since height doesn’t explain weight perfectly, you are left with a new variable, weight2.  In the second step, you calculate how life expectancy correlates with weight2, since weight2 is "weight after controlling for height" you have now calculated the effect on life expectancy of weight after controlling for height.

To be clear, I am not suggesting that this is what Steve should have said!  (If asked I would have said, "Well, I could tell you that Jon, but then I would have to bore you.")  I’ve opened the comments section if you have some other ideas.

By the way the ubiquitous Steve Levitt will be here on Wednesday, but I repeat myself.