Notes on Genetic Insurance
My idea of genetic insurance created some controversy with Randall Parker at FuturePundit, Brock Sides at Signifying Nothing, and MR’s guest blogger Lloyd Cohen raising some objections. One of the objections that all three had in common (dealt with in my papers but not in the post) is that adverse selection is still a problem if people lie about having taken a test. This minor problem is easily handled, however. Insurance companies could have a clause in the contract forbidding previous tests. We don’t worry so much about people having a theft and then buying home insurance and the issue here is quite similar. (See my papers for a little more on this issue).
Randall at FuturePundit, however, raises a more serious problem. As the price of genetic tests falls it will soon be economic to sequence a person’s entire genome at birth or even before (see Randall’s posts for some links on costs). In this case, genetic insurance works only if the parents buy the insurance. This is not so implausible (especially not for those who have their child’s DNA sequenced!) but it is a real issue. (We should also remember that genetic insurance will be quite cheap because most people do not have serious genetic defects.) If we have genetic insurance today, however, we can perhaps avoid the adverse selection problem for a couple of decades and that may be good enough for one of two things to happen 1) genetic engineering will reduce the need for insurance (sequencing is much more valuable if there is genetic engineering to correct defects) or 2) genetic insurance could evolve into a more Rawlsian scheme (perhaps involving government at some level) in which payments are made at birth to compensate for Nature’s genetic lottery.
Time for Genetic Insurance
The Genetic Information Nondiscrimination Act that cleared the Senate Tuesday on a 95-0 vote would bar employers from using people’s genetic information or family histories in hiring, firing or assigning workers. Insurance companies could not use genetic records to deny medical coverage or set premiums. (from ABC News)
I understand the desire to pass such a bill but if genetic “discrimination” is made illegal then as genetic testing becomes common we risk serious problems of adverse selection. People who test postive for a genetic disease will buy more life and health insurance threatening the financial stability of insurance companies.
Genetic insurance is a better way of handling the problems brought on by genetic testing. Genetic insurance would pay out depending on the results of a genetic test. If you turn out to have a gene implying a higher risk of heart disease, for example, then the test would pay you enough to cover your now higher health and life insurance premiums and perhaps also something to cover the possibility that you will have a shorter working life.
I think of genetic insurance as a “free-market” idea but it also has Rawlsian undertones. We are all behind the veil of ignorance as far as (some) of our genes are concerned. Buying insurance before a genetic test lifts the veil goes some way to compensating those who, through no fault of their own, were unfortunate to get a bad draw from nature’s lottery.
Addendum: I originally discussed genetic insurance in Tabarrok, A. 1994. Genetic Testing: An Economic and Contractarian Analysis. Journal of Health Economics 13:75-91. A shorter version is in Entrepreneurial Economics.
Wining about Taxes
Jennifer Rosen totals up the taxes on a bottle of wine. This summary is direct from Walter in Denver.
1. Federal import license, $500, 3 to 5 month wait.
2. Register an office for each state in which the wine is sold, $100 to $350 per state.
3. Find a distributor for each state or even each county. These distributors will add their own markup to the price of your wine. State governments will not allow you to act as your own distributor.
4. Create and print a new English language label for the wine. The label will have to meet the federal requirements for warning labels and such.
5. After shipping, wait ten days for the wine to clear customs.
In Rosen’s hypothetical case the bottle of wine that sells in its home country for $4.50 winds in U.S. stores at $15.50 per bottle.
Tax protestors often note that half of the average American’s paycheck goes to taxes. When you count the cost of regulation, government’s cost is actually much higher.
Cream Skimming
Glen Whitman at Agoraphilia has some comments on my debate with Tyler on vouchers. He notes that the public school system separates students according to ability with honors classes, AP classes, magnet schools and so forth. Yet, few people call this “cream skimming.” I think Glen’s point blows the peer-effects argument against school choice out of the water.
More generally, the argument in the peer-effects literature is that we shouldn’t let smart kids escape the public school system because their presence gives dumb kids a positive externality. I detest this argument. Children are not pawns to be moved about to satisfy the desires of some grand master. A decent school system treats children as ends in themselves. (In preparation, one might add, for life in a society that treats every individual as an end in themself.)
Climate Change Change
I took my kids to see the dinosaurs in the Smithsonian yesterday. As I was wandering around, I came across a surprising exhibit on the ice age that noted the following:
Initiation of glacial conditions may be triggered by surprisingly rapid climate changes. Therefore, the minor global cooling trend of recent decades…is being carefully watched and studied. Already the effects on food production are severe in many parts of the world….We are now in a relatively warm period (“interglacial”) following one of several major glacial periods. It is not certain when the present interglacial period will end but…imagine the impact of another full scale glacial advance like that just a few thousand years ago!
Clearly, the Smithsonian needs to update some of its exhibits but when they do so I hope they note that the “scientific consensus” on global climate change has been much more variable than the climate.
Lloyd Cohen to Guest Blog at MR
This week we are pleased that Professor Lloyd Cohen of GMU’s School of Law will guest blog for Marginal Revolution. Lloyd has published widely in law and economics especially on creating a market in transplant organs, marriage and divorce, wrongful death, tender offers, and free riders and holdouts. We look forward to Lloyd’s bracing style!
I’m moving to Switzerland!
Not only are taxes low in Switzerland, but according to Alvin Rabushka beginning in 2004 (not 1994 – earlier version had a typo) the Schaffhausen Canton will introduce an income tax with declining marginal tax rates. Beginning at 8% the marginal tax rate will peak at 11.5% and then decline so that the very highest income earners will face a marginal income tax (from the Canton) of just 6%. I like this not only because my income is relatively high but also because declining marginal tax rates are a property of optimal tax systems (see here for an introduction to optimal tax theory).
Is Austrian Business Cycle Theory Back?
Two new papers on ABC have been written recently by mainstream economists. The Great Depression as a credit boom gone wrong is by Barry Eichengreen and Kris Mitchener under the auspices of the Bank for International Settlements and The Austrian Theory of Business Cycles: Old Lessons for Modern Economic Policy? is by Stefan E. Oppers under the auspices of the IMF. Both links are courtesy of Bruce Bartlett’s Talking Points.
More Bickering
Two quick notes on Tyler’s comment on my recent post on vouchers.
First, whether the school or the parent is sent the check is irrelevant (this is a basic theorem in economics). My point, however, was that parents cannot add-on to the voucher amount – i.e. the Chilean system has extensive price controls. Another way of saying this is that in the Chilean system parents never spend any of their own money on the private (subsidized) schools. I think a good voucher system requires that on at least some margins parents spend their own hard-earned dollars on their children’s education.
Second, Tyler thinks that the most convincing evidence is that Chileans did not improve on an international scale. Actually this is the least convincing evidence and it illustrates my point about the power of HU’s tests. The private schools in Chile increased by about 20 percentage points over the relevant time frame. Suppose that private schools were better than public schools by 10 percent then the aggregate gain at the national level would only be 2 percent. Small exogenous decreases in the quality of the public schools could easily swamp this gain.
Business Regulation
Andrei Shleifer and colleagues have engaged in a massive collection of data on legal regimes around the world. The World Bank has now released a major report written by the same group called Doing Business 2004 (summary here). In addition, the data from their project is available on the World Bank website Doing Business. This is a major resource for economists.
Here’s a nice graph from the report (click to expand).
What is in a voter’s self-interest?
Alan Krueger reports on survey research that shows that people do not vote according to their self-interest. In particular, he bemoans the fact that a majority of the poor want to get rid of the estate tax. This and other odd results are due to “ignorance and uncertainty” says Larry Bartels, a Princeton political scientist. If only the poor were better informed they would vote against tax cuts for the rich. Moreover, a better informed electorate would be a good thing. I take issue with both of these positions.
Take the normative position first. Assuming that voters voted self-interestedly, would a more informed electorate be a good thing? Doubtful. If everyone voted their “interest,” as Krueger and Bartels conceive it, every bureaucrat, welfare recipient and old person living on social security would vote for more government. Naturally, I think this would be a disaster but even those who think this would be a good thing ought to give pause when they consider how much more polarized our society would become were it not for the fact that ideology cuts across class lines.
Moreover, isn’t it interesting that when the poor vote against their “self-interest” they are labeled “uninformed” – Bartels compares them to Homer Simpson. But when Hollywood liberals like Barbara Streisand or rich philanthropists like Bill Gates Sr. vote against their “self-interest” they are called enlightened. What Krueger and Bartels refer to as self-interest is actually masking an ideology.
Is it true that informed voters would vote differently? (Krueger cites some evidence suggesting that in fact this is not the case – at least not as much as one would expect – but he doesn’t offer an explanation.) To understand this one should first realize that voters are uninformed because it doesn’t pay to be informed. The probability that one vote sways the election is infinitesimal so voters are rationally ignorant. Does this imply that voting is random? Not at all. Voters who care about ideas even a little are free to vote their ideology at low cost. Thus, in my view, the fact that votes don’t matter gives us hope. It’s only because votes don’t matter that libertarianism has a chance of success. Of course, I recognize that the same facts gives socialism a chance at the polls but I hope good ideas will win out.
Addendum: I’ve been influenced on these issues by our colleague, Bryan Caplan – although I give the ideas a more positive spin than he does. I recommend his paper Libertarianism Against Economism: How Economists Misunderstand Voters, and Why Libertarians Should Care from The Independent Review and his other papers on rational irrationality which you can find on his web page.
Vouchers in Chile and Colombia
Tyler mentioned, following a depressed Brad DeLong, a new paper on education vouchers in Chile that does not find large achievement gains. I have some criticisms of the paper (see below) but I was surprised that neither mentioned the most important recent paper on vouchers, Vouchers for Private Schooling in Colombia by Angrist, Bettinger, Bloom, King and Kremer in the Dec. 2002 AER.
Using data from a randomized experiment, Angrist et al. estimate that attending private school increased the probability of finishing eighth grade by 13-15 percentage points or 25 percent. Test scores increased by .29 standard deviations which is equivalent to about an extra year’s worth of schooling which has been estimated to increase yearly wages by 10 percent. Other markers such as teen cohabitation also improved.
Is this just a case of dueling papers? No, first, unlike Hsieh and Urquiola (HU), the Angrist et al. results are consistent with results found elsewhere. See in particular those found for Catholic schooling in the United States . Second, Hsieh and Urquiola (HU) are good researchers, judging by their paper, but Angrist et al. have a much more convincing research design – results from a randomized trial beat econometric identification any day. Cheer up Brad!
I shouldn’t give the impression that the results are directly comparable, however, as HU are trying to get at the general equilibrium effect of a voucher experiment and Angrist et al. are after the partial equilibrium effect of private schooling. Given the large gains found in the partial equilibrium literature, however, the GE results from HU are not plausible in my view.
Now regarding the HU paper some information is in order. First, there were no vouchers in Chile. Instead, there was public funding of some private schools on a per-student basis. Parents could not apply their voucher to the tuition at a private school of their choice.
Second, HU do not test whether students who transferred to private schools did better than other students – they tested whether aggregate scores (public and private) increased over time as more students attended private schools. Their evidence seems consistent with a nationwide decline in public school quality over time. More generally, I would have liked to have seen some information in their paper on the power of their tests. Given the size of the private sector what sort of gains could would we have expected to see in the aggregate scores and is their technique powerful enough to pick up such gains?
Third, HU claim that “cream skimming” was extensive but I find this difficult to believe because there is no price difference between public and private (voucher-accepting) schools since each was paid the same per-student amount. There are some non-pecuniary barriers but no limits on entry that HU mention.
Fourth, why did private enrollment increase if parents did not perceive a quality improvement? HU mention “freshly painted walls” which I thought was a bit flip – we ought to take revealed preference more seriously.
I do think that the HU study of Chile provides useful information about designing a good voucher program and my priors would have been that the program instituted in Chile, even though not a true voucher program, would have produced a larger effect – thus I learned something from the paper.
Threesomes
Some people find this objectionable but I am in favor of experimentation.
Bounty Hunters
The “bounty hunter” conference was fascinating. To be precise, I was invited to speak before the California Bail Agents Association which includes bail bond agents who write the bonds, surety/insurance companies who back the bonds as well as bail enforcement agents (aka bounty hunters) who recapture fugitives.
The bounty hunters were generally big guys but not so that you would notice on the street – these were not your Gold’s Gym type. A bounty hunter can always buy muscle but what they really need is smarts. A successful bounty hunter avoids excessive confrontation because every pickup is a lawsuit waiting to happen. One bounty hunter told me a big part of his success has been unfailing politeness.
Another key element is getting family members to cosign the bond – even hardened criminals don’t want to see Momma’s house taken should they fail to appear at trial.
It’s no coincidence that bail agents typically have their annual convention in Reno or Las Vegas but these are poker players not mindless feeders of the slot machine. (The distinction between these forms of gambling strikes me as important but to my knowledge has not been taken up by economists.)
Many of the “bondsmen”, perhaps even a majority, are women. Bondsmen must develop intuition and judgment about who is a flight risk and women may be particularly good at this. Also, although the defendant’s are usually men, its often their wives, girlfriends and mothers who bail them out and dealing empathetically with these women is a big part of the art – alas, repeat business is not uncommon.
As with other insurance industries, you can make a lot of money quickly by writing bail but trouble comes when your charges skip and their bail becomes forfeit. At least that is what is supposed to happen but – and I am surprised to be saying this – lax regulators and high-price lawyers can open a window of opportunity that makes bad bail writing potentially profitable. The problems this creates for the honest players in the industry was a big topic at the conference. I was impressed, however, that there was also a frank discussion about how to distinguish rules meant to weed out the fraudulent from anti-competitive rules. This is a topic I need to think more about.
I was asked to speak at the CBAA because of my paper on bounty hunters with Eric Helland (forthcoming in the Journal of Law and Economics). Here are some key facts and findings:
A whopping one-quarter of all felony defendants fail to appear at trial. Of these some thirty percent can’t be found after a year.
The police are overrun with unserved arrest warrants for failure to appear and typically devote little time to the task.
As a result, FTA appear rates are some 28% lower for those released on commercial bail compared to those released on their own recognizance.
When a defendant does FTA he is about 50% more likely to be caught and is caught much sooner if a bounty hunter is on his trail compared to if only the police are involved. (Both of these effects are after controlling for other relevant factors, of course).
Defining the Placebo Effect Carefully
I agree with Tyler that there is some serious evidence for placebo effects, especially although not exclusively for subjective components of disease. But the evidence is usually overstated because it is confused with the natural tendency of sick people to get better. A typical medical study, for example, will compare the results of a new drug against a placebo. The improvement in health of those on the placebo is then labeled “the placebo effect” – but this is wrong. To correctly identify the effect of the placebo one needs three randomly selected groups – a treated group, a placebo group and a non-treated group. The effect of the placebo per se is then measured by the health differences between the placebo and non-treated group. Although spontaneous healing effects are large, placebo effects when measured correctly tend to be small although not non-existent.