A simple economic model of today’s NBA

by  Tyler Cowen in

Given economic bad times, many teams have overspent.  But they have lots of long-term contracts, plus there is a salary cap and luxury tax for going above that cap.  Real wages ought to fall but most of them cannot fall right away.  If a player becomes a free agent, few teams will bid and those players will absorb a disproportionate share of the required wage cuts (the pricing of complementary inputs had some indeterminacy anyway, plus there is an AC constraint). 

The lower returns available mean that a given free agent is more likely to be a self-deluding trouble maker who has worn out his welcome (Artest, Gordon, etc.).  This favors teams with dominant players (Cleveland), strong systems (Boston), and strong coaches.  All those teams can swallow the troublemakers without cracking up.  It also favors teams which suffer from well-defined "missing pieces."  It favors already-good teams and indeed we see that Cleveland, Orlando, San Antonio, and LA have been major players in the free agent or trade markets.

I predict a greater dispersion of win totals for next year's season.

I am wondering to what extent a similar analysis applies to economics departments, or to teams of bloggers, or to other groups of complementary labor inputs.

Addendum: TrueHoop comments.

Adverse Selection Once Again

by  Alex Tabarrok in

Adverse selection is an easy story to tell but a hard story to verify.  In fact, empirical studies indicate that adverse selection is not an important (equilibrium) effect in the market for used cars, or used trucks, or of auto, life insurance or health insurance.  See my earlier post, Adverse Selection is NOT the Problem, for reasons why markets handle asymmetric information better than most economists think.

In two excellent posts (here and here), Bryan Caplan further points out that the adverse selection model does not explain current regulations.  Adverse selection, for example, implies that it's the low-risk consumers who drop out of the market so it's the low-risk consumers who need a mandate to buy insurance.  But…

When you actually look at these regs, you'll notice some peculiarities:

1. Mandatory insurance is most prominent in the auto insurance industry. But these regulations don't target low-risk drivers. Their main purpose, contrary to the adverse selection model, is to make sure high-risk drivers get insurance.

2. Even more shocking: The regulations usually go on to somehow subsidize the rates that high-risk drivers pay. This is necessary because, contrary to the adverse selection model, insurance companies are able to detect high-risk drivers, and do not want to cover them at a loss.

3. Economists usually mention adverse selection in the context of health insurance. But in the market for individual health insurance – precisely where you'd expect adverse selection problems to be most severe – governments very rarely mandate insurance coverage. Instead, they focus on mandatory employer-provided health insurance, where the adverse selection problem is likely to be milder.

4. When governments do mandate health insurance, they almost always subsidize the rates that high-risk buyers pay. This is once again necessary because, contrary to the adverse selection model, insurance companies are able to detect high-risk customers, and do not want to cover them at a loss.

Bottom line: Real-world insurance regulation has little or nothing to do with economists' "moral hazard and adverse selection" mantra. The "intellectual" bases of real-world regulation of insurance are rather populism and paternalism: Big bad insurers won't cover people unless it's profitable, and simple-minded consumers don't care enough about their own health to pay for it themselves.

See also Tyler's post on this issue which makes many similar points.

Maniacs, all of us

by  Tyler Cowen in

Is blogging declining?  Matt writes:

Laura at Apartment 11D offers an excellent précis
of the ways in which the blogosphere of today lacks much of the charm
of the blogosphere of four or five years ago. I would say that there
are compensating benefits to the new, more professionalized, more
institutionalized blogosphere. But it really is different and the
change has been for the worse in many ways.

Laura links to many comments.  I'm more optimistic.  Very few (if any) of my favorite bloggers have quit and of course there are some new ones.  It's surprising how few of them have quit.  (If blogging is so great, why hasn't competition competed away their returns?  What about comparative advantage in this sector is so persistent?)  The rest of the output you can ignore.

Some Simple Economics of Mandated Benefits

by  Tyler Cowen in

Via MR commentator John Chilton, here is a link (JSTOR, but free pdf here) to the classic and excellent treatment by Lawrence Summers on mandated benefits.  My view is that the main case for mandated benefits is simply to note that public provision is often worse and that direct subsidy, such as a cash transfer, is not always feasible.

The case against is simple too.  Say that previously unprovided health insurance would have cost the employer 60 and would have been valued by the worker at 40.  You're imposing a tax of 20 on the employment relation.  In the short run firms will hire less labor and during a recession is an especially bad time to produce that effect. 

In the longer run, if the market is competitive, wages will fall by 20.  We're forcing relatively poor workers to consume more medical insurance, and more medical care, than they wish to, at the expense of their cash income.

Do not forget the excellent words of Ezra Klein:

Indeed, the main impact of health-care
reform on health may be that if it could contain costs, we'd have money
to spend on things that actually do make us healthier.

He means things other than health care in the narrow sense.  I don't know if Ezra opposes the mandates approach (compared to what?) but his quotation indicates a problem with it, even from the standpoint of health alone, much less considering the other pleasures of spending or saving cash.

Of course some of the people covered by the mandate would otherwise end up showing up at emergency rooms.  Treating them that way would get tacked on to my medical bills, one way or another.  With a mandate they are no longer my financial headache. 

With this new change, who's better off?  Me.  Who's worse off?  The previously uninsured poor person.

You might say: "We are covering more people, at a lower price, than we had thought possible."  That sounds like a kind of triumph.  But if you cut through to the actual analysis, your paternalism has to be a lot stronger than your egalitarianism for you to support this kind of measure.

Twitter search of the day

by  Tyler Cowen in

Employer mandate.

How many of you use this function?

Here's a search on Karl Malden and Ben Gordon (now a Piston).  Besides entering your own name, what are the best methods for getting quality information out of Twitter?  Is there a successful hybrid blog/Twitter format, where the blogger pairs with Twitter to produce a better aggregator than either could do alone?

When should one blog the obvious…?

by  Tyler Cowen in

Usually I try not to blog points which already have occurred to everyone, even if those points are true and important.  But today I will do so.

First, the idea of an employer mandate for health care is a tax on hiring labor in a time when, if anything, the hiring of labor should be subsidized.  On top of that is the proposal to tax health insurance benefits.  Keynesians especially should be upset about these developments, although I haven't heard many peeps.  Even if they favor this policy in the abstract, surely they are accustomed to the idea that the short run is very important, most of all for labor markets and aggregate demand.

Second, Joseph Stiglitz's idea that "the UN has a key role to play in "reforming the global
financial and economic system"" is a bad idea.  It is a very bad idea.  We're past the point where "they can't do any worse than we did" is a good or usable argument.  Has the Public Choice revolution been such an unpalatable pill to digest?

On the brighter side, I did not agree with but enjoyed this comment from thehova (citing Michael Powell):

"Wilco" is a five-letter word for the quiet slaughter of all that is
elemental, passionate, and reverentially stupid about rock 'n' roll.

Markets in everything

by  Tyler Cowen in

Chessboxing
has a convivial party atmosphere and is far more female friendly than a normal
boxing crowd, with 40% of tickets purchased by ladies.

Here is more, with the subheader Swedish Chessboxing Sensation in London.  About a year ago, five or so people sent me links about chessboxing for "Markets in Everything."  I didn't think it was weird enough to merit inclusion in the series.  But now, with the addition of "Swedish" and "ladies" to the mix (or is it the "convivial party atmosphere"?), I think it is weird enough.  Here is Wikipedia on chessboxing.

*Wilco*, by Wilco

by  Tyler Cowen in

If you aggregating a lot of binary opinions, I vote yes you should buy it.  It's more accessible and less mysterious-sounding than their usual fare, which you may consider either a plus or a minus.  If you're wondering what my underlying stance is, a few days ago I said to Brian Hooks something like: "I'm glad I've never really been a fan, that leaves me free to enjoy them without feeling threatened by what they stand for."

Status games among the Amish

by  Tyler Cowen in

Some Amish bishops in Indiana weakened restrictions on the use of
telephones. Fax machines became commonplace in Amish-owned businesses.
Web sites marketing Amish furniture began to crop up. Although the
sites were run by non-Amish third parties, they nevertheless
intensified a feeling of competition, says Casper Hochstetler, a
70-year-old Amish bishop who lives in Shipshewana.

"People wanted bigger weddings, newer carriages," Mr. Lehman says.
"They were buying things they didn't need." Mr. Lehman spent several
hundred dollars on a model-train and truck hobby, and about $4,000 on
annual family vacations, he says. This year, there will be no vacation.

It became common practice for families to leave their carriages home and take taxis on shopping trips and to dinners out.

Some Amish families had bought second homes on the west coast of
Florida and expensive Dutch Harness Horses, with their distinctive,
prancing gait. Others lined their carriages in dark velvet and
illuminated them with battery-powered LED lighting.

Most of the article concerns a recent bank run in an Amish community:

Only Amish people can join. The trust's 2,100 depositors receive
annual interest of 3.2%, while borrowers pay 3.5% interest on loans.
There are no credit checks. Monthly mortgage payments can be no more
than 33% of a borrower's gross income.

The trust's structure reflects the Amish philosophy of sharing. It
isn't insured by the Federal Deposit Insurance Corp., but by its own
bylaws it maintains at least $1 million in cash reserves. The trust has
never exercised its authority to foreclose on a home.

A sustained run wiped out the bank's reserves and now it has ceased lending.  Probably it is hard to gather the data, but I would love to read a book Economic Life Among the Amish.

Update on the public plan

by  Tyler Cowen in

Ruth Marcus tells Democrats not to go to the wall for it.  She is not personally against the presence of a public plan, she just doesn't think it is a "do or die" question.  There are other ways of making the sector more competitive, if need be.

Here is the veteran commentator Wisewon on the public plan.

As Ezra Klein indicates, the health insurance exchanges are a more important part health care reform.  Here is a progressive symposium on the public plan; read Paul Starr.

Brad DeLong writes:

We should set up a public plan, let it compete with the privates, and
see if it can provide care people like more cheaply than the private
insurance companies. Friedrich Hayek would approve: the idea is to use
the market as an institutional discovery mechanism.

Is this the SOE model?  I'm still stuck on what the public plan will be instructed to maximize, much less what it will end up maximizing after ?? years of Congressional interference.  And exactly who in our government will mimic the behavior of shareholders?