Kiss me, I’m vaccinated

by  Alex Tabarrok in

I just had my flu shot.  Please send your checks to my George Mason address.

People who have the flu spread the virus so getting a flu shot not only reduces the probability that I will get the flu it reduces the probability that you will get the flu.  In the language of economics the flu shot creates an external benefit, a benefit to other people not captured by the person who paid the costs of getting the shot.  The external benefits of a flu shot can be quite large.  Under some conditions each person who is vaccinated reduces the expected number of other people who get the flu by 1.5.

Since a large fraction of the benefits of the flu shot, perhaps even a majority of the benefits, go to other people and not to the person paying the costs, the number of people who get a flu shot in the United States is well below the efficient level.  I only got the shot because, as you well know, I’m altruistic.  I care about you.  But do send your checks, that will help.

In lieu of a check I’m thinking of having some buttons made up to encourage people to get their shot.  Here are some possible slogans:

  • Kiss me, I’m vaccinated.
  • Take one for the herd!
  • Get a flu shot.  The life you save may not be your own.

Madison Avenue here I come!

Of course, we know from the Coase Theorem that there is an alternative approach.  We could charge people who do not get their flu shots. (Thus, if you haven’t had a shot you must still must send me a check.)  Or to reduce transaction costs we could fine people who get the flu.  I kind of like that last one.  (But what to do about the 36,000 a year who die from the flu – charge their estates?)

What do you think?  Leave your suggestions/slogans for how to encourage getting a flu shot in the comments.

The roots of price stickiness, part II

by  Tyler Cowen in

Book rage, anyone? As the Canadian dollar hit the $1.10 mark earlier
this week, booksellers and publishers began to circulate stories of
customers going beyond simply venting their dismay at hapless clerks
and turning books into projectiles, sometimes to the point of drawing
blood.

If you live in Bangalore or Singapore, you may not know that the cover of a North American book typically has a price posted in U.S. dollars and a higher price posted in Canadian dollars.  The Canadian dollar used to be worth much less yet now it is worth more and so Canadian consumers feel ripped off.  Could we minimize this problem by also posting the price of the book in Switzerland or New Zealand, two countries with notoriously high book prices?  Or do Canadians care most about their price treatment relative to Americans, or simply their price treatment relative to the greatest comparative outrage elsewhere, rather than their relative treatment compared to the world as a whole?

Here is the link and story.  Along related lines, I found Sarah Maxwell’s The Price is Wrong:  Understanding What Makes a Price Seem Fair and the True Cost of Unfair Pricing to be a stimulating collection of anecdotes on this issue.  Here is my previous post on the iPhone and price resentment.

Why are so many top terrorists engineers?

by  Tyler Cowen in

Diego Gambetta and Steffan Hertog report:

We find that graduates from subjects such as science,
engineering, and medicine are strongly overrepresented among Islamist
movements in the Muslim world, though not among the extremist Islamic
groups which have emerged in Western countries more recently.  We also
find that engineers alone are strongly over-represented among graduates
in violent groups in both realms.  This is all the more puzzling for
engineers are virtually absent from left-wing violent extremists and
only present rather than over-represented among right-wing extremists. 
We consider four hypotheses that could explain this pattern.  Is the
engineers’ prominence among violent Islamists an accident of history
amplified through network links, or do their technical skills make them
attractive recruits?  Do engineers have a ‘mindset’ that makes them a
particularly good match for Islamism, or is their vigorous
radicalization explained by the social conditions they endured in
Islamic countries?  We argue that the interaction between the last two
causes is the most plausible explanation of our findings…

Henry Farrell adds commentary.  I take the bottom line to be that engineers are systematizers by nature and in Islamic countries in particular they face difficult social  circumstances, relative to their human capital and ambition.  I suspect also that elites with a clear inherited path to the top do not become engineers.

I am less convinced by the parallels drawn with politically conservative engineers in the United States, but the piece offers (p.51) this fascinating bit:

…engineers turn out to be by far the most religious group of all academics – 66.5 per cent, followed again by 61.7 in economics [emphasis added by TC], 49.9 in sciences, 48.8 per cent of social scientists, 46.3 of doctors and 44.1 per cent of lawyers, the most sceptical of the lot.  Engineers and economists are also those who oppose religion least (3.7% and 3.0%), and, together with the humanities, those who more strongly embrace it…

Footnote 63 (p.58) is not satisfactory but nonetheless intriguing.  This is probably the best piece on terrorism I have read.

Last night’s debate on happiness

by  Tyler Cowen in

It was Jeffrey Sachs and Betsey Stevenson against myself and Will Wilkinson on the topic of whether America is failing in the pursuit of happiness.  The Economist magazine was the sponsor and it was held in Gotham Hall in New York, which yes could have been out of a Batman movie.

As I had expected, Will proved to be the world’s best debating partner, or at least in the top two (my previous debate partner was Randall Kroszner, for a year in high school).

The initial tally of sentiment was about 67-33 in favor of the Sachs-Stevenson position that America is indeed failing at the pursuit of happiness.  By the end of the debate there was a slight margin in favor of the Cowen-Wilkinson position.  The crowd turned, I believe, in part because Sachs pursued attacks on the current administration rather than focusing on the defined topic at hand.  He was rendered shrill by the unholy madness of something or other, as Brad DeLong would put it.  Will and I don’t like current policy either, but we looked happy.  We were happy.  We are happy.  We also had a long array of facts and citations from the happiness literature and some pointed rebuttals to the so-called Easterlin paradox.

Many loyal MR readers were there, so of course your impressions are invited, even if you don’t usually leave comments.  Who else is to tell this story if not you?  Expect to see reports on Will’s blog and by Felix Salmon as well.

Addendum: Here is Will, Tyrone may weigh in soon.

Why are Hollywood Unions Powerful?

by  Alex Tabarrok in

Glen Whitman asks a good question, Why are unions so powerful in the entertainment industry when unions
are generally weak and in decline in most other sectors of the economy?  (Tyler asked the same question several years ago.)

I went to the family expert, my brother the movie producer and he had this to say:

…unlike in most other unionized industries, it’s the INDIVIDUAL members of the unions in the entertainment industry that the management / owners want to work with. For example, Tom Cruise is a member of SAG, (I use him as an obvious example, but every other known actor is as well) and if the studios and producers want to make a film with Mr Cruise, and we all do, we have to come to terms with SAG. Similarly, Steven Spielberg is a member of the DGA, same issue. Though writers are not household names, it’s the same issue, there are specific individuals who the studios want to be writing their TV shows and screenplays.  It  doesn’t matter if Joe or John or Mary is stacking the boxes, flipping the burgers or ringing the cash registers so management can easily hire a non-union member to do the same job, in the film business we need to work with specific individuals who happen to be union members. Thus the power of those (comparatively) few empowers them all.

Combine with a bit of Hollywood leftism and the fact that the big names don’t lose much from unions and you have a very powerful cartel.  About the only way to break the cartel would be to turn the big names into owners – this has been done a few times but the stars earn so much anyway that even then the incentives to deviate are small.  You Tube can give is a
parade of amateurs but as soon as the amateurs become stars this
model suggests that they will be co-opted into the union framework.  Like my brother, I don’t see the power of Hollywood unions ending anytime soon. 

Arnold Kling on compensation

by  Tyler Cowen in

I have a very different approach to compensation. I think that the
key is to change compensation schemes frequently. The reason is that
any scheme can be gamed, and the longer you wait to change any given
scheme, the more effectively the participants will have gamed it. That
is one reason I think that "Pay for Performance," the newest miracle
cure for health care costs, will fail miserably. The doctors will be
able to run circles around the bureaucrats. In the U.K., they already
have–all of a sudden, 91 percent of doctors were receiving bonuses for
being above average.

I think that the more Washington tries to regulate CEO pay, the more
it will create a disconnect between pay and performance. Regulation
will inhibit companies from frequently changing their incentive
systems, and that will give CEO’s more time to game them.

Here is the full post, which also covers Tim Harford’s forthcoming The Logic of Life, which you’ll hear more about in due time (it carries a blurb and recommendation from yours truly).

The economic consequences of Mr. Bush?

by  Tyler Cowen in

Joseph Stiglitz writes:

You’ll still hear some — and, loudly, the president himself — argue that
the administration’s tax cuts were meant to stimulate the economy, but this was
never true. The bang for the buck — the amount of stimulus per dollar of
deficit — was astonishingly low. Therefore, the job of economic stimulation
fell to the Federal Reserve Board, which stepped on the accelerator in a
historically unprecedented way, driving interest rates down to 1 percent. In
real terms, taking inflation into account, interest rates actually dropped to
negative 2 percent. The predictable result was a consumer spending spree. Looked
at another way, Bush’s own fiscal irresponsibility fostered irresponsibility in
everyone else.

Stiglitz seems to claim that Bush will go down with a lower reputation, in economic terms, than Herbert Hoover.  I have not been a huge fan of Bush’s fiscal policy, but I can add: a) Bush is not to blame for loose Fed policy, b) it remains debatable among honest Democratic economists whether loose Fed policy was bad, c) U.S. consumption has been robust for a long time, and d) changes in real interest rates do not explain much of the variation in private consumption, and that’s even assuming you manipulate the ex ante vs. ex post distinction to suit your convenience.  The first two sentences of this paragraph are plausibly true but then the text deteriorates rapidly and is determined to blame as many things on Bush as possible.  The paragraph ends up attacking Bush for promoting a "consumer spending spree" when Stiglitz had started by arguing for traditional Keynesian fiscal stimulus, the purpose of which is to promote…a consumer spending spree.

Stiglitz also argues that Bush is in large part (he won’t say how large) to blame for high oil prices.  In his view the war in Iraq led to political instability and stifled investment in the region, I say that Saudi oil wells are running dry anyway and increased demand — most of all from China — is the fundamental issue.  Note also that for many plausible parameter values, political instability leads to more pumping today and thus lower prices; the counterweighing cycle of less exploration and exploitation can take a long time to kick in.

It’s also worth noting how much the arguments run counter to Stiglitz’s own (earlier) writings on macroeconomics.  He used to preach that a) banks are excessively reluctant to lend to risky borrowers (compare to his discussion of the subprime crisis), b) changes in real interest rates generally don’t matter much, c) adverse selection makes it hard to sell non-transparent assets for a reasonable price (compare to his discussion of securitization), and d) we cannot expect monetary policy to be especially effective but rather we must focus on the extent of credit rationing.  Stiglitz of course has the right to change his mind, but if the shift is so big surely this is news.

There are many good arguments against many of Bush’s economic policies, and many other arguments which are maybe wrong but at least plausible or possibly true.  But essays such as this are not promoting the public’s understanding of economics.

The pointer is from Mark Thoma. 

Why arranged marriage is costlier than you might think

by  Tyler Cowen in

…when parents are involved in mate choice,
sons are significantly less likely to marry college-educated women and women
engaged in the labor force, after controlling for individual and family
characteristics. I show that these effects are driven, at least in part, by
parental preferences and cannot entirely be attributed to correlation between
arranged marriages and unobserved characteristics. These results suggest that
lowering the incentive for parental control in mate choice may improve
investments in women’s human capital in India.

That’s from Divya Mathur; here is the paper, she is on the job market this year from Chicago.  I take the implicit model to be that parents want a wife who will obey her in-laws.  Sons want wives who will earn some money and be more interesting to talk to.  Put the son in charge and the supply of potential mates responds accordingly.

Is the American economy taking too much risk?

by  Tyler Cowen in

As usual James Surowiecki has an excellent piece.  Excerpt:

Fund managers get bonuses at the end of each year, and they keep those performance fees even if the fund eventually goes south. So if a billion-dollar hedge fund rises twenty per cent in its first year and falls twenty per cent in its second, its investors will have lost money, while the fund’s manager might earn forty million dollars in performance fees. Hedge funds do have a rule that’s meant to deal with this problem: when a fund loses money, it yields no performance bonus until investors get back to even. The catch is that nothing prevents a hedge-fund manager from simply shutting down after a bad year and walking away with the fees he’s already accrued…Because fund managers reap large rewards on the upside without a correspondingly punitive downside, they have a much greater incentive to take big risks than ordinary investors do.

Managers, or for that matter ordinary investors, may not under normal conditions have enough incentives to take risk.  Remember the Kenneth Arrow argument that not all private financial risks amount to equivalent social risks?  Who cares if you lose money, provided that no real resources have been destroyed?  Yet a risk that pays off, say with a new product, does not in general return the entire social value of that product to the entrepreneur.

With hedge funds, are we now above or below the optimal amount of risk?  The answer of course is "we are taking the wrong kinds of risk."  We are finding more and more ways to (implicitly) write naked puts in highly leveraged forms.  Yes this has brought us new products but it all seems to be new mortgage products.  Could those products possibly justify the financial carnage we have seen?  That is the critical question but I suspect the answer is "no," that in this sphere we stepped beyond the bound of optimal risk-taking.

The junk bond revolution of the 1980s involved some "excess" risk-taking, but I believe those risks were more closely connected to the real economy, and more likely to bring real economy benefits, than the recent spate of mortgage-related risks. 

Markets in everything: self-constraint edition

by  Tyler Cowen in

Greying Japan has a new weapon to scare people into saving for their retirement — an exploding piggy bank.

The "Savings Bomb," which goes on sale in Japan next week, "explodes" and scatters coins if users fail to save for a long time, toy manufacturer TOMY Co Ltd said Thursday.

The battery-powered toy — designed as a cartoon-style, ball-shaped black bomb with a skull and crossbones logo — lights up, makes a noise, shakes violently and scatters coins if it is not topped up for a long time.

"Users must pick up and collect the scattered coins and reflect on their laziness," the Japanese company said.

Here is the full story, and thanks to William Griffiths for the pointer.  Of course if you think about the third derivative long enough, you will realize this might just cause people to spend their money, not save it.

Markets in Everything: Cheat Offsetting

by  Alex Tabarrok in

Building on the thriving carbon offset industry, an innovative British firm, Cheat Neutral, now offers cheat offsetting:

At Cheatneutral, we believe that we should all try to reduce the
amount we cheat on our partners, but we also realise that
fidelity isn’t always possible.

That’s why we help you neutralise your cheating. Your actions
are offset by a global network of fidelity, developed by us.
By paying Cheatneutral, you’re funding monogamy-boosting offset
projects – we simply invest the money you give us  in monogamous,
faithful or just plain single people, to encourage them to stay that way.

Many people have already successfully used Cheat Neutral:

David cheated on his partner of ten years, Sebastian, with a
younger man. He described for us what happened:

"Seb was so angry with me, I felt really bad about what I’d done.
I came to Cheatneutral to offset the side effects of my cheating,
and later on, Seb said the  only reason he could forgive me was
because I’d offset my cheating with Cheatneutral. Thanks to Cheatneutral,
we’re still together, I can feel good about my cheating, and
I’ve helped to reduce global cheating as well! If I do cheat on
Seb again, I’ll definitely be calling Cheatneutral."

Hat tip to David Zetland’s new blog Sex, Drugs & Water Utilities.

Ricardo Haussman is bullish on biofuels

by  Tyler Cowen in

He writes in the FT:

…technology is bound to deliver a biofuel that will be competitive
with fossil energy at something like current prices. It probably
already has. Brazil has been exporting ethanol to the US at an average
delivery price of $1.45 for an amount with the energy equivalence of a
gallon of petrol. It is doing so profitably and in increasing amounts,
in spite of a 54 cents a gallon tariff to protect American maize-based
ethanol producers. Many countries are following suit.

But
ethanol is an inconvenient chemical compound that is corrosive and
soluble in water, thus limiting its immediate market to that of a
gasoline additive. However, this is just the Betamax phase of the
industry. There is plenty of private venture capital money being poured
into finding more efficient ways of extracting energy from biomass and
delivering it to transport and power systems. Over time, the technology
will also become more flexible, allowing more crops to be used as
feedstock, not just the current choice of sugarcane, maize and palm
oil…the world is full of under-utilised land that can grow the biomass that the new technology will require.

It shocked me to read this, though not for any good cognitive reason.  Perhaps I too quickly assume that the trendy will not pan out.  My not well informed mental model has been that our energy future lies with (relatively) clean coal, not so clean coal, nuclear, oil shale, and tar sands, all of which can in fact produce lots of power.