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Incredible piece by Dani Rodrik on a plot to discredit his father-in-law, a Turkish general:

On a drizzly winter day four-and-a-half years ago, my wife and I woke up at our home in Cambridge, Massachusetts, to sensational news from our native Turkey. Splashed on the first page of Taraf, a paper followed closely by the country’s intelligentsia and well-known for its anti-military stance, were plans for a military coup as detailed as they were gory, including the bombing of an Istanbul mosque, the false-flag downing of a Turkish military jet, and lists of politicians and journalists to be detained. The paper said it had obtained documents from 2003 which showed a group within the Turkish military had plotted to overthrow the then-newly elected Islamist government. The putative mastermind behind the coup plot was pictured prominently on the front page: General Çetin Doğan, my father-in-law

Begs the question: In a comparison between two types of pseudo-democracies – voting constrained by threat of military coups or voting manipulated by dirty tricks – which is the better system?

 

Clayton Christensen responds to Jill Lepore. One passage:

One criticism Lepore makes is that some of the firms you describe as failed incumbents—whether it’s in the disk drive industry or the mechanical excavator industry or the steel industry—the companies that are ostensibly being disrupted, don’t disappear but continue to do very well, in some cases continue to dominate their industry. In 1960 there were 316 department stores in North America—department stores like Macy’s. Then the discount department stores like Korvettes and Kmart and Woolco and Target and Walmart came in, starting in 1962, and they were disruptive because for the department stores to go down-market and compete with discount prices, their profitability would have been decimated, so they had to move upmarket and get out of hard goods where margins were small and get into clothing and cosmetics where margins were higher. (My emphasis.) Now, how long has it been? Fifty-two years, Jill. Just so you understand, disruption doesn’t happen overnight. There are now six or eight traditional department stores in existence in North America. Let’s just call it less than 10. And Walmart is quite a large company. Target is quite a big company. So has disruption been at work in the retailing industry? It’s a question. Macy’s still exists. So—Jill, tell me, what’s the truth? If you could just be Jill’s answer for me.

The stuff in italics is a slightly more elaborate version of the replacement effect from a previous post. So it seems Christensen’s logic is in fact based on the replacement effect. But actually Christensen does not correctly account for the impact of competition.

Suppose an incumbent is making profits from the high-end hard good market. If there is no threat of entry, he has a weak incentive to create discount stores for these self-same goods because of the risk of cannibalizing his own high-end sales. This is the replacement effect. But facing the threat of entry, the incumbent’s logic changes. The entry destroys the incumbent’s profits from his core activity. Since these profits were holding the incumbent back and now there will be no such profits, the incumbent has good incentives to enter the low end. Knowing that the incumbent will enter the low end, the entrant may actually stay out as profits are going to be shared at the low end and price competition will dissipate them anyhow. The bottom line is that “disruption” can rationally increase the incentives of the incumbent to innovate even at the low end.

How does this fit in with the previous post? If the entrant’s product is differentiated from the incumbent’s (eg MOOCs are quite different from HBS classes) and poses little threat to the core business, the replacement effects is the key force and the incumbent innovates less than the entrant.

(All this analysis is quite generic. We have MBA homeworks exercises based on it. Tirole’s textbook has a great exposition of key intuitions and cites papers from the early 1980s. I should not be blogging about old stuff. But if old stuff is having impact on business practice and is only partially understood, why not? After all, Krugman goes over IS-LM repeatedly!)

From a story about the NCAA trial:

Noll, like most of the expert witnesses here, was paid well for his testimony: $800 an hour. (James Heckman, an N.C.A.A. expert, received $2,300 per hour.)

“I think it’s like being a pro athlete,” Noll said. “Getting paid for something I love to do.”

Every few years, a fad comes along that takes the business world by storm. Jack Welch loved Six Sigma, others look for “synergies”, “core competencies”, “blue sky strategies”, etc etc. These fads usually involve over-generalization from a key example or set of examples.

Occasionally, a nay-sayer identifies the over-generalization. Jill Lepore has an article in the New Yorker that goes further by debunking even some of the key examples that underlie the theory of “disruptive innovation” of Clayton Christensen. What is disruptive innovation? Lepore describes it thus:

Manufacturers of mainframe computers made good decisions about making and selling mainframe computers and devising important refinements to them in their R. & D. departments—“sustaining innovations,” Christensen called them—but, busy pleasing their mainframe customers, one tinker at a time, they missed what an entirely untapped customer wanted, personal computers, the market for which was created by what Christensen called “disruptive innovation”: the selling of a cheaper, poorer-quality product that initially reaches less profitable customers but eventually takes over and devours an entire industry.

Another key example for Christensen is the disk-drive industry. Lepore follows the key companies and concludes:

As striking as the disruption in the disk-drive industry seemed in the nineteen-eighties, more striking, from the vantage of history, are the continuities. Christensen argues that incumbents in the disk-drive industry were regularly destroyed by newcomers. But today, after much consolidation, the divisions that dominate the industry are divisions that led the market in the nineteen-eighties. (In some instances, what shifted was their ownership: I.B.M. sold its hard-disk division to Hitachi, which later sold its division to Western Digital.) In the longer term, victory in the disk-drive industry appears to have gone to the manufacturers that were good at incremental improvements, whether or not they were the first to market the disruptive new format. Companies that were quick to release a new product but not skilled at tinkering have tended to flame out.

Josh Gans finds the Lepore takedown to be easy pickins’ and also does a great job explaining why Christensen’s attempt to make his theory predictive contradicted the essence of his own argument. While the takedown does not surprise Gans, it irritates the tech community:

@pmarca: What does Jill Lepore PhD in American Studies from Yale think about Bayesian algorithmic filtering?

To which I replied: “What does Clayton Christensen DBA at Harvard know about ….?” In other words, both are equally qualified/unqualified to discuss innovation. Also, why not attack Lepore’s argument not her?

But I have my own bone to pick with disruptive innovation. Let’s say an incumbent firm has a great product and buys into the disruptive innovation idea. What should it do? Since its core product is under threat of disruption, it seems the company should disrupt it themselves and invest in all sorts of technologies that look weak right now but might improve dramatically. But this does not make any sense because it implies huge costs but with little expected gain because most crappy-looking initial ideas do in fact end up on the shelf. On the other hand not investing opens up the company to disruption. To make the theory operational, we need to understand the tradeoffs. For that, you need a toy model of some sort.

The obvious candidate for such a model is Ken Arrow’s (1962?) idea of the “replacement effect” (this term was coined by Tirole). (We teach related material in our MECN 441 Competitive Strategy elective.) The profits from a new invention that supersedes the incumbent’s old product will replace the profits from the old product. Hence, the bigger the profits from the old product, the smaller are the incentives to innovate. You would destroy your own profits so no need to make the better Rice Crispy when the exisiting one is doing great. Past success rationally constrains incentives for future innovation. This theory would predict that incumbents innovate less than entrants who have no exisiting profit flow to replace. Bit like Christensen’s theory, no?  Arrow pre-disrupted Christensen’s main thesis but based on rational choice analysis and with a coherent argument for assessing new investments (roughly, compare the expected NPV of current product with expected NPV of new one minus cost of investment).

As MOOCs come along, Christensen’s employer HBS has to decide how to proceed. The tradeoff is is clear and quite similar to Arrow’s point:

Universities across the country are wrestling with the same question — call it the educator’s quandary — of whether to plunge into the rapidly growing realm of online teaching, at the risk of devaluing the on-campus education for which students pay tens of thousands of dollars, or to stand pat at the risk of being left behind.

Ironically, HBS has decided not to side with Christensen but with Porter who sees no major disruption:

“Do it cheap and simple,” Professor Christensen says. “Get it out there.”

But Harvard Business School’s online education program is not cheap, simple, or open. It could be said that the school opted for the Porter theory. Called HBX, the program will make its debut on June 11 and has its own admissions office. Instead of attacking the school’s traditional M.B.A. and executive education programs — which produced revenue of $108 million and $146 million in 2013 — it aims to create an entirely new segment of business education: the pre-M.B.A.

 

Excellent article by Lawrence Wright:

Al Qaeda was originally envisioned as a kind of Sunni foreign legion, which would defend Muslim lands from Western occupation….

Bin Laden had asked Zarqawi [founder of ISIS] to merge his forces with Al Qaeda, in 2000, but Zarqawi had a different goal in mind. He hoped to provoke an Islamic civil war, and, for his purposes, there was no better venue than the fractured state of Iraq, which sits astride the Sunni-Shiite fault line….Violent attacks would create a network of “regions of savagery,” which would multiply as the forces of the state wither away, and cause people to submit to the will of the invading Islamist force….[A] broad civil war within Islam would lead to a fundamentalist Sunni caliphate.

In other words, Al Qaeda is focussed on expelling the West from the Middle East but ISIS is focussed on creating a Sunni Islamic superstate. Hence, Al Qaeda attacks the West but ISIS attacks Shiites. This leads to different “realist” policy prescriptions – self-interest implies attacking Al Qaeda but not necessarily ISIS. It leads to the same neocon policy prescriptions – there will be a humanitarian crisis from civil war and democracy (to the extent Iraq is a democracy) is threatened. Hence, send in the troops say Kristol and Kagan, just as they did before Gulf War II.

From the WSJ:

“I think the rate of innovation is just getting faster and faster,” Mr. Mokyr said over noodles and spicy chicken at a Thai restaurant near the campus where he and Mr. Gordon have taught for four decades.

“What’s the evidence of that?” snapped Mr. Gordon. “There isn’t any.”

The men get along fine when talk is limited to, say, faculty gossip. About the future, though, they bicker constantly. When Mr. Mokyr described life-prolonging medical advances, Mr. Gordon cut in: “Extending life without curing Alzheimer’s means people who can walk but can’t think.”
Lots to argue about with both men in this article (e.g. arguments do not rise to level of logical structure and falsifiability normally required of academic discourse but hey this is a newspaper article after all).
Here is one other thing I disagree with:
Mr. Gordon, the more famous of the two men, has the credentials to buck conventional wisdom…..
Since when is Bob Gordon more famous than Joel Mokyr?  I suppose it depends on the audience you ask – Joel is not known to journalists. But in academic circles, the fame ranking is reversed.

Ed O’Bannon’s anti-trust suit against the NCAA moves forward today. Roger Noll of Stanford is likely to testify on his behalf. Here is a sample of  his views from a related case:

[R]esearch in the economics of sports concluded long ago that the only way to achieve competitive parity among schools was to randomly allocate athletes and coaches among teams and prohibit athletes and coaches from switching after they have been allocated. With an unfettered competitive market for coaches and freedom of choice among student-athletes, the expected result is that the colleges with the most revenue will hire the best coaches and build the best facilities, and that as a result they will attract the best student-athletes. Interestingly, a market for student-athletes actually could improve competitive balance. If teams can pay different amounts to different students, a lesser school may find that it is willing to pay more for its first five-star athlete than Alabama or USC is willing to pay for its tenth five-star athlete. If so, the lesser schools could be somewhat more successful than they are now in recruiting top players. But even in the best of circumstances, as long as coaches and athletes have a choice, the colleges with the most to spend will have the best teams. The main effect of the scholarship limits in comparison to a market allocation is to transfer wealth from studentathletes to expenditures on coaches and facilities.

Full testimony can be found here.

A division in a company, division A,  is trying to find talented people. They have a number of positions to fill and they can fill them now or wait to find better candidates. Once a position is filled, it is hard to terminate employment for a few periods at least. The profits of the division depend both on the quantity and quality of the people employed.

This system creates an option value to waiting. Given its payoff function, the division has a quality bar for hiring. The quality bar depends on the number of unfilled slots. It leaves some slots empty deliberately to capitalize on option value. There is another threshold for firing, also with an important option value component in its determination.

A CEO is hired to build value. He is focussed on the short term. For him, unused resources mean lower output – the quality is less important. So he starts allocating resources across divisions. If a division has unused resources or positions, the CEO gives them to another division if they can come up with a candidate that passes their bar.

Let’s assume the divisions have private values – they put zero value on the other division’s success. (Microsoft recently reorganized itself because different parts of the company were at war with each other.)

For each division, the option value of an empty slot declines – it can now be filled by someone from the other division. The incentives are obvious – both divisions lower their standards for hiring and firing. There is a race to the bottom.

Counterintuitive effects arise if there are common values – each division takes the other’s success into account. Suppose division A’s standards for hiring are originally higher than division B’s. Division A faces much the same incentives as in the case of private values – it will lower standards to pre-empt slot reallocation to division B. But division B, since it now wants to prevent the decline of division A, will raise standards so the principal will not give it division A slots. The fact that this seems so implausible argues in favor of private values.

In any case, even in the case of common values, the divisions’ equilibrium response to principal short termism will not achieve the first best. A better strategy is to reallocate slots between divisions ex ante. The reallocation should reflect the principal’s payoff function as well as those of the divisions. Then, let the divisions make their own decisions on hiring and firing.

 

Just went to a talk by Jesse Shapiro where he gave an overview his work on the media, much of it joint with Matt Gentzkow. One theme is that competing newspapers with different party affiliations generate more information for the electorate. How fitting to return to my office and find this Guardian discussion (by Howard Reed) on FT takedown  of Piketty (by Chris Giles).  Main issue is that FT did not account for differences in way wealth is measured across separate series which are then merged into one time series:

To summarise, Chris Giles’s investigation of Piketty’s data has uncovered some errors and inconsistencies which Piketty will hopefully address in future work. This shows the importance of quality assurance and third party checking of all results from statistical analysis – particularly when they involve spreadsheets, where it is very easy to make errors.

However, Giles then goes on to make a very serious error of his own in handling the UK data: he treats changes in the way wealth inequality is measured over the decades as if they were real changes in the underlying distribution of wealth. This error leads him to the misleading conclusion that wealth inequality fell in the UK between 1980 and 2010, whereas in fact it has increased (although not by quite as much as Piketty’s published results would suggest).

In some ways, the Guardian discussion is even clearer than Piketty’s own response today. This reflects the universal truth that (good) referees and discussants can often explain your paper better than you can yourself.

But this all leaves one question unanswered: When is Piketty going to respond to Debraj? He disputed Piketty’s theory not his data.

Finally, a review I can understand. Here’s one simple but good bit:

The rate of return on capital tracks the level of capital income, and not its growth. If you have a million dollars in wealth, and the rate of return on capital is 5%, then your capital income is $50,000. Level, not growth. On the other hand, g tracks the growth of average income, not its level. For instance, if average income is $100,000 and the growth rate is 3%, then the increase in your income is $3000. Saying that r > g implies that capital income will grow faster than labor income is a bit like comparing apples and oranges. 

To make the point clear, I’m going to expand upon this argument in two ways. First, let us look at a situation in which the argument apparently holds. Suppose that capital holders save all their income. Then r not only tracks the level of capital income, it truly tracks the rate of growth of that income as well, and then it is indeed the case that capital income will come to dominate overall income, whenever r > g. But the source of that domination isn’t r > g. It is the assumption that capital income owners save a higher fraction of their income! 

Debraj adds his own sobering thoughts on technological progress and inequality at the end of his review.

From the AEA citation:

Matthew Gentzkow has made fundamental contributions to our understanding of the economic forces driving the creation of media products, the changing nature and role of media in the digital environment, and the effect of media on education and civic engagement. He has thus emerged as a leader in a new generation of microeconomists applying economic methods to analyze questions that were historically analyzed by non-economists. His empirical work combines novel data, innovative identification strategies and careful empirical methods to answer questions at the interface of economics, political science, and sociology.  This work is complemented by significant theoretical work on information, communication, and persuasion.  Gentzkow, both on his own and in collaboration with his frequent co-author, Jesse Shapiro, has played a primary role in establishing a new and extremely promising empirical literature on the economics of the news media.

I think of Matt’s work as straddling political economy and industrial organization. The latter area is extremely mature and yet Matt, often with Jesse Shapiro, has made extremely original contributions with a focus on the media. (I note that he has produced interesting papers on brand preferences more recently, closer to traditional IO concerns.)

I am most familiar with his work on media bias and reputation (JPE, 2006). Consumers want to take an action that fits the state of the world. They have some prior distribution over the states. The media can produce a signal that potentially informs this decision. The consumers are also trying to assess the quality of the media as well as take optimal actions. That is, there is a second dimension of uncertainty over the “type” of the media. If the media’s signal has low probability given the consumers’ prior, they will infer the media is bad quality. Hence, there is an incentive for the media to lie or “spin” to fit the prior of the consumers. There are many other results but this key logic underlies all of them. The model uses differing priors which is a non-standard assumption. It is non-standard as it may not yield a tractable model or crisp, falsifiable results (among other more philosophical reasons). But Gentzkow and Shapiro show that it is possible to handle such a setting.

I am less qualified to judge empirical work but I did see Matt and Jesse’s paper on ideological separation on the internet. Cass Sunnstein has claimed that the internet has created polarization of opinions as people just go to websites that fit their ideological preferences. Using data on internet use, reporting of ideological preferences, and measures of media bias of a site based on fraction of conservatives and liberals visiting the site, Gentzkow and Shapiro calculate conservative exposure of conservatives and liberal. The difference is a measure of isolation. This number is surprisingly low.

Finally, Kamenica and Gentzkow have introduced a new kind of principal-agent/receiver-sender into economic theory. The receiver’s (e.g. a judge or jury) action depends on the state of the world. The sender (e.g. a prosecutor) has his own preferences and chooses an information structure, i.e. a distribution of signals as a function of the state, to influence the receiver. They show that the sender will deliberately choose a noisy signal structure to persuade the receiver. For example, the prosecutor may choose an investigation that deliberately delivers guilty signals for innocent defendants. If this probability is low compared to the probability of guilty signals for guilty defendants, the judge will convict any defendant for whom there is a guilty signal, even though the defendant might be innocent. If the prosecutor wants to maximize the rate of conviction, by using noisy signals, we can achieve a higher conviction rate than with perfect signals. This paper has stimulated research on “Bayesian persuasion”.

All this work is quite original and quite sophisticated. The AEA is right in concluding:

His work is creative without sacrificing quality.   He has established himself as a role model in both substance and execution.

Your kid leaves her phone lying around. You find the scatterbrain never bothered to change her password as you guiltily break into her phone. You follow the trail of texts from last Saturday night. The slang is beyond you but Google translates. Shocked you find the supposed naïf and her friends were trying score some pot and booze from the cool crowd in school.

How should you respond?

You immediately want to go Putin-style hard on her ass. Confrontation, grounding, extra math classes. But any confrontation will likely reveal you accessed her phone. The stakes will only increase. Password changes, another phone purchased with the proceeds from the baby-sitting business..who knows where it will all end up?

You think through your strategy. Before this crisis, your threshold for the gateway drug was caffeine. So no Coca Cola has crossed the girl’s lips. But it seems she’s graduated from Izzes to Corona. Surely that worse than Coca Cola so you should come down like a ton of bricks? But one thing is certain – your access to her secret life is over because she’ll close off the information superhighway. How will you know if and when she’s “chasing the dragon” as people apparently said when you were young? You realize your threshold for intervention is coke (the drug) not Coca Cola. Just keep an eye on her messages till you see “yeyo” and then intervene.

You contemplate home schooling. You head over to the liquor cabinet and fix yourself a Scotch. Straight, no chaser.

 

 

 

Harold Pollack of UofC interviews Jon Gruber on the future of the healthcare act. Here is one exchange:

Jon:Right now, there is a successive subsidization of healthcare for many through Medicare – many rich people don’t need the excessive benefits of getting Medicare – and for many through the employer system. So I think we can get there in a different sharing route, but the bottom line is right. The constraint is going to be the financing.

Harold: By the way, you have now permanently prevented yourself from winning a high elective office in the United States despite your charisma, they be playing this tape back in an endless loop with a guy with a deep voice in the background.

Jon: I’ll guarantee it further by highlighting that guns are a public health issue.

From Bloomberg:

The latest fare study, by a Boston-area travel-tech startup called Hopper, found that Thursday is the cheapest day to purchase a ticket, with weekends the worst. The best fares were found for Wednesday departures, while returns were cheapest on Tuesday for domestic flights and on Wednesday for international trips. Friday was the most expensive day to fly home both domestically and abroad, likely because Friday and Sunday are two of the heaviest traffic days for airlines worldwide.

But don’t get too excited:

Still, as airlines become ever-more sophisticated at pricing—and keep tight checks on seat capacity—savings are relatively narrow. The difference between the “worst” and “best” purchase days was $10 for domestic flights and $25 internationally. Fare differences in departure and return days topped out at $60 for international flights, and even less domestically, according to Hopper. “I think the airlines have just become a lot better at the yield management piece so there’s no longer this predictable way you can outwit them,” says Patrick Surry, Hopper’s data scientist, calling the days of frequent consumer “big wins” largely over.

Wutherings Heights singer sells tickets for $80-$250 but they are on sale for $1000s on eBay.  She’s still running up that hill when it comes to ticket pricing

 

Farhad Manjoo has an interesting article on Netflix’s selection of oldish movies:

Like salmon, Hollywood movies are governed by rigid life cycles. First, a movie is released in theaters. A few months later, it heads to second-run outlets like airlines and hotel pay-per-view, and later it goes to Blu-ray, DVD and digital services that allow you to purchase or rent films à la carte.

Then, about a year after a film’s theatrical release, trouble kicks in. That’s when a movie is made available to pay-TV channels like HBO, Starz and Epix. These premium periods are exclusive; when a movie gets to a pay channel, it often can’t be shown on any other streaming service. This usually means it gets pulled from à la carte rental services, too. Right now, for instance, HBO is showing “This Is 40,” “The Hobbit” and “Moonrise Kingdom,” among other titles. Because of the network’s exclusive hold over those titles, you can’t rent those films from any other digital service….

Why are movies released in this staggered way? And why can’t the system change to accommodate an all-you-can-eat plan? Money, of course.

HBO and other premium networks have agreed to pay billions of dollars for the exclusive run of major studio films. HBO has said that, despite the cultural cachet of its original programs, movies are its most popular content; consequently, it has purchased rights to about half of all the movies released by major studios in the United States until beyond 2020. At least in this decade, then, a monthly movie plan that offers all of the movies isn’t going to happen.

Eric Posner makes a key point:

After the collapse of the Soviet Union, Ukraine inherited a huge nuclear arsenal, which it subsequently gave up. In return it received assurances from Russia,  the United States, and the United Kingdom that its territorial integrity would be respected. These assurances were embodied in the Budapest Memorandum of 1994. While the United States and the UK complied with that agreement by not invading Ukraine, Russia did not.

What if Ukraine had retained its nuclear arsenal? It seems more than likely that Russia would not have invaded Crimea. Putin might have calculated that Ukraine would not have used its nuclear weapons in defense because then Ukraine would itself have surely been obliterated by Russia. But the risk of nuclear war would have been too great; Putin would have stayed his hand. (However, it is possible that Ukraine would have been forced to give up its nuclear weapons one way or the other long before 2014.)

So between meaningless paper security assurances and nuclear weapons, the latter provides a  bit more security. One implication of the Crimea crisis may be the further unraveling of the nuclear nonproliferation efforts that President Obama has made the centerpiece of his foreign policy.

I would add that a similar implication follows from the lessons of Libya.

Zeke Emanuel, healthcare advisor to President Obama (and brother of Rahm and Ari) thinks:

Even though the health law’s “employer mandate” requires that companies with 50 or more workers pay a penalty of $2,000 per employee if they do not provide health care, many large companies now spend far more than that to offer coverage. As a result, Mr. Emanuel says they will be able to pay the penalty, give workers a raise and shed the burden of providing coverage by sending workers to the public exchanges.

The press is picking this up and focussing on the $2000 penalty and saying it is too small. But note the “give workers a raise” part. In a competitive labor market, just dumping workers on the exchanges without compensating them is not an option. They would exit and find jobs with companies that do offer them health insurance. To prevent this, you would have to raise their salaries. It would have been great if the NYT article could have added analysis of expense of this and hence whether the end of employer provided health insurance is really on the horizon.

Also, the big advantage Walmart etc have over the private exchanges is the ability to negotiate volume discounts. Is a decentralized private exchange ever going to be able to match those rates?

Economists of all stripes agree that there is no reason companies should also be in the business of providing health insurance to their employees. But there still seem to be many steps to there from here.

From NU:

Jean Tirole, chairman of the Foundation Jean-Jacques Laffont/Toulouse School of Economics and scientific director of the Institute for Industrial Economics, University of Toulouse Capitole in France, is the recipient of the 2014 Erwin Plein Nemmers Prize in Economics.

The prize carries a $200,000 stipend, among the largest monetary awards in the United States for outstanding achievements in economics. The 2014 prize marks the 11th time Northwestern has awarded the prize. The Frederic Esser Nemmers Prize in Mathematics and the Michael Ludwig Nemmers Prize in Music Composition will both be announced this spring.

The Nemmers prizes are given in recognition of major contributions to new knowledge or the development of significant new modes of analysis. Six out of the past 10 Nemmers economics prize winners have gone on to win a Nobel Prize. (Those who already have won a Nobel Prize are ineligible to receive a Nemmers prize.)

Looking forward to hanging out with Jean next year.

 

The standard story about Obamacare has two steps: (1) We need young people to join so that average costs are low. Prices will reflect average cost because of insurer competition and so healthy young people will cross subsidize less healthy older people. (2) This cross subsidy will only operate if the young get Obamacare. They may not because the price is greater than their payoff from going without insurance. Hence, the individual mandate is necessary to hold this together. If the tax is too small or the website failure too forbidding, young people will not join and the whole thing will collapse as adverse selection drives up prices and further reduces participation etc – the so-called “death spiral”.

But this story is persuasive if young and old people are in the same pool. Obamacare allows pricing based on age so young and old people are in different pools. The young do not subsidize the old. If the young do not get Obamacare the old still get their insurance and they can live happily ever after (or at least get statins and heart bypasses). At a second cut there is a bit of a cross subsidy because Obamacare imposes a 3-to-1 ratio on prices of older age groups versus new. If this constraint does not bind, no problem. Even if it binds, it is relaxed if the young do not participate in their pool so prices go up in that pool allowing higher prices in the older pools.

Still, within a fixed age based pool there can be adverse selection. How big is it?  There is a working paper by Handel, Hendel and Whinston that gives us an idea. There is an impact of adverse selection because at least when you allow just two plans, one covering 90% of costs and the other 60%, only the latter trades. But what happens if you also drop the individual mandate? The last column of Table 12 on page 41 gives their forecast based on their model and the data. Participation is 87%-90% for those 50 and older. But is only 63-70% for those 25-40.

This is the death spiral, but only among the young. It does not affect the older population. First, age-based discrimination innoculates the old from the non-participation of the young. Second, the 50+ crowd (which I am fast approaching!) need health insurance so they all get it.

(Also, this analysis ignores subsidies which would increase participation further even in 25-40 age group…)

Melissa Harris at the Chicago Tribune has written a nice story about Purple Pricing at NU.    (The photographer asked us to look serious and we complied!) Melissa also interviewed Nick Kokonas whom we talked to originally. He decided not to use auctions for Next restaurant tickets. Here is his current rationale:

“Even if we could charge more, I don’t want to,” he said. “The economists say I’m being inefficient; that it’s a rational thing to take more money, if people are willing to pay it. But I’m convinced people would be willing to pay it only once. If we allowed people to pay $2,000 to eat at Next, but it feels like it’s worth $500, they’re not coming back. And I’m not in this for a one-time sale of some gizmo. We want to be around for 20 years.”

But here is the point: Since the tickets can be resold, they end up on Craiglist etc and people pay $2000. People do not end up with the great deal Kokonas wants to give them to persuade them to be repeat customers. They still end up paying $2000 for a $500 meal but the extra $1500 goes to a scalper and not to Kokonas. The scalpers are exploiting Kokonas’s “irrationality” to make money. So, if Kokonas really wants to achieve his objective he must be more old school and sell tickets at the door. This subverts his business model as Next becomes more like Frontera Grill with a set menu and random revenue stream. A compromise might be to auction off some fraction of seats and sell some at the door. This at least captures scalper surplus. If you do not want the extra money, use it to set up a Achatz- Kokonos Institute for the Culinary Arts (AKICA).

In the Tribune article, Jeff talks about interesting ideas to leverage the secondary market if resale can be fully controlled by the originator. When this happens, it would be possible to implement the Kokonas social welfare function: Set a price P for a ticket. All resale has to go through your system and the resale price must be P. You can set P as low or as high as you want depending on your desire to give consumers a good deal.

A couple of days ago, someone who currently has individual insurance could either sign up for insurance on an Obamacare exchange or pay a penalty. Now, these people can keep their current insurance and they will not have to pay a tax penalty. In other words, their outside option to the exchanges just got better.

But what about the inside option? First, the policies traded on exchanges are regulated. They have a cap on the maximum amount consumers can be charged per year. They cover pre-existing conditions etc. They are higher quality than the contracts traded outside the exchange. Second, the plans on the exchange are subsidized based on income. These two factors can imply the inside option is better than even the new outside option.

There are two countervailing effects. First, given the disfunctionality of healthcare.gov, it is impossible to calculate the inside option! Second, there could be a selection effect that makes the prices increase on the exchanges and leads to a “death spiral”. Specifically, if the people who currently have individual insurance are healthy and stay out of the exchanges, and there are a large number of them, prices could skyrocket in the exchanges. Then, paying the tax penalty makes more sense and the exchanges collapse.

Surely resolving the first countervailing effect is only a matter of time. This debacle should have been avoided but it is possible to fix. The second effect is potentially more problematic. It should be possible to estimate the size of the death spiral with enough data. Jon Gruber should be able to do it. I don’t have the data and can only offer an anecdote. On my way to the airport, my cab driver and I started discussing Obamacare. He and his two kids are on his wife’s individual insurance which costs them $1600/month and has huge deductibles. He was looking forward to getting Obamacare. He did not know about the subsidies. When I told him he got very excited. I used by smartphone to access the Kaiser Family Foundation subsidy calculator to guess what his family would have to pay for a silver plan. It was well below their current payments because they got a big subsidy. But how many people like him are there? How many people are buying plans in the individual marketplace in the first place? Someone should work this out.

Amazon wants to use small bricks-and-mortar retailers to sell more Kindles and eBooks. They are trying to incentivize them to execute their business strategy:

Retailers can choose between two programs:
1) Bookseller Program: Earn 10% of the price of every Kindle book purchased by their customers from their Kindle devices for two years from device purchase. This is in addition to the discount the bookseller receives when purchasing the devices and accessories from Amazon.
2) General Retail Program: Receive a larger discount when purchasing the devices from Amazon, but do not receive revenue from their customers’ Kindle book purchases.

EBooks are an existential threat to retailers. But no one small bookstore can have a significant effect on the probability of the success of the eBook market through its own choice of whether to join Amazon’s program or not. Hence, it can ignore this existential issue in making its own choice. Suppose it is beneficial for a small bookstore owner to join the program ceteris paribus. After all, people are coming in, browsing and then heading to Amazon to buy eBooks – why not capture some of that revenue? Many owners independently make the decision to join the program. Kindle and eBook penetration increases even further and small bookstores disappear.

Quite disturbing even though you know no volts are coursing through the subject’s body.

From Bloomberg:

UnitedHealth will “watch and see” how the exchanges evolve and expects the first enrollees will have “a pent-up appetite” for medical care, Hemsley said. “We are approaching them with some degree of caution because of that.”

An interpretation from Think Progress:

Get that? The company packed its bags and dumped its beneficiaries because it wants its competitors to swallow the first wave of sicker enrollees only to re-enter the market later and profit from the healthy people who still haven’t signed up for coverage.

A rational player concedes to a known crazy type in a negotiation. If the crazy type is committed to a tough strategy, meeting that strategy with toughness leads to disaster. Hence, a rational opponent will concede. But this means a rational type has the incentive to pretend to be crazy. Then, a rational opponent will still concede as crazy and rational types pool.

This strategy might be effective in a two player game with one-sided incomplete information. But if one side is the Republicans in the Senate, it is not going to work because the McCain, Ayotte, Collins… part is too rational to send the country over the debt limit. So what to do?

One strategy is to compromise and try to win the Presidency. This is the establishment strategy with all its prescriptions of outreach to women and immigrants. But only a centrist appeals to the wishy-washy median voter. So if you are Ted Cruz, you cannot get the policies you want via a centrist Republican winning the Presidency.

The other strategy is to make commitment credible. This involves primarying those who do not vote crazy. Partisans turn out in droves in primaries and even a rational politician who wants re-election is forced to act/vote crazy to get into office. Then you have enough crazies or acting crazies to filibuster if your demands are not met. In essence, you give up on winning the Presidency and focus on ruling in opposition as a minority.

 

 

He has a blog (!):

Carl Reiner on Twitter last week, worried about the current Government shutdown, said this was cause for great concern in the world’s leading democracy.  And I thought, leading?  Who’s following?    The answer would appear to be no one.

After one of the recent school shootings a young mother said to me, “What must you think of us?   You must think we’re all mad.”     Mad certainly, but not all of you.

Half of America seems to be entirely enviable, movies, books, TV, arts, liberal democratic institutions, great centers of learning and research, gay marriage, social freedoms, etc. etc.

The other half does seem to be, well, nuts.

From the always interesting Erik Erickson at Red State:

So the question is do we want to stop Obamacare or do we want to stop the debt ceiling increase? My view is that we cannot do both at the same time. We might dare to dream, but the debt ceiling will be increased one way or the other.

Right now the GOP is holding up very well in the press and public opinion because it is clear they want negotiations. The GOP keeps passing legislation to fund departments of government. It has put the Democrats in an awkward position.

But the moment the GOP refuses to raise the debt ceiling, we are going to have problems. Remember, the last time you and I wanted the GOP to fight on the debt ceiling, the attacks from our own side were particularly vicious.

They’ve been vicious over the shutdown too, but now that we are here, the water ain’t so bad and only a few ankle biting yappers continue to take shots at conservatives from the GOP side.

It will not be so with the debt ceiling. And the GOP will no longer seem very reasonable. The debt ceiling fight will become an impediment to undermining Obamacare.

The main target is defunding Obamacare. Since the House will cave on the debt limit, not good to link defunding Obamacare to the debt ceiling. Link it to CR. Logic seems good if you like the objective. Also, it reveals that right believes debt limit will be raised. Hence, bondholders can relax.

From National Memo:

A day in the life of the emptiest suit in Washington:

7 a.m. You wake up, light a Camel. Read a pink Post-it left on the refrigerator by your wife: “John, don’t ever forget, YOU REALLY ARE THE SPEAKER OF THE HOUSE!!! Also, we’re out of bagels.”

7:30 a.m. You lie in your tanning bed meditating about the government shutdown, wondering if it was such a brilliant idea to let it happen. You put on some Pink Floyd, “Dark Side of the Moon,” but that doesn’t help.

8:00 a.m. On the ride to Capitol Hill, your driver remarks that there’s not much traffic in the city, no tourists lined up to see money being inked at the Bureau of Engraving and Printing. You smoke another Camel.

Hiaasen has a new book out.

Leviathan_by_Thomas_Hobbes

 

From political scientist Gary Cox at the Monkey Blog:

The idea goes back to England’s Glorious Revolution, where MPs fought hard to put the Crown on a short financial leash, so that they could control Crown officials’ actions. Although they did not use the term, English arguments about what would give Parliament bargaining leverage vis-à-vis the Crown hinged on the budgetary reversion.  Because expenditure authority would lapse every year, forcing portions of the government to “shut down” in contemporary American parlance, parliamentarians were assured the Crown would seek a new budget every year — whereupon they could bargain for attainment of their various goals.

Eventually the power of the purse meant the monarch became a figurehead, the House of Lords a rubber stamp and power truly resides in the House of Commons. So, the analogy would be that the President becomes an (elected) figurehead, the House of Lords becomes an (elected) rubber stamp and the House of Representatives becomes the center of power. And the Tea Party Republicans want to turn us into Britain!

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