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Via the FT:

Airlines that offer this either send travellers an email inviting them to upgrade or travellers can go direct to the airline’s website.Once you’re on their site, rather than them saying, ‘you can pay £400 to upgrade’, you can now say, ‘I’ll pay £300’,” explains Ken Harris chief executive of Plusgrade, the technology company behind the platform. “There may be a minimum upgrade price and there will be an indicator which shows the strength of your offer.” The airline will then email you at least 72 hours before your flight to tell you if your bid has been successful; if not, you retain your original reservation.

Taking things to another comfort level:

Along with upgrades, you can also pay a nominal fee to ensure the seat next to you is not occupied.

To extract surplus and reduce information rents from high types, “low” types must be punished with inefficient allocations. Expect to be seated en masse if you do not purchase an upgrade even if the plane is half empty.


“Thibs is a guru,” Gibson said. “He understands the game plan.
“He had me guarding Ray Allen. That’s how much confidence he has in everybody’s ability to guard on defense. He really drew up and knew what the team was gonna do.
Every time they ran down and ran offense, it was exactly what Thibs showed us on paper.”

I enjoy my Mother’s cooking all too rarely. This is good for my waist line but bad for my taste buds. I have resorted to consumption of frozen Indian food as a poor substitute. I was surprised to find that Whole Foods carries a reasonable brand, Tandoor Chef, that has some decent options. Of course, these products come with a Whole Foods price tag.

On a recent trip to Devon Av., I happened to notice that the Fresh Farms supermarket carried these same products. Unfortunately, the prices are benchmarked against Whole Foods – no good deal there. But the supermarket also carries much cheaper products by Healthy Tiffin and they bear a remarkable resemblance to the Tandoor Chef products, e.g. both have Paneer Tikka Masala cooked in a relatively healthy way (if that is possible!). On closer inspection, Healthy Tiffin and Tandoor Chef are both made by Deep Products. I have been enjoying the arbitrage opportunity for a few months now. I worry that Deep Foods will reduce the quality of the Healthy Tiffin products to prevent arbitrage!


In a few years, this blog will focus on the concerns of “fifty-something” professors. Retirement communities in Florida and California will be the main topic of discussion. Before that comes the fiftieth birthday party. Should it be “celebrated” with  a public gathering of some sort, ignored completely, or with some significant event involving just the nuclear family?  In investigating the final option a few years in advance, expecting to be really decrepid by then and hence need a lot of help to move around, I looked at the National Geographic tours. They have a sophisticated pricing scheme:

                                  Tier Pricing

Our trip costs are determined by group size. (As you can imagine, we’re able to secure lower per-person rates with
larger groups.) When you sign up for a trip, its highest cost will be noted on your initial invoice and then adjusted 30
days prior to your departure. If for any reason the group falls below the minimum number of guests, a small group
surcharge may be applied. (We have found that our guests prefer to pay a bit more rather than have their trip canceled.)
Please note that trip physicians, lecturers, and GeoEx staff are not included in the guest count to determine per-person
trip cost.

For an exotic trip to Turkey, this boiled down to: $9350 (6–7 guests), $7950 (8–9 guests), $7450 (10–11 guests), $6350 (12 guests).

The higher the volume, the lower the price. No penalty for booking early. But at these prices, I’m leaning towards ignoring the 50th landmark completely and putting the money down for a foreclosed home in Florida.

I just flew to La Guardia from O’Hare. It is spring break so the plane was full. The United agent tried to persuade two people to take a later flight. Initially, she offered  $300. No-one took the bait. She upped the ante to $400. Still no volunteers. Then, she raised the stakes to $400 plus a first class seat.

Maybe no-one was willing to delay their trip. Or perhaps now the blandishment was ever increasing, people were waiting for the better deal.

Obvious solution is to give insurance: if the deal gets better, the people who bit first get the better deal too.

From Business Week:

Do you favor or oppose taxes on bank depositors?

I am totally against it. First, deposits under 100,000 are insured. What happened to that insurance? How could the euro group agree to taxing deposits as small as one euro? What is the meaning of deposit insurance in the euro zone? Second, deposits include the savings of honest people who have paid their taxes and saved for retirement, to buy a home, educate their children or whatever. Why pay a hefty additional tax? And how would these people feel when they woke up on Saturday morning to be told, “Sorry guys, we are not letting you withdraw your money anymore, until we sort out how to take a big chunk away from you.” And why? Because two banks out of the tens operating in Cyprus made bad investment decisions three years ago to help Greece out of its crisis, and got hit by the troika. What’s the incentive that banks now have in the European Union to treat risky investments with caution? If one of them takes bad risks the others will pay for it; if it works well for it, it will keep the profits. A classic scenario for market breakdown.

Trade of shares is going to be taxed by some countries inside the EU. The usual counter argument is that this will simply cause trading to move outside the tax zone to, in this case, the U.K. and the U.S. To try to get around this, the countries involved require that the tax be paid wherever the trade takes place:

The tax would be owed no matter where the trade took place, as long as a European security or European institution was involved. The law has been written so broadly that if a French bank bought shares in an American company on the New York Stock Exchange, the tax would be owed.

But who is going to report the trade? The EU authorities are relying on a prisoner’s dilemma to do the monitoring for them:

There is every chance that markets from other countries will not be very cooperative, meaning that to learn if a German bank traded in New York the authorities might have to rely on the bank to report it to them. But then there would be the risk that the tax authorities would learn of it otherwise, perhaps through an audit or from a report by an Italian bank that happened to be on the other side of that trade.

Mr. Bergmann, himself an economist, compared that to “the prisoners’ dilemma,” a classic concept in economics in which two people arrested for a crime would do best if neither confessed, but either would do very badly if he did not confess while the other did. If the authorities did find out, it would be tax fraud under the proposed law.

If the Italian bank reports the trade but the German bank does not, does the Italian bank get a reward? Is the tax forgiven? This is not clear from the article. (I also had a hard time finding the actual law but perhaps I did not look hard enough.) If the Italian bank is liable for tax if it unilaterally reveals the trade, then the game is a coordination game:

If the German bank does not reveal the trade, the Italian bank avoids the tax if it does not reveal but pays the tax if it does. Hence, not revealing is a strict best response to not revealing by the opponent. On the other hand, if the German bank is expected to reveal the trade, if the Italian bank does not reveal the trade, it pays a big fine. If it also reveals the trade, it just pays the tax. Hence, reveal is a strict best response to reveal. Then, the blog post should be called Coordination Games Everywhere.

Would love to know what the facts are. Or are they ambiguous? This would introduce uncertainty and then papers can be written about this possibly…

Interesting article about the Cameron government’s use of Thaler tricks to improve government servies and save money:

Take the job centre in Loughton, where he describes – step by step – the minutiae of how his team has encouraged advisers to be forward-looking, specific and to give their clients a sense of progress; all of which, studies have shown, have a big impact on people reaching their goals, he says.

“So instead of jobseekers having to show they’ve looked for at least three jobs in the last two weeks, advisers will now say, ‘OK, let’s talk about what you are going to do in the next two weeks’. They will ask what their client needs to work on. ‘So, you said you needed to work on your CV. So when will you do that. OK, Wednesday morning after breakfast.’ The client is then encouraged to write it down in a little booklet they get. And all the things you need to do before you get your job have been compressed on to one side of paper and designed in such a way that when you go through it with the adviser, you’ve done a third of it straight away. That in itself gives you a strong, immediate sense of progress.”

The results speak for themselves. On the top floor of the job centre where it was trialled for three months, about a fifth more jobseekers were off their books in 13 weeks compared with the floor below where processes remained unchanged.

I still need a nudge to buy the book though.



James Surowiecki has a great article about why the Jets are sticking with struggling quarterback Mark Sanchez:

[T]he Jets have invested an enormous amount of energy and money in Sanchez, and, assuming that no one will trade for him, they are contracted to pay him $8.25 million next year, whether he plays or not….

In a purely rational world, Sanchez’s guaranteed salary would be irrelevant to the decision of whether or not to start him (since the Jets have to pay it either way). But in the real world sunk costs are hard to ignore. Hal Arkes, a psychologist at Ohio State University who has spent much of his career studying the subject, explains, “Abandoning a project that you’ve invested a lot in feels like you’ve wasted everything, and waste is something we’re told to avoid.” This means that we often end up sticking with something when we’d be better off cutting our losses—sitting through a bad movie, say, just because we’ve paid for the ticket. In business and government, the effect pushes people to throw good money after bad.

Jeff and I have a paper, Mnemonomics: The Sunk Cost Fallacy As A Memory Kludge, that offers a primitive theory of this “Concorde effect” as a response to limited memory. Mark Sanchez was hired years ago. At that time there was a rationale for why he would be a great QB for the Jets and hence he was paid a high salary. This rationale for his hiring has been lost in the mists of time but his salary is recalled perfectly. His salary encodes the rationale for his hiring – the higher the salary the better must have been the rationale for his hiring.  Even if we have forgotten the details, the rationale must have been good if Sanchez was paid a high salary. Therefore the higher the salary, the greater the chances of retention even when future events creates costs of retention.  This is the Concorde effect. As far as Mark Sanchez goes, mnemonomics does not do too bad a job.

But an obvious alternate theory rests on reputation:

“Taking the original decision-maker out of the picture and letting a fresh pair of eyes look at the pros and cons can help,” Arkes says. He points to a…study of a bank that found that loan officers were reluctant to acknowledge that loans they’d made had gone bad, whereas new executives were far more likely to take the loss and move on. Whoever becomes the Jets’ new general manager will have no personal or reputational investment in Sanchez, which should make it easier for him to be more objective, though he’ll still have to persuade the head coach and the owner.

There’s surely a lot of truth to this theory. But there is a countervailing effect too. Managerial turnover generates limited memory – who knows why the previous CEO made the decisions he did? If he was smart, it would be good to accord his decisions some respect and see them through before trying out new ideas. Perhaps the best CEOs understand this. From our paper:

For example, when John Akers stepped down and Lou Gerstner became C.E.O. of IBM in 1993, he was determined to “carry out a set of policies put in place by none other than the much-maligned Akers.” He was not “rushing to make significant changes in vision” but was “still following through on Akers’ two-year-old restructuring.” He believed that “IBM has yet to test fully many if the changes Akers put in place” and said, “I want to make sure the current system is implemented before we try any alternatives.” We interpret Gerstner’s decision-making as follows: Akers’ old plans were initiated using information known to him at the time. By the time Gerstner arrived, the direct information was lost but was manifested indirectly in the strategic plan he inherited. Hence, this generated a bias to implement the old plan.

You dig your car out of the snow, run an errand or two and come back home to discover…someone else has parked in “your” spot! This free rider problem reduces your incentive to dig your car out in the first place. If only property rights could be enforced, your incentives would be good. It turns out that Bostonians have solved this problem:

Cold-weather cities like Boston, however, have gone so far as to enact laws on the subject. The Post reports that in Boston, “a city law says that if you dig out your car in a snow emergency, a lawn chair or trash can renders the spot yours for at least two days while you’re away at work.”

The Windy City is relying on social norms instead:

In Chicago, the article adds, citizens cannot legally block a parking spot but even city officials acknowledge an “informal rule of dibs” in favor of the person who has dug out the spot.

Hat Tip: Andrew Ellis, job candidate from B.U.

From the Observer:

The Observer‘s panel of stock-picking professionals has been undone in our 2012 investment challenge by a ginger feline called Orlando who spent time paw-ing over the FT.

The Observer portfolio challenge pitted professionals Justin Urquhart Stewart of wealth managers Seven Investment Management, Paul Kavanagh of stockbrokers Killick & Co, and Schroders fund manager Andy Brough against students from John Warner School in Hoddesdon, Hertfordshire – and Orlando.

Each team invested a notional £5,000 in five companies from the FTSE All-Share index at the start of the year. After every three months, they could exchange any stocks, replacing them with others from the index.

By the end of September the professionals had generated £497 of profit compared with £292 managed by Orlando. But an unexpected turnaround in the final quarter has resulted in the cat’s portfolio increasing by an average of 4.2% to end the year at £5,542.60, compared with the professionals’ £5,176.60.

While the professionals used their decades of investment knowledge and traditional stock-picking methods, the cat selected stocks by throwing his favourite toy mouse on a grid of numbers allocated to different companies.

From Bloomberg:

“JPMorgan Chase & Co. (JPM) asked more than 2,000 current and former employees to contribute to a settlement with the U.K.’s tax authority over their use of an offshore trust for bonus payments, according to a person briefed on the situation…..

People who used JPMorgan’s trust told the FT they were asked to participate in a so-called blind auction, in which they would volunteer to pay a tax rate of their choosing.

If the auction fails to generate enough money to fund the settlement, people who submitted less than the average bid would be excluded from the deal and face a 52 percent tax rate when the trust’s assets are liquidated, the newspaper said.

People who don’t wish to participate can try to fight the government’s demand, the person briefed on the situation said.”

The rules of the auction are not 100% clear from the article. Taken at face value, there is the possibility of multiple coordination equilibria. If I expect everyone else to contribute a lot but not enough to pay off the tax debt, then I will contribute a lot too to avoid the 52% tax. If I expect everyone to contribute a little, so will I hoping people who decided not to participate or contributed less than the average bid will bear the punishment. Finally, if I expect total contributions to exceed the tax debt, I will contribute zero. Uncertainty about everyone’s willingness to pay, deep pockets etc will generate randomness and perhaps refine equilibria but leave open the possibility of multiplicity. Also, there will be positive probability that the auction does not fully recompense the tax authorities. This is also true in mixed strategy equilibria of the complete information game.

To increase contributions and guarantee success, the auction should specify that everyone who contributes more than the average bid will escape the 52% tax if total contributions are lacking. Then, people will submit more than the average just to be safe. Then, the average expected bid will go up. Then, they’ll submit even more etc.

From NYT, a proposed tax on beer has French imbibers, producers and intermediaries upset. E.g., from a bar owner:

“The increase is brutal; 160 percent is a lot,” said Mr. Thillou, 36, who prides himself on promoting French microbreweries. On a barrel near the entrance, a pile of fliers that say “+160% taxes on beer: Who is going to pay the price?” shows what he thinks of the government’s latest plan for raising revenue.

But the goverment may be rasing revenue the right way, by taxing goods with inelastic demand:

Philippe Lessevre, 26, who had come for a beer, said higher prices would not change his drinking. “It will affect my wallet,” Mr. Lessevre allowed, “but not my consumption.”

But Mr. Charvier was still skeptical about the government’s professed concerns for public health. “It’s the same as for cigarettes: If a percentage of the price goes into their pocket, they still need people to continue buying,” he said. “It’s hypocritical.”

But, of course, there are always lobbyists:

Many opponents of the bill suggested that wine was exempted because the industry has greater political clout, given that it is one of the country’s top three exporters and employs 250,000 people. Wine is currently taxed around the same rate as beer, per hectoliter, but unlike the rates for beer, its rates do not increase with the degrees of alcohol.

According to Jean-Jacques Dethier, a development economist at the World Bank:

 Alec Trevelyan (Sean Bean) wants to use an electromagnetic pulse from a nuclear weapon to bring London to its knees and destroy the Bank of England, but not before electronically stealing millions of pounds from the Bank’s systems.

Plausibility: First of all, wouldn’t destroying London and the Bank of England render the pounds you’ve stolen largely worthless? “Not exactly worthless, but close,” says Dethier. Would you be able to convert it? “It’s actually very hard to convert huge amounts of something, which is a problem the Chinese now know well with all their American dollar holdings,” he says. So Trevelyan would have to spend all those pounds in the one country that’d take them: Britain. Whose economy he’s just destroyed.

Other great analyses can be found at the Vulture.

From The Wages of Wins Journal:

I’ve decided to lump speed together with all of these other (hypothesized) factors under the general heading of “Floor Stretch”.  We’ll use it for an exercise in theoretical sports economics…Whatever it is that truly makes up “Floor Stretch”, it has to be sufficiently valuable that it offsets the lower raw productivity of the smaller players….

Floor Stretch, however, is really a relative function.  Having 5 point guards on the floor only stretches the other team if they don’t also have 5 point guards playing.  In this sense, what we really care about is the ratio of Floor Stretch between the two teams competing.  Theoretically, the Floor Stretch ratio is what the raw productivity must be balanced against in order to determine the best mix of players.  This, then, gets us into some classical Game Theory….

I’m too focussed on the election to digest fully. But I got this from Goolsbee’s Twitter feed today – he must be confident?


Jon Stewart asks Austan Goolsbee:

What we need to do in this country is make it a softer cushion for failure. Because what they say is the job creators need more tax cuts and they need a bigger payoff on the risk that they take. … But what about the risk of, you’re afraid to leave your job and be an entrepreneur because that’s where your health insurance is? … Why aren’t we able to sell this idea that you don’t have to amplify the payoff of risk to gain success in this country, you need to soften the damage of risk?

I guess there are two effects. First, as Stewart says, insurance against failure, including in the form of health insurance disconnected from a salaried job, encourages more people to become entrepreneurs. This is the occupational choice component. Second, insurance against failure reduces the incentive to work hard. This is the usual trade-off between risk-sharing and incentives in the classical principal-agent moral hazard model. The two effects move in opposite directions so the net effect on welfare is ambiguous (assuming we want more people to be entrepreneurs which is not clear!). As far as I know, the empirical work on the trade off between risk sharing and incentives finds weak support for any tradeoff. It would be nice to have a model to think things through.  I assume someone must have written such a model but not sure of the reference.

Lee Crawfurd emails me about events in Sudan.  North and South Sudan have agreed to a price at which the North will supply oil to the South.  On his blog, Roving Bandit, Lee writes:

So – whilst this seems like a good deal for North Sudan in the short run and a good deal for South Sudan in the long run, my main concern is the hold-up problem. What is stopping North Sudan ripping up the agreement in 3 years, demanding a higher cut, and just confiscating oil (again).

In his email he adds:

As it turns out, the South’s strategy is to resume piping oil through the North, but also to simultaneously build a pipeline through Kenya, giving them an extra option.

The fact that the North can hold up later makes it less likely that the North and South will invest and trade in their relationship now.  This makes both the North and South worse off.  For this difficulty to be resolved, the North has to be able to commit not to exploit the South in the future.  But the Kenyan pipeline gives them this commitment power to some extent: If the North threatens to raise prices, the South can go the Kenya route.  This means the North will not raise prices in the future and that is good for trade and the welfare of both parties.  Paraphrasing the wrods of the great philosopher Sting, “If Someone Does Not Trust You, Set Them Free“.

One issue is that the South may overinvest in the pipeline to get more bargaining power.  That could lead to inefficiency as the North then has bad incentives.

Another classic Williamsonian solution is to use hostages to support exchange.  I don’t know enough about North and South Sudan to know what they might transfer that is of little value to the recipient and high value to the donor. This sort of solution has been attempted recently in the US in the debt reduction negotiations. Automatic cuts in defense (bad for Republicans) and entitlement expenditures (bad for Democrats) go into force in January if Republicans and Democrats do not agree in debt negotiations. This has not worked so far. First, this is because there are crazy types who are willing to send the country over the “fiscal cliff”. Second, this is because there is no commitment and the automatic cuts can be delayed by Congress and so they are not real hostages.

My memory is terrible but I vaguely recall papers relating to investment in changing outside options in hold up models. These would be the most relevant to the Sudan scenario.

A confusing article in the New York Times discusses a possible tomato trade war with Mexico. First, it says:

The United States Department of Commerce signaled then that it might be willing to end a 16-year-old agreement between the United States and some Mexican growers that has kept the price of Mexican tomatoes relatively low for American consumers. American tomato growers say the price has been so low that they can barely compete.

Later, the article adds more detail:

As part of a complex arrangement dating to 1996, the United States has established a minimum price at which Mexican tomatoes can enter the American market. Over the years, Florida’s tomato sales have dropped as low as $250 million annually, from as much as $500 million, according to Reggie Brown, executive vice president of the Florida Tomato Exchange, which has led the push to rescind the agreement. The state is the country’s largest producer of fresh market tomatoes, followed by California.

In the meantime, Bruno Ferrari, the economy minister of Mexico, said the value of Mexico’s tomato exports to the United States had more than tripled to $1.8 billion since the agreement was signed, and the tomato industry there supports 350,000 jobs.

Note the agreement established a MINIMUM price.  If the agreement is dropped, then prices can go down further. In this interpretation, the agreement has not “kept the price of Mexican tomatoes relatively low for American consumers”.  It has kept them high.  This is probably good for Mexican farmers because it moves prices away from perfect competition and towards the monopoly price.  It is also good for Florida producers who are competing with more expensive Mexican tomatoes.  Obviously, it is bad for American consumers.  Overall, we should expect both Mexican and Floridian (?) producers to oppose the end of this agreement.

If the agreement is being dropped to be replaced by free trade, it seems I will be buying cheaper tomatoes.

But, finally the article says:

The agreement, which has been amended since it was struck, sets the floor price for Mexican tomatoes at 17 cents a pound in the summer and 21.6 cents in the winter. American growers say they cannot compete at that price.

So, really what is on the cards is even higher minimum prices.  This could still be good for Mexican growers as it should raise prices even more towards the monopoly price.  But the problem is that more Florida farmers could then afford to grow and sell tomatoes.  Then, the rationing rule that determines who makes the sale becomes important.  If domestic growers are favored disproportionately, Mexican farmers will suffer.  And I will be buying more expensive tomatoes or growing my own.

There should be some diagram that illustrates this so we can all use it in our Micro classes.


For the casual fan such as myself, the final second of the Packers-Seahawks game had the thrill of the Roman circus – an arbitrary, conflicted decision was handed down by emperor referees.  For the real fans and the teams, it must be torture.  But is it painful for the owners? After all, they will influence the decision in the labor dispute with referees.  Steve Young thinks not:

The NFL is “inelastic for demand,” Young said, meaning that nothing — including poor officiating — can deter a significant percentage of fans and corporate sponsors away from the most popular game in the country. It’s the primary reason the NFL has held steady in its labor impasse with regular officials: There is no sign that enough of the sporting public cares to make it a priority.

“There is nothing they can do to hurt the demand of the game,” Young said in the video. “So the bottom line is they don’t care. Player safety doesn’t matter in this case. Bring Division III officials? Doesn’t matter. Because in the end you’re still going to watch the game.”

But the NFL/referee dispute is partly about “pay for performance” – the NFL wants to bench referees who botch calls (the money issues are trifling as a fraction of NFL revenue).  This suggests the NFL does actually care about good officiating.  This makes them weak in the face of the current officiating.  They should cave sooner rather than later.

Mitt Romney and Paul Ryan have proposed a plan to allow private firms to compete with Medicare to provide healthcare to retirees. Beginning in 2023, all retirees would get a payment from the federal government to choose either Medicare or a private plan.  The contribution would be set at the second lowest bid made by any approved plan.

Competition has brought us cheap high definition TVs, personal computers and other electronic goods but it won’t give us cheap healthcare.  The healthcare market is complex because some individuals are more likely to require healthcare than others.  The first point is that as firms target their plans to the healthy, competition is more likely to increase costs than lower them.  David Cutler and Peter Orzag have made this argument.  But there is a second point: the same factors that lead to higher healthcare costs also work against competition between Medicare and private plans.  Unlike producers of HDTVs, private plans will not cut prices to attract more consumers so competition will not reduce the price of Medicare.  A simple example exposes the logic of these two arguments.

Suppose there are two couples, Harry and Louise and Larry and Harriet.  Harry and Louise have a healthy lifestyle and won’t need much healthcare but Larry and Harriet are unhealthy and are likely to require costly treatments in the future.  Let’s say the Medicare price is $25,000/head as this gives Medicare “zero profits”.  Harry and Louise incur much lower costs than this and Larry and Harriet much higher.  Therefore, at the federal contribution, private plans make a profit if they insure Harry and Louise and a loss if they insure Larry and Harriet.  So, private providers will insure the former and reject the latter. Or their plans deliberately exclude medical treatments that Larry and Harriet might need to discourage them from joining.  The overall effect will be to increase healthcare costs. This is because Harry and Louise get premium support of $50,00 total that is greater than the healthcare costs they incur now so they impose higher costs on the federal government than they do currently.  Larry and Harriet will be excluded by the private plans and will get coverage from Medicare.  This will cost more than $50,000 total so there will be no cost savings from them either.  Total costs will be higher than $100,00 as surplus is being handed over to Harry and Louise and their insurance companies.

To deal with this cream-skimming, we might regulate the marketplace.  It might seem to make sense to require open enrollment to all private plans and stipulate that all plans at a minimum have the same benefits as the traditional Medicare plan.  Indeed, the Romney/Ryan plan includes these two regulations.  But this just creates a new problem.

Suppose the Medicare plan and all the private plans are being sold at the same price.  The private plans target marketing at healthy individuals like Harry and Louise and include benefits such as “free” gym membership that are more likely to appeal to them. Hence, they still cream-skim to some extent and achieve a better selection of participants than the traditional public option.  (This is actually the kind of thing that happens in the current Medicare Advantage system. Sarah Kliff has an article about it and Mark Duggan et al have an academic working paper studying Medicare Advantage in some detail.)  So total healthcare costs will again be higher than in the traditional Medicare system.

But there is an additional effect.  Traditional competitive analysis would predict that one private plan or another will undercut the other plans to get more sales and make more profits. This is the process that gives us cheap HDTVs. The hope is that similar price competition should reduce the costs of healthcare. Unfortunately, competition will not work in this way in the healthcare market because of adverse selection.

Going back to our story, if one plan is cheaper than the others priced at say $20,000, it will attract huge interest, both from healthy Harry and Louise but also from unhealthy Larry and Harriet.  After all, by law, it must offer the same minimum basket of benefits as all the other plans.  So everyone will want to choose the cheaper plan because they get same minimum benefits anyway.  Also by law, the plan must accept everyone who applies including Larry and Harriet.  So, while the cheapest plan will get lots of demand, it will attract unhealthy individuals whom the insurer would prefer to exclude – this is adverse selection.  Insurers get a better shot at excluding Larry and Harriet if they keep their price high and dump them on Medicare.  This means profits of private plans might actually be higher if the price is kept high and equal to the other plans and the business strategy focused on ensuring good selection rather than low prices.  An HDTV producer doesn’t face any strange incentives like this– for them a sale is a sale and there is no threat of future costs from bad selection.

So, adverse selection prevents the kind of competition that lowers prices.  The invisible hand of the market cannot reduce costs of provision by replacing the visible hand of the government.

Some economists toiled away in Stockholm on U.S. Labor Day.  They were attending the Nobel Symposium on Growth and Development.  This implies that the 2012 Prize cannot be in Growth and Development.  The fallout from the symposium has to settle before a Prize is awarded.  Next year is probably still too early so my guess is that a growth and development prize will be awarded in 2014 or later.

Looking at the program, a few people can be excluded as they are too young to get it now.  The pivotal voter will be Robert Lucas who has enormous scientific credibility on this topic and is also attending the symposium.

How do we “bend the cost curve” of healthcare? Atul Gawande has some ideas after visiting the Cheesecake Factory with his daughters:

“We have forecasting models based on historical data—the trend of the past six weeks and also the trend of the previous year,” Gordon told me. “The predictability of the business has become astounding.” The company has even learned how to make adjustments for the weather or for scheduled events like playoff games that keep people at home.

A computer program known as Net Chef showed Luz that for this one restaurant food costs accounted for 28.73 per cent of expenses the previous week. It also showed exactly how many chicken breasts were ordered that week ($1,614 worth), the volume sold, the volume on hand, and how much of last week’s order had been wasted (three dollars’ worth). Chain production requires control, and they’d figured out how to achieve it on a mass scale.

Mitt said that Israeli and Palestinian and Mexican and US economic outcomes differ because of cultural differences. This immediately brought to mind the recent book by Daron and Jim, “Why Nations Fail” because they begin by comparing Nogales Arizona and Nogales Mexico. These have quite similar geography, quite similar culture and yet very different GDPs. Daron and Jim argue this is because of vastly different political and economic institutions. Now Daron and Jim have addressed the issue themselves on their blog. They offer a couple of more examples:

But as we show in Why Nations Fail, cultural differences cannot explain differing levels of prosperity. Deng Xaioping didn´t change Chinese culture after 1978 to make the economy grow, but he did change economic institutions a lot. Indeed, many cultural differences we see are the outcomes of different institutional choices. This is surely the case between North and South Korea, for example. After all, does Mitt and David think that there were huge cultural differences between the north and the south of the 38th parallel before the separation of Korea into two?

I guess we need a convincing example of a situation where two countries have the same geography, the same institutions, but different cultures and vastly different economic outcomes.

Crown should get a copy of Acemoglu and Robinson’s “Why Nations Fail” over to the Romney campaign a.s.a.p. Speaking about the difference in income between Israelis and Palestinians, Romney suggested:

that cultural differences between the Israelis and the Palestinians were the reason the Israelis were so much more economically successful than the Palestinians. He also vastly understated the income disparities between the two groups.

Hin inspiration for the theory? Two books:

In his speech, Mr. Romney mentioned two books that had influenced his thinking about nations — “Guns, Germs and Steel,” by Jared Diamond, and “The Wealth and Poverty of Nations,” by David S. Landes. Mr. Diamond’s book, Mr. Romney said, argues that the physical characteristics of the land account for the success of the people living there, while Mr. Landes’s book, he continued, argues that culture is the defining factor.

“Culture makes all the difference,” Mr. Romney said. “And as I come here and I look out over this city and consider the accomplishments of the people of this nation, I recognize the power of at least culture and a few other things.”

After this caused some backlash:

[H]is campaign said that the Associated Press had “grossly mischaracterized” the remarks by not providing the full context. For instance, the campaign said, after mentioning the per capita G.D.P. of Israel and Palestine, Mr. Romney also said: “And that is also between other countries that are near or next to each other. Chile and Ecuador, Mexico and the United States.”

The Acemoglu and Robinson book begins with Nogales AZ (USA) vs Nogales Mexico and puts institutions at the center of an explanation of income disparities not culture or geography.

Things are not going smoothly for Romney’s London trip. First, he criticizes secuirty and attendance at the London Olympics only to draw a rebuke from Prime Mister David Cameron. The Telegraph reports:

Mitt Romney is perhaps the only politician who could start a trip that was supposed to be a charm offensive by being utterly devoid of charm and mildly offensive.

And now it seems tickets are not selling for his fundraiser so he has been forced to cut prices. According to the Guardian:

The Mitt Romney Summer 2012 World Tour to Three Countries is apparently having trouble moving tickets.
The London blogger Guido Fawkes reports that organizers of a Romney fundraising reception in the city this evening have slashed the original $2,500 ticket price to $1,000 for “a few last minute guests,” in an effort to drum up participation.


What does a biological perspective imply about impatience? The rate of mortality will contribute to impatience, as is thunderingly obvious, and well-known in economics, certainly since Irving Fisher. A specifically biological contribution is the rate of population growth. If population is growing, then a reproductive strategy that entails the earlier production of offspring would be smiled upon by evolution. Consider a population in which all individuals produce 4 offspring at age 2. The population quadruples in two periods or, equivalently, doubles every period. A type that produced these 4 offspring at age one instead would do much better, quadrupling every period.

However, back-of-the-envelope calculations suggest that the sum of the mortality rate and the population growth rate may be inadequate to produce a plausible pure rate of time preference. That is, even for hunter-gatherers, mortality may be  only 1-2% for most ages, for those who are not on the walls-of-death at the beginning of life or at the end. And the rate of population growth over the 1.8 million years of our evolutionary history must be close to zero, as an arithmetical necessity. However, the pure rate of time preference seems likely to be more than 1-2%.

One approach to closing the apparent gap is to suppose the average population growth rate of near zero cloaks a more dramatic detailed scenario. Perhaps, for example, there are long runs of peace and plenty generating substantial population growth. Occasionally, however, there are random demographic disasters of biblical proportions. Suppose these disasters are equal opportunity grim reapers, wreaking the same proportionate damage on all ages. Larry Samuelson and I (AER, 2009) show that the relevant rate of population growth is the rate that obtained during the sunny eras of peace and plenty, thus potentially closing the gap.

Another mechanism to close the gap is sex, finally validating the title of this post. (Thanks for your patience ;). Sorry if you were expecting something more lubricious.) This idea was formulated by an anthropologist, Alan Rogers (AER, 1994). Although there are mathematical difficulties with Alan’s model, and not all plausible models deliver the desired result, the intuition can be resuscitated. (This paragraph relies on work with Balazs Szentes.) This intuition is as follows. A prime motivation for saving for the future is to favor offspring. However, sexual reproduction means that each offspring has a value that is only 1/2 of each parent’s value. This is an instance of “Hamilton’s rule” from biology, but is also, more familiarly, the free-rider problem. That is, offspring are a public good to each couple, and there is a temptation for each parent in the couple to undercontribute.


Consider a two horse race– with probability 3/4 Duchess Camilla wins, with probability 1/4, it’s Princess Anne. You have $1 to bet. Camilla pays $2 for a win, and Anne $1– the precise numbers don’t matter. You are risk-neutral. Which horse should you pick? Camilla, of course, who pays $1.50 in expectation, whereas Anne pays only $0.25. Now suppose this race is run twice and you reinvest your winnings from the first race as a bet in the second. How you should now bet? You will bet on Camilla in the second race, for the same reason as before. Indeed, it is not hard to see that you should bet on Camilla in the first race as well, since you should maximize the expected amount of money you’ll have available to bet on the second. This is kind of boring. If there is any finite number of repetitions, bet on Camilla always.

But what if there is an infinite number of these races, where you reinvest all your winnings, and you care about your wealth in the far distant future? Now there’s a problem with always betting on Camilla– she will lose eventually, and you will be broke as soon as that happens. You must bet some of that $1 on Anne. How much should you bet? If you bet a fraction f on Camilla and 1-f on Anne, your wealth at date T, w(T), say, will be a product of n(T) factors of 2f and T-n(T) factors of 1-f, where n(T) is the number of times that Camilla wins. It follows that (1/T)ln(w(T)) = (n(T)/T)ln(2f) + ((T-n(T))/T)ln(1-f). The law of large numbers implies that (1/T)ln(w(T)) tends to (3/4)ln(2f) + (1/4)ln(1-f). You should maximize this long run limiting growth rate. In this case, it follows that the optimal f = 3/4.

As a strategy for investment, this log criterion was proposed by Kelley in 1956, as Lones Smith reminded me yesterday. He also said this Kelly criterion led to “Beat the Dealer”, the MIT Blackjack team, and eventually the Kevin Spacey movie “21”.

Kelley was roundly criticized by PA Samuelson in 1971, who objected to the criterion of long run wealth maximization, but Kelley was rehabilitated by Blume and Easley in several relatively recent papers.

Without needing to take a stance on the merits of the objections, they do not apply with a biological reinterpretation. In particular, the criterion of long run population maximization is evolutionarily convincing. The corresponding result is that the evolved utility function should be the expectation, with respect to aggregate risk, of the natural log of the expected offspring conditional on each aggregate state.

Individuals should be more averse to aggregate risk than they are to idiosyncratic risk. Preferences do not satisfy “probabilistic sophistication,” since it is not enough to list the outcomes and the associated probabilities. Preferences are interdependent, since the impact of gambles on others matters. Individuals may be induced to take idiosyncratic gambles in the face of aggregate risk.

Questions that might at first blush seem banal may have illuminating answers from an evolutionary perspective. Why do we have a utility function, for example?  Perhaps because it permits a plastic response by an individual to circumstances that are unusual or even novel in our evolutionary history. Think of Mother Nature as a principal, a puppeteer, who knows the fitness consequences of various outcomes, say.  Nature wishes to enhance the evolutionary success of the individual, the agent, the puppet, where this individual also has some local information. This local information might be about the probabilities with which these outcomes occur in various gambles, say. An evolutionary strategy that fixes an appropriate hedonic scoring system for the outcomes within the agent and then devolves autonomy onto the agent permits the agent to blend together the two components–outcomes and probabilities. In the end, the agent chooses the optimal gamble in a flexible and optimal way, endowed with free will, but bound in an hedonic straitjacket.

To ask: Why do we value food, warmth, even of the intelligent and well-educated is to invite incredulity. “What are you, stupid? If we lack those, we will die and have no offspring. Aren’t you into biology?” But if utility is the solution to this principal-agent problem, and we credit ourselves with the requisite intelligence, then why would the optimal utility not simply be offspring? Why wouldn’t the optimal evolutionary strategy not set offspring as utility and then leave it to the intelligent and autonomous agent to figure out that it would be a good idea to eat to further this goal. Sex would seem messy and awkward, but it would have to be endured too. For the kids.

Again the reason why utility has as arguments goods that are intermediate to the production of offspring, as clearly it must in reality, might be that Nature has information that the individual lacks. Although there are, in principle, be other ways of conveying this information, as a matter perhaps of historical accident, Nature has come to whisper in your ear “Don’t think about it, just eat that cheesecake, bask in the sun, smile at that pretty girl…”

Economists stand pretty much alone in believing that people are indifferent to one another’s situation. Psychologists do not believe it, the man/woman in the street typically would not, your mum does not (mine didn’t anway). I wouldn’t go as far as Oliver Cromwell (I beseech you, in the bowels of Christ, think it possible that you may be mistaken.) But we might want to consider the possibility that we are wrong. The prime facie evidence in favor of a concern with status is strong–going back to Duesenberry’s discussion of the consumption function in 1949 and further of course. Modelling a concern with status is rewarding–for example, such a argument sheds light on attitudes to risk. The case for including status in utility could rest there. However, it also seems highly plausible that such a concern with status is the fruit of evolution.  It is easy to think of evolutionary scenarios that might engender a concern with relative standing. If males compete with one another to obtain resources, it might be that the most successful male in terms of resources, even if only by a smidgin, wins a wildly disproportionate level of attention from the fair sex. But the economists intense predilection for selfish preferences has only been moved to a deeper level. Deriving non-selfish preferences in this fashion is tantamount to embedding aspects of the game or the feasible set into preferences in a way that would win instant opprobrium in a conventional economic setting. Why wouldn’t an intelligent actor maintain purely selfish preferences in the winner-take-all game described, but apply the features of the game appropriately to arrive at the same course of action? In a new setting, the individual with aspects of the old game embedded in preferences is likely to behave inappropriately, but the actor with purely selfish preferences could recompute and find the optimal course.  What is the upshot of all this? Perhaps, non-selfish preferences evolved as a rule of thumb in complex circumstances, a rule of thumb necessitated by complexity and cognitive costs, a rule of thumb whose theoretical treatment is going to be famously awkward.

CNN got the call wrong on the Supreme Court and the individual mandate. They then tweeted it, put it up on their website, put in as a banner onscreen etc etc. Then news began filtering in that the mandate had been upheld as a tax. What should they do now? There is an interesting blow by blow account of what happened by Tom Goldstein on SCOTUSblog. He adds:

Ironically, CNN reacted too slowly in part to avoid a second error.  The network did not want to be in the position of reporting that the mandate had been struck down, then reporting that it was upheld, then reverting to its initial report.  (That had happened to the media in the 2000 presidential election, and it had been a debacle.)  CNN gravitated to an intermediate position of uncertainty on the air, which of course was not decisive enough to correct viewers’ initial impressions.

CNN had also converted itself into an integrated circuit in which its electronic media teams were tied directly into the broadcast operation.  But not anticipating the possibility of an error or confusion, its first web, electronic, and Twitter reports did not hedge.  And the network did not have a clear plan to reverse the circuit on the electronic-media side and tell readers that its initial reports may have been wrong.

Once CNN made one mistake, it was hard to admit it because they were operating in an open environment with other players judging their actions. If CNN were operating in isolation – like an individual deciding whether to invest in a healthcare company – they would have reacted rapidly to correct their action given their latest information. But in an environment where others are watching them, they have to make future decisions which are consistent with their earlier error.

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