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[email protected] (Luke Froeb)



Articles by [email protected] (Luke Froeb)

Bad ideas from Nashville politicians

4 days ago

Potential exam question:QUESTION:  Nashville currently has had a ban on evictions for about two months.   In about two weeks this ban will expire. Question:  What would happen if we followed Councilman Sean Parker’s call for banning "Evictions … until Davidson County’s unemployment rate returns to 2.8%…"
ANSWER: In the short run, it would reduce incentives for renters to pay rent in a timely manner.  This would reduce the value of owning and building housing, which would reduce the supply of housing in Nashville, which would increase price of housing and rents.  The policy would end up hurting would-be home buyers and renters, the very people that it is designed to help.

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Marriott’s changed strategy when it realized it was competing on the wrong dimension

7 days ago

New paper identifies a strategy mistake by Marriott:
Early in the 1980s, Marriott operated a chain of large, higher-end full-service hotels that typically had 300-500 rooms.

While attractive to higher-income tourists, these hotels were not attractive to business travelers who wanted lower-prices and larger rooms.  Marriott surveyed its business customers and learned exactly what these customers valued, and what they didn’t:
…many business travelers did not value out-of-room amenities such as full service restaurants, lobbies, or meeting space as much as firms believed, and valued in-room amenities such as larger and better-appointed rooms more than they thought.

The results of this analysis were a surprise to Marriott executives … The results indicated that some out-of-room

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Causality

7 days ago

Many business problems are questions of causality:
How much will sales increase if I increase my advertising budget?
Will employee productivity increase, if I raise the wages to new employees?
Will productivity be hurt if I allow employees to work from home?

Anyone who has read this blog knows that I am huge fan of randomized control trials ("experiments") as they get rid of the "selection bias," or "reverse causality."  For example, each of the following factors would bias simple correlations:

When sales increase, advertising budgets typically increase
New employees are younger and less experienced than older ones
Low productivity employees may be more inclined to work from home.  

In this interview, Josh Angrist details some of experiments he ran to figure out that:Allowing laptops

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Moral Hazard: over-reporting of COVID-19 deaths

12 days ago

For a variety of reasons (many asymptomatic cases, lack of random testing), it is difficult to measure the infection rate or the death rate of COVID-19.  Deaths due to COVID-19 is probably the best data we have, but there is good reason to doubt these data as well:

…The CARES Act adds a 20 percent premium for COVID-19 Medicare patients.  

 Incentives matter. When the government increased the disability compensation for air traffic controllers, a lot more controllers suddenly started claiming to be disabled. When unemployment insurance payments increase, more people become unemployed and stay unemployed for longer periods. When the government offers flood insurance that charges everyone the same insurance premium regardless of the risk level in their area, more people build homes in

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Density used to be green, now it kills

23 days ago

Anyone who has followed this blog, knows that I was a big fan of urban density: it reduces commuting costs, pollution, urban sprawl but, most importantly, it increases the supply of housing.  I vilified NIMBY’s in places like SF and NY for erecting barriers to new housing that would have increased density, and supply.  I even blamed them for homelessness, inequality, and segregation.One of the things I love about myself is that I can admit it when I am wrong.  Although I still believe in what I wrote, now we have a bigger problem.
Density Kills,The coronavirus has been much more deadly in places like New York City or Boston than in rural settings. As demographer Joel Kotkin notes, Los Angeles has done much better than other big cities, because it’s less dense. “L.A.’s sprawling,

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Is it ethical to buy antibody rich blood at inflated prices?

27 days ago

Alex Taborrak tells it like it is:The huge demand for antibody rich blood (to develop a vaccine) has driven up the price:

From March 31 to April 22, prices asked by Cantor BioConnect for its cheapest samples — always sold by the milliliter, the equivalent of less than a quarter of a teaspoon — rose more than 40 percent, to $500 from $350.

QUESTION:  Is this ethical?

ANSWER:  Only if you want to save lives.  

“I’ve never seen these prices before,” said Dr. Joe Fitchett, the medical director of Mologic, one of the British test manufacturers that was offered the blood samples. “It’s money being made from people’s suffering.”

READ THE WHOLE POST!

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Pandemic ==> inequality

April 22, 2020

New Paper: Mobile phone (GPS) data shows Richer and younger New York City residents are able to shelter in second homes and with friends and family away from the epicenter of the outbreak. 
 Low-income, black, and Hispanic are likely to be frontline workers, while other populations are more easily able to work remotely. 
 Similarly, they are likely to have higher frequency of visits to retail establishments instead of ordering food and groceries delivery services

Bottom line:  these factors likely explain why the disease spreads more easily among poorer, older, and minority populations. HT:  Marginal Revolution

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Will the suburbs rise and the cities decline?

April 21, 2020

From WSJ: 

Indeed, the experience has the family rethinking its commitment to the city. Until the pandemic, the suburbs didn’t seem practical. But now that her husband, a lawyer, has proven his ability to work from home, they’re hoping his employer will be open to the idea. Last week, Ms. Euretig made her first call to a Hudson Valley real-estate agent.

…What’s the point of paying crazy rent on a cramped apartment if you can’t enjoy the city? 

Related from MarginalRevolution:
 New York City’s multi-tentacled subway system was a major disseminator – if not the principal transmission vehicle – of coronavirus infection

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Sweden’s strategy, for the long haul

April 4, 2020

Lockdowns will slow the virus (temporarily?), but will damage the economy (temporarily?).  Sweden is trying a different strategy.
“It is important to have a policy that can be sustained over a longer period, meaning staying home if you are sick, which is our message,” said Tegnell, who has received both threats and fan mail over the country’s handling of the crisis.“Locking people up at home won’t work in the longer term,” he said. “Sooner or later people are going to go out anyway.”

Let’s try to learn from this experiment.

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Subsidies to “Flatten the Curve”

March 19, 2020

Summary:
Trying to quarantine everyone until a vaccine is available doesn’t seem feasible. In addition, restrictions mainly delay when the epidemic explodes, e.g., see previous post on Flattening the Curve.   In this paper, we propose subsidies to both individuals and businesses, to better align private incentives with social goals, while leaving it up to individuals and businesses to decide for themselves which risks to take.For example, testing would give individuals the information necessary to make the best decision about whether to shelter in place or, if they have recovered and are now immune, to come out.  But, the negative consequences of a positive test, e.g., quarantine, can deter people from getting tested. Rewards for those who present for a test and submit to isolation when

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What does “flattening the curve” mean?

March 19, 2020

Policy makers are using the term to describe the effects of social distancing and travel restrictions.  In this post, we use a cellular automata model of infection to show how they might do this.DISCLAIMER:  THIS IS AN UNREALISTIC MODEL, FOR TEACHING PURPOSES ONLY.The images below are from a cellular automata model of the spread of a disease on a 100×100 grid.  White dots represent uninfected; red dots, infected; green dots, survivors; black dots, deaths.  The key parameters are:death rate=1%, given that a person has been infected.  
r0 = 2 is the basic reproduction number, the number of people infected by each infected person, e.g., here are estimates for corona virus.   We model social distancing as reducing this number.  
mean distance of infection = 5.0 cells away from an infected

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Italy’s moral dilemma

March 13, 2020

NY Times

Today, Italy has 10,149 cases of the coronavirus. [but] They lack machines to ventilate all those gasping for air.

In other words, they have scarce resources and must allocate them somehow.  They follow a utilitarian ethic, a type of consequentialism:
“Informed by the principle of maximizing benefits for the largest number,” they suggest that “the allocation criteria need to guarantee that those patients with the highest chance of therapeutic success will retain access to intensive care.”
Those who are too old to have a high likelihood of recovery, or who have too low a number of “life-years” left even if they should survive, would be left to die. This sounds cruel, but the alternative, the document argues, is no better. “In case of a total saturation of resources, maintaining

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Should electricity be a right?

March 6, 2020

MarginalRevolution has the answer
In step 1, because electricity is seen as a right, subsidies, theft, and nonpayment are widely tolerated. Bills that do not cover costs, unpaid bills, and illegal grid connections become an accepted part of the system. In step 2, electricity utilities—also known as distribution companies—lose money with each unit of electricity sold and in total lose large sums of money. Though governments provide support, at some point, budget constraints start to bind. In step 3, distribution companies have no option but to ration supply by limiting access and restricting hours of supply. In effect, distribution companies try to sell less of their product. In step 4, power supply is no longer governed by market forces. The link between payment and supply has been

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A simple way to combat corruption

February 26, 2020

New paper:  Does Greater Regulatory Burden Lead to More Corruption?The paper documents that regulation seems to create opportunities for public officials to extract bribes.  It finds that the bribery rate is higher the higher the cost of regulation. Briber is measured as a percentage of firm sales,  so a 1% increase in regulation will cost a firm with revenue of $1M about $3,000 in bribes to avoid. SOLUTION: ."..deregulation offers a simple way to combat corruption."HT: MarginalRevolution.com

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“There might be some unintended consequences,” she added.

February 25, 2020

WSJ:

If two-thirds of voters approve the measure, San Francisco would become one of the first big U.S. cities to tax landlords for store vacancies when it goes into effect next year. Washington, D.C., imposed a similar tax in 2011, though it was on residential and commercial property vacancies, not just retail.

Predict the unintended consequences in the comments.

HT: Cramer

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Homelessness, inequality, and segregation are a housing problem

February 21, 2020

NY Times article based on Golden Gates: Fighting for Housing In America

Nearly all of the biggest challenges in America are, at some level, a housing problem. Rising home costs are a major driver of segregation, inequality, and racial and generational wealth gaps. You can’t talk about education or the shrinking middle class without talking about how much it costs to live near good schools and high-paying jobs. Transportation accounts for about a third of the nation’s carbon dioxide emissions, so there’s no serious plan for climate change that doesn’t begin with a conversation about how to alter the urban landscape so that people can live closer to work.

When it was Ms. Trauss’s turn to speak, she argued that the entire notion of public comment on new construction was inherently flawed,

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Why is real estate market so inefficient?

February 15, 2020

The US real estate market is really inefficient:
For decades the market has been characterized by low volumes and extortionate transaction costs (sales commissions, taxes, and mortgage fees total about 10% of the sales price). [As a result,] just 7% of American homes change hands each year (down from 20% in the 1950’s).

PropTech firms are trying to take advantage of the inefficiency, helped by my former employer, the Antitrust Division of the Justice Department:
…in 2008 the Department of Justice (doj) ruled that MLS listings data could not be restricted …, and should be shared with online platforms. Zillow and Redfin now publish MLS listings.

New entrants are bringing liquidity to the market:
These firms use vast quantities of data and whizzy machine-learning algorithms to appraise

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When does information about mergers affect stock price?

February 15, 2020

As with the other studies the paper cites in its literature review, this particular research design included a window of multiple weeks both before and after the event occured. When analyzing the T-Mobile/Sprint merger decision, we should similarly expand the window beyond just a few hours of after hours trading.
After a Judge ruled favorably on the Spint/T-mobile merger, the prices of competitors ATT and Verizon initially increased (within 3 hours), but then decreased when the market had some time to digest what the ruling meant (over the next few days). In general, an anticompetitive merger that raises price will benefit rivals, while a procompetitive merger that reduces price will harm rivals (substitutes).  Because the stock prices of rivals decreased, it supports the hypothesis

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Where does foreign aid go? [HINT: not where it is supposed to]

February 15, 2020

From the Economist:

When autocratic, oil-rich nations enjoy a windfall from higher crude prices, where does the money go? One place to look is Swiss bank accounts. Sure enough, an increase in oil prices is followed by a spike in deposits held by these countries in financial havens, …

[Similarly]…infusions of aid from foreign donors … were followed by a jump in their deposits in foreign financial havens. The leaks averaged about 5% of the Bank’s aid to these countries.

..publication [of this research] was blocked by [World Bank] higher officials. They may have been worried about how it would look if the bank’s own researchers said that a chunk of its aid ended up in Swiss bank accounts and the like.

The lessons I take from this:Institutions are primarily concerned with preserving

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MBA’s need econ as it teaches you how to think, not what to think

February 14, 2020

Book: Range: Why Generalists Triumph in a Specialized World 

Business majors performed very poorly across the board, including in economics.  Econ majors did the best overall.  Economics is a broad field by nature, and econ professors have been shown to apply the reasoning principles they’ve learned to problems outside their area.  Chemists, on the other hand, are extraordinarily bright, but in several studies struggled to apply scientific reasoning to nonchemistry problems.  

"When he recounts his own education at the University of Chicago…[Flynn] raises his voice. "Even the best universities aren’t developing critical intelligence," he told me. "They aren’t giving students the tools to analyze the modern world, except in their area of specialization. Their education is too

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Is this underlying cause of rising inequality?

February 12, 2020

From David Brooks’ Atlantic article,

If you want to summarize the changes in family structure over the past century, the truest thing to say is this: We’ve made life freer for individuals and more unstable for families. We’ve made life better for adults but worse for children. We’ve moved from big, interconnected, and extended families, which helped protect the most vulnerable people in society from the shocks of life, to smaller, detached nuclear families (a married couple and their children), which give the most privileged people in society room to maximize their talents and expand their options. The shift from bigger and interconnected extended families to smaller and detached nuclear families ultimately led to a familial system that liberates the rich and ravages the

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Why does it cost only $10,000 to own a Chick-fil-a franchinse?

February 8, 2020

Good puzzle posed by an article:For KFC, the cost of opening a franchise is $2M dollars, but you get to keep a 95% of your sales.
For Chick-fil-a, the cost of opening a franchise is only $10K (the franchisor buys the land and equipment), but you keep only 50% of revenue and only 85% of net profit.

Why the difference?
In lieu of wealthy investors, Chick-fil-A selects franchisees who are involved in their local communities. The company’s aim, says a spokesperson, is to find people who are willing to be “highly involved” in day-to-day operations. (While not a stated requirement, adhering to “Christian values” also doesn’t hurt an applicant’s chances). 

“You run every aspect of the restaurant six days a week,” says Jeremiah Cillpam, a Chick-fil-A franchise owner in Los Angeles. In return

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Seattle commits the hidden cost fallacy

February 1, 2020

In Seattle, if you have a spare room to rent, you cannot conduct a criminal background check and you have to rent to the first person who shows up.  The new laws will reduce supply, or encourage black-market rentals, as they make renting to strangers more costly:
Landlords aren’t the only victims. Renters will suffer too. As owners like Ms. Yim and Ms. Lyles flee the housing market because they can’t bear the regulatory burden, the contraction in supply will further inflate rents. Remaining landlords will raise prices even more to underwrite the risks they face because they can’t adequately vet rental applicants.

HT:  CramerRELATED:

Does this help or hurt Ex-Felons?

Screening on criminal background and credit history

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Marijuana legalization increases cigarette consumption

January 27, 2020

Econ Paper:  
… marijuana and cigarettes are complements and legalizing recreational marijuana is associated with an increase in cigarette consumption by about 4-7%.

So, beware the hidden-cost fallacy:  
We advise caution in passing [marijuana legalization] laws since we estimate the nationwide health care costs associated with such an increase in tobacco consumption will be about $10 billion and may equal or exceed the touted monetary benefits of marijuana legalization in many states.

HT:  MarginalRevolution.com

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China’s coming population collapse

January 24, 2020

… it’s staggeringly hard to grow an economy when you lose a fifth of your working-age population in a single generation. … Demographics will slow America’s economy, but they’re a five-alarm fire for other countries. So even assuming equal levels of productivity growth, the U.S. is head and shoulders better off than other developed nations, just given its demographics alone. 

(Article link) HT: Lamar

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What domestic cause unites the presidential candidates?

January 21, 2020

From the Atlantic:  zoning restrictions on supply make housing unaffordable

…Booker, Castro, Klobuchar, and Warren propose a combination of financial carrots and sticks that the federal government could use to induce local governments to reform their zoning. Indeed, a larger federal role in reducing local barriers to development appears to be one area with potential for bipartisan cooperation: President Donald Trump recently created a task force to address this issue.

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In NYC, why are homeless shelters full, and luxury condos vacant?

January 21, 2020

Good article in The Atlantic focusses on several factors1. Declining demand for luxury condos:
Developers bet huge on foreign plutocrats—Russian oligarchs, Chinese moguls, Saudi royalty—looking to buy second (or seventh) homes. … But the Chinese economy slowed, while declining oil prices dampened the demand for pieds-à-terre among Russian and Middle Eastern zillionaires. It didn’t help that the Treasury Department cracked down on attempts to launder money through fancy real estate.

2. Developers are building larger, higher-cost, housing:
First, the typical new American single-family home has become
surprisingly luxurious, if not quite so swank as Manhattan’s glassy spires.
Newly built houses in the U.S. are among the largest in the world, and their
size-per-resident has nearly doubled

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No institutions are seen as both competent and ethical

January 20, 2020

WSJ survey shows mistrust of all major institutions, but particularly Government.  Business seems to be responding.  

When it comes to looming societal challenges, 92% of people said it was imperative for their employers’ CEOs to speak out on issues from the ethical use of technology to climate change, and three-fourths said they believed chief executives should be the drivers of change, rather than waiting for government intervention. 

Some CEOs have picked up on this already. Lawrence Fink, chief executive of BlackRock Inc. has been outspoken on topics like slow wage growth and jobs lost to automation. His widely read annual letter to investors, released earlier this month, said that BlackRock would take a tougher stance against corporations that aren’t providing a full accounting

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Old people taking from the young

January 18, 2020

WSJ has an interview with Prof Ed Glaeser on how old people are using government to enrich themselves at the expense of the young:
Consider the housing market. “In the 1960s and earlier,” Mr. Glaeser says, “America basically had a property-rights regime that meant that anyone who had a plot of land could pretty much put up anything reasonable on that plot of land.” Since then, cities and towns have circumscribed the areas where homes can be built, capped numbers of units, and imposed strict requirements on developers—all of which raise prices. “So there’s this intergenerational redistribution that’s occurred by restricting housing supply.

People who bought homes while the rules were lenient, or who are wealthy enough to have bought lately, have seen their values soar. Meanwhile, “younger

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