Friday , November 22 2019
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[email protected] (Luke Froeb)

Articles by [email protected] (Luke Froeb)

Incentives matter: physicians perform fewer surgeries on smokers

24 hours ago

The move towards fixed fees, and away from fee-for-service, has given physicians an incentive to get their patients as healthy as possible before surgery, so that there are fewer complications.  Under a fixed fee system, e.g., $20,000 for a joint replacement, the surgeon makes less money if there are complications.
“A year from now, I’ll probably be at a point where I would require all my patients to stop smoking,” Spector said. “Currently, I evaluate it on a case-by-case basis. Over time, we’re going to feel comfortable being a little more stringent with our patients about these modifiable risks.” 

Edwards said he finds many patients “don’t take it well at first” when he advises them to quit smoking or lose weight. But many of them thank him later.

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A novel way to screen using the felony box

3 days ago

A student told me how his company used the felony box (previous posts) to screen out bad applicants
Being a felon did not rule you out from being hired to work for my company.  Instead, we used the box to see if the job applicant was truthful about their felony past.  We did not hire those who (i) had a felony record and didn’t disclose it; or (ii) lied when filling out the explanation of the charges.  

However, we did hire those who disclosed truthfully (except for certain crimes), and found them to be good employees.

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Holiday book recommendations (add your own in the comments)

3 days ago

This year’s book recommendations are below, in the order I would recommend them.  Click on the links for my blog posts that reference the book. FactfulnessShoe DogAn Economist Walks into a BrothelSapiensDataclysmRising Strong (squishy, but good)Last year’s recommendations are copied below–the first two are highly recommended. 
Friday, November 30, 2018

Book recommendations (add your own in the comments)

Everybody LiesRandomistasAlgorithms to Live ByStreaming, Stealing, SharingAmazon, the Everything StoreMachine, Platform, CrowdThe Platform Revolution

Posted by Luke Froeb at 5:57 AM 7 comments:

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Time to Experiment with Price Transparency in Health care

7 days ago

For ten years, Vanderbilt
students have heard about two airport gas stations who refuse to post prices.  When travelers stop to fill up,
they see a price on the pump that is $2/gallon higher than in the rest of
Orlando.  Because few travelers will risk
missing a flight to shop for a better deal, there is no pressure on the
stations to reduce their outrageous prices.

Our students are amused by
the story until they try to complete their first assignment, “find the price
for any health care service.”  The
assignment is among the most difficult of the semester.  Students learn just how hard it is to shop in
an industry that accounts for 18% of the economy.  And just
like the gas stations in Orlando, when there is no shopping, there is no competition. 

Ironically, health plans
are now

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Sapiens, a brief history of humankind (2015)

8 days ago

The scope of the book Sapiens is extraordinary.  From the birth of our species, about 150,000 years ago until about 70,000 years ago, we were just another unremarkable "Great Ape."  Then about 70,000 years ago, we went through what Harari calls the "Cognitive Revolution," and we began to
…behave in far more ingenious ways than before, … and we spread rapidly across the planet. About 11,000 years ago we enter on the agricultural revolution, converting in increasing numbers from foraging (hunting and gathering) to farming. The "scientific revolution" begins about 500 years ago. It triggers the industrial revolution, about 250 years ago, which triggers in turn the information revolution, about 50 years ago, which triggers the biotechnological revolution, which is still wet behind the

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Does a sense of fairness make us better bargainers?

11 days ago

Most ultimatum games, in which one player makes a take-it-or-leave-it offer to another, result 60-40 splits.  This occurs because the player making the offer knows that their offers will be rejected if seen as too "unfair." Some hypothesize that this notion of fairness makes us better bargainers so there might be some evolutionary basis for passing on a sense of fairness.See how monkeys behave when they get an unfair payoff.[embedded content]

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The benefits of being WEIRD (Western, Educated, Industrialized, Rich, Democratic)

14 days ago

Reputation and trust can solve a lot of business problems, like post-investment hold-up or free riding. It turns out that WEIRDo’s (about 12% of the planet) have been successful, in part, because they manage to build and maintain reputations and trust more easily than others. 

 WEIRDos are more individualistic and independent, less conformist and obedient, more likely to favor “impersonal prosociality” — the idea that one set of moral rules should govern how you treat everyone, from the most distant stranger to your nearest kin. This seems normal to them, but in a global context, WEIRD people really are extremely weird. And as modernity erodes the last vestiges of traditionalism, they are probably getting WEIRDer and weirder by the day.  

 …More specifically, Western Christianity; the

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The costs of fighting inequality

15 days ago

Following up on an earlier post, Why are there so few unicorns in Europe?, Bloomberg suggests an answer straight out of Chapter 1:  the EU limits on incentive pay, particularly on stock options, make it difficult for innovators to align the incentives of employees with the profitability goals of the company:
"…when you’re not highly profitable, you have to incentivize employees on the promise of the upside.”  

Onerous rules and taxation make this difficult to do.  Examples of EU limits on incentive pay:The Dutch capped bonuses for bankers, money managers, and other financial professionals at 20% of base salaries. 
 Entrepreneurs must navigate onerous tax rates and restrictions that often make equity sharing and options more trouble than they’re worth. 
When employees in Germany

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Is predatory pricing profitable?

16 days ago

Predatory pricing is rare, at least in the US, because it is an investment that rarely pays off.  After an incumbent firm drives an entrant out of the market by pricing low (and deliberately losing money), the incumbent must be able to recoup the lost money by raising price–without attracting more entry–when the entrant exits the industry. Perhaps the best examples of predatory pricing come from the airline industry, when the Department of Justice brought several cases in the 1990’s.
Probably our best known airline predation investigation involved Northwest’s response to Reno Air’s entry into the Reno-Minneapolis city-pair in 1993. Not only did Northwest institute service of its own on this route that it had previously abandoned, it also opened a new mini-hub in Reno that overlaid much

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What happens if we reduce drug prices by 70%?

17 days ago

Senator Warren’s proposed policy fails a benefit-cost test:
Between 1982 and 2015, for example, the US saw the launch of 719 new drugs, the most of any country in the sample; Israel had about half as many launches. By looking at the resultant change in each country between mortality and disease, Lichtenberg calculated that the years of life lost before the age of 85 in 2013 would have been 2.16 times as high if no new drugs had been launched after 1981. For a subset of 22 countries with more full data, the number of life-years gained in 2013 from drugs launched after 1981 was 148.7 million.

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How does Google auction ads?

18 days ago

[embedded content]

Note the analogy to second price auctions–the highest rejected bid determines the price.  Because advertisers do not pay what they bid, they are willing to bid their values.

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Fight in the Eurozone about negative interest rates

18 days ago

New EU Bank Head Christine Lagarde, pushing for lower interest rates and a weaker euro, said "We Should Be Happier To Have A Job Than To Have Savings," appealing to voters as producers, not consumers. 
Lagarde’s direct attempt at shaming Europe’s fiscal conservatives was nothing short of shocking: normally ECB officials avoid naming individual countries in public statements, because their mandate is to act in the interests of the eurozone as a whole. But when Lagarde made her speech she had not yet officially taken over at the Frankfurt-based institution — she succeeds Mario Draghi on Friday.
We somehow doubt this "explanation" will fly with the German population, which sees itself as funding peripheral Europe’s profligate ways for the past decade, even as it benefited from the weak euro

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Switzerland vs Sweden

19 days ago

NY Times on Sweden:

Die-hard admirers of Scandinavian socialism overlook the change of heart in countries such as Sweden, where heavy government spending led to the financial crises of the 1990s. Sweden responded by cutting the top income tax rate from nearly 90 percent to as low as 50 percent. Public spending fell from near 70 percent of G.D.P. to 50 percent. Growth revived, as the largest Scandinavian economy started to look more like Switzerland, streamlining government and leaving business more room to grow.

Same article on Switzerland:

Capitalist to its core, Switzerland imposes lighter taxes on individuals, consumers and corporations than the Scandinavian countries do. In 2018 its top income tax rate was the lowest in Western Europe at 36 percent, well below the Scandinavian

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Privately funded, Randomized Control Trials for policy

24 days ago

Results from the first four RCT’s funded by Arnold Ventures.Here are the results for charter schools:
The study found that students who won a KIPP middle school admissions lottery were 6 percentage points more likely to enroll in a four-year college than students who lost the lottery (47% of lottery winners enrolled vs. 41% of lottery losers). We view this finding as highly suggestive but not yet strong evidence of an effect because it did not quite reach statistical significance (p=0.085). The study also found a 4 percentage point increase in the rate of persistence through the first two years of a four-year college (30% vs. 26%), but this finding was not statistically significant and so is preliminary and not reliable (p=0.23). These effects of winning a KIPP lottery (i.e., the

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Why is PG&E shutting down power in California?

26 days ago

The incentives are clear:  to avoid liability from fires caused by its power lines.
PG&E filed for bankruptcy in January after amassing tens of billions of dollars in liability related to two dozen wildfires in recent years. As speculation grew that its equipment might be the cause of the Kincade Fire, its stock price plummeted about 30 percent on Friday to $5.08, a small fraction of its 52-week high of $49.42.

Liability laws are designed to give potential wrongdoers (tortfeasors) incentives to take appropriate care (by investing in safety measures), so that they do not cause too much harm to others.  However, shutting down power causes just as much harm to some consumers as the risk of fire.A better solution would be to invest more in infrastructure, but PG&E is a regulated monopoly,

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What isn’t for sale? vs. The Market as God

29 days ago

From the Atlantic, What isn’t for Sale? lamenting the "commoditization" of society, and calling for a debate about markets:
A debate about the moral limits of markets would enable us to decide, as a society, where markets serve the public good and where they do not belong.

Note the hubris of the framing, as if society can decide what is best for all of us, rather than letting each of us decide for ourselves.BOTTOM LINE:  This older Atlantic article is much more fun, The Market as God.HT:  the loyal opposition

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Why did the Airbus 380 fail?

October 20, 2019

Above, I show how Airbus "won" the game of chicken between Airbus and Boeing by seizing the first-mover advantage, and began building a jumbo jet, which deterred Boeing from building its own jumbo jet. 
Here is the rest of the story from two students:

The A380 was designed to fly point-to-point (bypassing hubs) with more people but less frequently (it was suppose to disrupt the hub-and-spoke model). This Forbes article supports the idea that this strategy was not as profitable as the existing hub-and-spoke model nor did it serve what the market actually wanted – more frequent routes with more options. On a side note, it looks like there was a lot of political pressure by EU political leaders for AirBus to build the A380 (can anyone say jobs program).I also think it’s interesting

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3 Randomista’s win Nobel prize in economics

October 15, 2019

…for using Randomized Control Trials to figure out which policies work and which do not. 

Here are some blog posts on information from randomized control trials:
Before going on a date, consult an economist
Randomistas: fighting poverty with science
What do physicians have in common with pilots?
Book recommendation: Randomistas

Below is a Ted Talk from one of the winners (I suspect that it would be profitable for business to run more randomized control trials, e.g., to estimate the effects of advertising campaigns.

[embedded content]

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Why are 600,000 waiting for apartments in Stockholm?

October 15, 2019

Good article from Economist on how rent control destroys wealth by preventing housing from moving to higher valued uses:
Rent controls are a textbook example of a well-intentioned policy that does not work. They deter the supply of good-quality rental housing. With rents capped, building new homes becomes less profitable. Even maintaining existing properties is discouraged because landlords see no return for their investment. Renters stay put in crumbling properties because controls often reset when tenants change. Who occupies housing ends up bearing little relation to who can make best use of it (ie, workers well-suited to local job opportunities). The mismatch reduces economy-wide productivity. The longer a tenant stays put, the bigger the disparity between the market rent and his

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Learn regression simply

October 10, 2019

PEDAGOGY: The program "inverts" the
problem of teaching regression by asking students to create data by clicking on
an (x, y) graph to achieve a given outcome, like a statistically significant
regression line. An early version of this program was used to teach Justice
Dept. attorneys enough about regression to allow them to cross-examine rival

© 2019, Luke M. Froeb & Keyuan Jiang. The program may be
freely used at
but not copied without permission from Froeb [email protected]

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Conneticut’s slow job growth

October 8, 2019

Is likely caused by taxes and regulations that prevent assets from moving to higher valued uses:…the governor raised taxes on Connecticut residents by about $1.7 billion over two years, mostly in the form of various new sales taxes. 
[the governor] “refinanced” pension payments to state employees. The agreement with the unions doesn’t reform the system but shorts contributions by $2 billion through 2032, only to increase the taxpayer’s obligation by $5 billion from then until 2047. 
a 6.5 percent pay increase for state troopers and an 11 percent increase for assistant attorneys general.
a $15 statewide minimum wage and workers will be hit with a new 0.5 percent payroll tax to fund a mandatory paid-leave program.

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What could possibly go wrong?

October 7, 2019

In August the knights of the Business Roundtable announced that they are putting “stakeholders” ahead of shareholders as their primary business purpose.
Senator Warren sent the Roundtable a letter saying that she "expects" them to "live up to their promises" by endorsing her bill to change the way that capitalism works:
…Every company with revenue of more than $1 billion would have to obtain a new federal charter, in contrast to the current system of state charters.

Instead of serving the interests of the shareholders who own the company, CEOs and directors would have to serve some combination of “the workforce,” “customers,” “the local and global environment” and “community and societal factors.” 

UPDATE:  Why An Elizabeth Warren Presidency May Not Be Catastrophic For The

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How did Blockbuster’s CEO solve the double marginalization problem?

October 2, 2019

Hal Varian’s (Chief Economist at Google) tells the story of Blockbuster (a video "rentailer") and its distributors who suffered from "double marginalization" or "the double markup problem." In other words, competition between firms selling complementary products results in a price that is too high and output that is too low:

Consider, for example, video tape rental industry. Prior to 1998, distributors
sold video tapes to rental outlets, which proceeded to rent them to end
consumers. The tapes sold for around $60 apiece, far in excess of marginal
cost. The rental stores, naturally enough, economized on their purchase,
leading to queues for popular movies.

The old contractual form suffered from double marginalization, which resulted in video rental prices that were too high and output

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NY Times should read Chapter 9

October 1, 2019

Former student John Tamny wrote a nice essay critiquing a NY Times critique of capitalism:
…Wu’s assertions about U.S. corporations wholly focused on profit without regard to “employees, suppliers, customers, and the communities to which they belong” would have meaning if he could produce evidence that the best get that way while running roughshod over the aforementioned. 

John is implicitly referring to the compensating differentials of Chapter 9 (which he has read). Remember that a mobile asset has to be indifferent about where it is used.  Workers will move to the better company, and the migration will continue until wages adjust so that employees are just indifferent between the two.  In this new equilibrium, workers will be compensated with higher wages for working at the bad

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REPOST: Screening out the “social” entrepreneurs

September 30, 2019

Funding early stage ventures presents a HUGE adverse selection problem:  How do capitalists find the twenty-something entrepreneur committed to making money for his or her investors, and screen out those who want to be entrepreneurs because it supports their lifestyle?  Here are four different ways: Mr Hommels employs a subtle test of character. During a chat about funding, he deliberately changes the subject. “The cool entrepreneur will immediately get back to the topic and not be a social talker,” he reckons. “The good ones are more focused.”
Mr Lobato’s test is more direct. “I get edgy and unpleasant,” he says. “I want to see what their reaction is. For them, I’m a means to an end. It shouldn’t matter how unpleasant I get. I want to see that they behave rationally and understand they

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