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Luke Froeb



Articles by Luke Froeb

Good metaphor for Equity/Efficiency tradeoff

4 days ago

To communicate ideas, we need metaphors.  Greg Mankiw has a good one in this mornings NY Times, Can America Afford to Become a Major Welfare State?Providing a social safety net is like using a leaky bucket to redistribute water among people with different amounts. While bringing water to the thirstiest may be noble, it is also costly as some water is lost in transit.In the real world, this leakage occurs because higher taxes distort incentives and impede economic growth. And those taxes aren’t just the explicit ones that finance benefits such as public education or health care. They also include implicit taxes baked into the benefits themselves. If these benefits decline when your income rises, people are discouraged from working. This implicit tax distorts incentives just as explicit

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The paradox of ESG investing

18 days ago

ESG definition:

Environment. What kind of impact does a company have on the environment? Social. How does the company improve its social impact?Governance. How does the company’s board and management drive positive change? John Cochrane has a good post on how it effects change:

The point of ESG investing is to lower the stock price and raise the cost of capital of disfavored industries, and therefore slow down their investment.

If it works, it raises the cost of capital to non-ESG firms, which lowers the Net Present Value (NPV) of their investments (because they have higher discount rates). As a consequence, non-ESG firms get very picky, and invest only in projects with higher rates of return. On the other side of the coin, NPV investing lowers the cost of capital to ESG firms,

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Price discriminating against brides seems profitable

20 days ago

The wedding industry is notorious for sticking it to brides.   But whether this is due to price discrimination or higher costs (brides can be demanding) is still a matter of debate.  But here is an example that seems clear:
As I wrote in the column, part of the reason that retailers can get
away with charging higher prices for wedding-related services is that
spouses-to-be probably have stronger preferences for their “special day”
than consumers shopping for other kinds of events do. That means
they’re less price-sensitive. In the case of gowns, for example, brides
probably have much more specific requirements for their own dresses than
for the dresses that their bridesmaids will wear, allowing retailers to
charge different prices for each, regardless of what material or labor

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Jeff Bezos does HR

22 days ago

Reading Amazon Unbound by Brad Stone, his second bio of Jeff Bezos and Amazon, which picks up where The Everything Store leaves off.  It is amazing how much Bezos involves himself in the details of running the company.  For the many of problems that Amazon faced–Kindle, Alexa, expansion into India, Mexico, and Brazil, or even HR–Bezos would form a team, give them an insane deadline, and dive into the details himself.  Most significantly, Bezos is not afraid to make mistakes.  He initially tried detailed performance reviews, but then moved to a something simpler, and easier for employees to digest.  Explaining the change to his board of directors, he said "its like telling your wife how great she is, and then adding, `but you are a little overweight.’  She won’t remember anything else."

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Differences-in-DIfferences explained, albeit with a macroeconomics example

24 days ago

[embedded content]Another great video from MRU.  Teaches students how to "create" natural experiments using non-experimental data.  To complement this video, try the "Hidden Causality" and "Spurious Correlation" exercises for this free web app described in A Simple Way to Teach Regression.Froeb, Luke M., A Simple Way to Teach Regression (August 05, 2021). Vanderbilt Owen Graduate School of Management Research Paper, Available at SSRN: https://ssrn.com/abstract=3507142 or http://dx.doi.org/10.2139/ssrn.3507142

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Costco’s profit comes mostly from membership fees

24 days ago

In 2018, Costco’s profit was equal to its membership fees.  In 2020 membership fees were 87% of profit.  These barely profitable prices (only 30¢ out of every $100 in sales is profit) increase demand for Costco membership.   In other words, people pay to become Costco members because they get very good prices, on average.  HT:  Merle Hazard

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Vaccine inequality

25 days ago

From The Economist:

By late August 2021 around 60% of people in higher-income countries had received at least one dose of a vaccine. In poorer countries only 1% had.The extended lockdowns have huge costs: 

The need to extend social-distancing measures, loss of revenue from tourism and business travel, and the likelihood of social unrest in the event of a prolonged struggle against the virus, among other factors, will all weigh on their economic trajectory.

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China gives the poor a bigger slice of the proverbial pie, but if it affects incentives…

25 days ago

…it will also make the pie smaller.  The Economist reports on the efforts of the Chinese government to redistribute income from rich to the poor.  Chairman Xi has pronounced, “We must not allow the gap between rich and poor to get wider.” He seems to be channeling Confucious whose writings he frequently quotes, "a wise leader worries not about poverty but about inequality."  If this sounds familiar, it may be because the top 1% in China own 30.6% of household wealth; close to the US figure of 31.4%.

The trick will be to redistribute income without muting the incentives that have made China so successful. [See earlier posts about the incentive aligning effects of private property in China]

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Why would an air traffic controller deliberately put two planes on a collision course?

25 days ago

In 1974, it became more difficult for air traffic controllers to qualify for "burn out" disability insurance.  They needed some hard evidence that they were actually burned out.  In response, some deliberately put planes on a collision course to generate "near misses" that would qualify them for disability.  The good news is that they did it in low-traffic periods so that the controller could closely monitor the two flights to make sure that they did not actually collide.  (link to article)

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Should physicians be bill collectors?

26 days ago

On the upside, physicians would see the bills as their patients see them, which would remind them of the tradeoffs associated with expensive treatments.One the downside, physicians have to play the dual role of healer and bill collector.FROM JAMA:Through increasing deductibles, coinsurance, and co-payments, the privately insured population in the US is responsible for a larger share of health care out-of-pocket costs. Although many studies have examined the effects on patients, the implications for physicians have received less attention. The increase in cost sharing is forcing many physicians and health systems to take on the role of bill collectors. It is a task for which physician practices are unsuited. The result is a system with substantial administrative burden, frustrated patients

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Trust only 1/3 of the results from Pscyhology, but 2/3 of the results from behavioral economics

August 24, 2021

Dan Ariely (psychologist and behavioral economist) was forced to retract a well-cited paper based on fraudulent data. Ariely, a frequent TED Talk speaker and a Wall Street Journal advice columnist, cited the study in lectures and in his New York Times bestseller The (Honest) Truth About Dishonesty: How We Lie to Everyone — Especially Ourselves. We have blogged about Ariely’s work and want to warn readers that we may have retract the blog posts, pending the outcome of an internal investigation.  Professor Ariely’s problems are part of a larger "replication crisis." It began when the journal Science found that only 1/3 of the psychology experiments underlying the most cited papers in the field of psychology  could be replicated.  A bigger and more recent study finds much the same thing.

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How did our underfunded public pensions do during the pandemic?

August 24, 2021

Previous posts have focused on the underfunding of public pensions caused by unrealistically high discount rates, e.g., 7%.  For these "defined benefits" plans, the states and cities usually do not save enough.For example, if a pension fund needs to pay a teacher $100 in 20 years and uses a 7% discount rate, it must save 100/(1.07)^20=$26.  Then, if it invests $26 and earns a 7% return, the fund will have $100 in 20 years when the employee retires.  However, if it earns only 4.7%, the fund will have only $26*(1.047)^20=$65, a shortfall of 35%.  MarketWatch reports on a Boston College study of the effect of the pandemic on defined benefit pensions:2020 funding of public-pensions to invest sector plans at 74.7%, up from 72.8% last year.The good performance was due to the huge stockmarket

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What my daughter is learning in Rome

August 23, 2021

We have blogged about the labor market problems in Italy before:
This is why Southern Europe is a messLook ahead and reason back:  ItalyIf you can measure absenteeism, you can control it

But I never realized how bad it was until I received this e mail from my daughter who is studying in Rome this summer:
Today, in my global practicum class we had a speaker who owns several McDonald’s
franchises in Rome and he enlightened us on the troubles of being an employer
in Italy First of all, he said, all employees who are hired, are hired for life.
They are allotted 6 weeks of paid vacation per year– even working at Mcdonald’s!!! Each employer must pay a 100 percent tax of what he pays to the employee to the
government. Each employee has a 6 month paid sick leave per year that they can take

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Book Review: Chaos Monkeys:

August 23, 2021

Chaos Monkeys, Obscene Fortune and Random Failure in Silicon Valley is an autobiography of a Physics PhD from Berkeley who:Went to Goldman Sachs to model credit derivatives; Founded a startup to be the Goldman Sachs of online ads:  instead of moving companies to their highest valued uses it moved ads to the best content .  Created FBX (Facebook Ad Exchange) that allows advertisers to bid for targeted users.The NY Times begrudgingly gave it a good review (they were able to look past the self-interested behavior the book celebrates and satirizes) because of its "educational value."  The book teaches readers:1.  To anticipate opportunistic behavior caused by the incentive conflicts between entrepreneurs, angel investors, and venture capitalists.  2. To understand how ad exchanges (i) find

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Price transparency at last!

August 23, 2021

Colleague Larry van Horn’s efforts to require negotiated prices between payers (insurance companies) and healthcare providers (doctors, hosptials) be made public are about to bear fruit.   Larry showed thatEven when insurance covers the cost, there is, on average, a 300 percent price variation within a market for the exact same services.
As a special advisor to President Trump, Larry encouraged the President to force the bargaining pairs to make public their negotiated prices.The first data is now trickling out and the NY Times seems to approve, and gives President Biden credit for not reversing Larry’s efforts:The requirement to publish prices is a rare bipartisan effort: a Trump-era initiative that the Biden administration supports

MEA CULPA:  17 years ago, when I was Chief Economist

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We are so busted!

August 19, 2021

https://freakonomics.com/podcast/reasons-to-be-cheerful-rebroadcast/Good but long podcast.  This caught my eye:BAUMEISTER: …And incidentally, professors complain a whole lot. I remember visiting a university and I was having a conversation like this. I say, “This is a wonderful job,” and so on. And they looked at each other and said, “Well, we never say that out loud. You have to always be complaining. Otherwise, the administration won’t give us a raise. We always have to act like everything’s awful.”

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Economists vs. environmentalists

August 11, 2021

Economics and environmentalism are belief systems that shape their adherent’s way of thinking about the world.                                                –Robert H. Nelson (link) When I earned my PhD, I started doing God’s work (link to funny essay, "The Market as God") at the Justice Department, challenging anticompetitive mergers and putting price-fixers in prison.  My housemate was trying to do the same at the Environmental Protection Agency, using marginal analysis to design incentives to get polluters to face the consequences of their behavior.  If polluters produce up to the point where    MR=MCan output tax equal to the harm they cause, T=P, would bring pollution down to the point where the benefits of producing more are equal to its costs, including the costs of pollution.

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Why do 25% of people get so easily duped?

August 6, 2021

MarginalRevolution.com has the answer:  because they don’t "look ahead and reason back," one of the maxims from our textbook.  In the simple game below, solved by backward induction (look ahead to the last move by the third player to see what the second and then the first player should do), 75% of fifth graders learned to look two steps ahead (as the first player) to correctly anticipate what the second and third players would do:

Player 3 is simply asked to match a shape. 

Player 2 earns the most by choosing the color chosen by Player 3. Of course, Player 2 doesn’t know what color Player 3 will choose and so has to reason about Player 3’s actions.

Player 1 earns the most by choosing the same letter as Player 2 but now must reason about Player 2 which involves reasoning about how

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Training Artificial Intelligence to not discriminate

August 6, 2021

The top book review on Amazon reduced Prediction Machines to three propositions: Artificial Intelligence (AI) is mostly about prediction The cost and price of prediction is falling, This will increase demand for complementary skills, like judgement and decision making.As the cost of developing predictions has fallen, tremendous innovation has followed.  For example, AI can identify tumors with much greater accuracy than humans.  However, AI can also identify race with "frightening" accuracy:

Whatever the algorithms were seeing, they saw it clearly. The software could still predict patient race with high accuracy when x-rays were degraded so that they were unreadable to even a trained eye, or blurred to remove fine detail.

To see how this could create problems, imagine training AI to

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House affordability

August 6, 2021

We have blogged extensively about the zoning restrictions that restrict the supply of new homes and raise the price.

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A Simple Way to Teach Regression

August 5, 2021

A Simple Way to Teach RegressionVanderbilt Owen Graduate School of Management Research Paper15 Pages Posted: 10 Jan 2020 Last revised: 5 Aug 2021Luke M. FroebVanderbilt University – Owen Graduate School of ManagementDate Written: August 05, 2021AbstractThis paper introduces a simple free web app that can teach regression to anyone who can point and click. Originally designed to teach Justice Department attorneys enough about regression so that they could cross examine rival experts, the app “inverts” the usual pedagogy: instead of showing users how to run regressions on data, it asks them to click on a graph to “create” data to achieve a given outcome, like a statistically significant line. Successful completion of each task is rewarded with immediate feedback that reveals the

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Clorox is outbidding Vanderbilt for ad space

July 23, 2021

Following up on an earlier post showing Facebook, Instagram, Google, and Twitter show 20% fewer STEM ads to women than men:  as  Scientific America explains

Women are pricier to reach because they generally make more household purchasing decisions than men do. …

…on Instagram it cost $1.74 to get a woman’s eyeballs on the ad but only 95 cents to get a man’s.

In other words, Clorox is outbidding Vanderbilt for ad space likely to be seen by women because Clorox places a higher value on the ad.  However, auctions are efficient, so both men and women end up seeing the highest-value ads.   OK, so there is no "disparate treatment" of men and women, but isn’t it illegal to adopt practices that have a "disparate impact?" My understanding (I am NOT an attorney) is that Federal law

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“What happened to you?”

July 11, 2021

Andrew Sullivan has always had a unique perspective.  He calls himself an Obamacon and fears that we are at risk of replacing "the largest, freest, most successful multiracial democracy in human history" with:

…the end of due process, the rejection of even an attempt at objectivity, a belief in active race and sex discrimination (“equity”) to counter the legacy of the past, the purging of ideological diversity, and the replacement of liberal education with left-indoctrination.

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NIMBY zoning is hurting our kids

July 10, 2021

Housing prices now consume 40% of the income of new home buyers. Our generation paid only 30%. The difference is NIMBY zoning. Plus density is green.

Fabulous essay by Ken Glaeser on zoning:

Americans who settle in leafy, low-density suburbs will leave a significantly deeper carbon footprint, it turns out, than Americans who live cheek by jowl in urban towers. And a second paradox follows from the first. When environmentalists resist new construction in their dense but environmentally friendly cities, they inadvertently ensure that it will take place somewhere else—somewhere with higher carbon emissions. Much local environmentalism, in short, is bad for the environment.

Thoreau was wrong. Living in the country is not the right way to care for the Earth. The best thing

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I am not sure this is how I would characterize my work, but …

July 1, 2021

Why the US is so friendly to monopoliesWhat they’re saying: "Numerous hard-wired differences between the European and American enforcement regimes make it very difficult for U.S. antitrust enforcement agencies to emulate their EU counterparts," wrote antitrust experts Gregory Werden and Luke Froeb in an article in 2019. In 10 different areas, they found it much easier to crack down on large monopolies in Europe than in the U.S.The big picture: European antitrust measures are decided by politicians; in the U.S. it’s up to judges.

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