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Articles by [email protected] (Michael Ward)

Musk Games High Powered Incentives

April 30, 2020

The Daily Mail reports that Elon Musk has seemingly joined the chorus demanding the end to COVID-19 related lockdowns. But it also reports that he was about to get a large payout from Tesla linked to its stock price. Shares, which had been depressed, rose 10% just ahead of its quarterly report.

Maybe he really believes this, but he sure has an incentive to feign belief.

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Lockdowns vesus contact tracing

April 28, 2020

Mulligan, Murphy, and Topel* have a thoughtful policy piece on "Some basic economics of COVID-19 policy." It combines a number of economic concepts (e.g., fixed costs versus marginal costs, option value, externalities, capital depreciation (physical and human)). Essentially, it compares the relative strengths of the policy alternatives of Large-Scale Social Distancing (LSSD) versus Screen, Test, Trace and Quarantine (STTQ). From their summary:
Our analysis indicates that the features of a cost-effective strategy will depend on both current circumstances and how we expect the pandemic to play out. Some elements are common, such as the desire to use STTQ rather than LSSD when infection rates are low, and shifting the incidence of disease away from the most vulnerable. These apply whether

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Dying from Protection from Gouging

April 1, 2020

David DiSalvo has a write up at Forbes on his experience trying to obtain N95 masks during this pandemic. Federal and state officials say they are "scouring the globe" for PPE while some medical professionals are going without. Here is his summary.
Millions of N95 masks have been available throughout the U.S., Canada and the UK during the pandemic, according to brokers trying to sell them.
The high price point per mask, driven by extreme demand, has
contributed to an overwhelmed reaction among potential buyers,
especially in the U.S.
Scrutiny surrounding these deals is high because of ongoing scams
and claims of price-gouging, both of which are triggering emotionally
charged reactions and fear of making deals.
Millions of masks are being purchased by foreign buyers and are

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How to Limit Hoarding

March 25, 2020

Usually, retailers want to sell as many units to a customer as possible. And we should want them to. But currently there is a social imperative against hoarding key supplies. Some retailers are willing to forgo additional profits to pursue this social goal. The Meny supermarket in Denmark set the price of a bottle of hand sanitizer at kr40 ($5.73) but two bottles at kr1000 ($143) each.

Hat tip: Carpe Diem blog

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“Ban-the-Box” versus Alternative Screens

March 18, 2020

The “ban the box” (BTB) policies limiting an employer’s ability to learn about job applicants’ criminal records are intended to improve employment outcomes for those with criminal records, with a secondary goal of reducing racial disparities in employment. However, since employees with a criminal record tend to have more workplace problems, it is valuable to employers to develop other screens to weed out these applicants. One possible screen is to reducing hiring among the demographic groups that include more ex-offenders.In "The Unintended Consequences of “Ban the Box”: Statistical Discrimination and Employment Outcomes When Criminal Histories Are Hidden," Doleac and Hansen recently investigated this issue by examining the outcomes in about one hundred jurisdictions enacting these

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Optomotrists tying services and products

March 10, 2020

Like most people with vision problems, I get my eyes checked (services) by an optometrist. Consumers like me could get eyeglasses or contact lenses (products) from an optician, but often our optometrists’ vertically integrate into the product to provide "one-stop shopping." Such a vertically integrated optometrist may want to blunt competition in the complementary product by steering consumers to their own products. One way to do this is to not release prescription information. This effectively ties the product to the service. How much more can optometrists earn from such a tying strategy?Norris & Timmons recently examined what happened when The Fairness to Contact Lens Consumers Act (FCLCA) of 2004 required the release of prescription information to patients. They compared states that

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Scale, Scope, and Law Firm Mergers

February 20, 2020

A merger between two large Philadelphia law firms led Sam Wood at the Philadelphia Inquirer to investigate why. It seems there have been quite a few law firm mergers recently.

It does not look like firms are trying to eke out efficiencies through scale economies.
“There are really no economies of scale,” said Tom Clay, a legal-industry consultant at Altman Weil. “Bigger firms are more expensive to run. The only way they save money is through a smaller real estate footprint. Anyone who tells you different is either ignorant or lying to you.”

 But there may be scope economies.
Firms want to expand their geographical scope. They want to offer clients more specialized practices and increase profits.

Practices in other geographical places are complementary to existing practices. And

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Adverse Selection into Privacy Protection

February 19, 2020

The recently enacted General Data Protection Regulation (GDPR) allows EU citizens various privacy protections, including the ability to opt out of data collection schemes. In a new paper, Aridor, Che, Nelson, and Salz find that a sizable fraction of the population, presumably those who are more sensitive to privacy issues, does opt out. How does this affect those that do not? They become even more "persistently trackable" because those who opt out now do not generate as much noise on those remaining.
Further in keeping with this hypothesis, we observe that the average value of the remaining consumers to advertisers has increased, offsetting most of the losses from consumers that opt-out. 
Hat tip: Marginal Revolution

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Valentines Signals

February 14, 2020

Two trends in how Americans celebrate Valentines Day seem to be at odds with each other. The National Retail Federation reports a steady decline in adults who are participating (51% in 2019 versus 63% in 2009) but a steady increase in average spending ($162 in 2019 versus $103 in 2009).This would be consistent with high quality suitors sending a stronger signal to their romantic partners so as to further differentiate themselves from low quality suitors. It seems to be working because the drop in participation suggests that low quality suitors are dropping out of this arms race.* This is consistent with the unhinging of the market or sex from the market for marriage.*Poor Mrs. Ward will reap only a fraction of this amount. But the quality of her suitor was revealed so long ago that

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Hidden Costs on Social Media Marketing

February 10, 2020

Michael Farmer cautions advertisers to be aware of the hidden costs of exploiting online and social media. Advertisers in traditional media, such as print, radio or TV, were familiar with what a campaign entailed. But the online scopes of work expanded into "banner ads, email marketing, Facebook posts, Instagram posts, mobile marketing efforts, and website development." The big advantage of online campaigns is the near instantaneous and increasingly granular feedback that can inform the refinement of campaign messaging to different niches. This advantage, though, requires exponentially more interaction between the client and the ad agency.
Agencies and their clients are overwhelmed by the need to communicate and deal with one another — to plan, obtain approvals, carry out work, calculate

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Pay-How-You-Drive Insurance Works

February 5, 2020

A new paper by Reimers and Shiller documents the effects of Pay-How-You-Drive (PHYD) insurance. The idea is to use telematics to monitor driver behavior and to reward better drivers with discounted premiums. While Progressive initiated monitoring driver behavior for insurance purposes, other companies are getting in on it too. Reimers and Shiller cleverly exploit the staggered rollout across states to observe company profitability and driver fatalities.First, they find that the first mover earns a profit boost. But this is temporary and dissipates with entry. That is, PHYD offers no sustainable competitive advantage to the first-mover. This seems to meet our expectations as there are few barriers to other insurers implementing PHYD systems. But  profit erosion with four or five firms also

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Does this help or hurt Ex-Felons?

January 23, 2020

The city of Oakland recently voted unanimously to bar landlords from conducting background checks before renting to tenants.
Supporters say the measure will help ensure residents released from prison are able to reintegrate back into society, hold down a job and provide for their families, instead of adding to Oakland’s homeless population. But some landlord groups worry the measure will sacrifice residents’ safety.

Sure, in the short-run ex-felons will be on a more equal footing relative to law-abiding renters. But it is hard to imagine that, on average, they are not worse tenants. That they are more likely to be late with rent, cause faster depreciation of they property, and possibly make other tenants more uncomfortable. Landlords screen out these higher cost individuals with a

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DC Teacher Incentives

January 6, 2020

Michelle Rhee’s tenure as Washington DC’s Chancellor of Public Schools was controversial mostly because she instituted reforms designed to hold teachers accountable for classroom performance. This episode provides the backdrop for studying the role of high-powered incentives linked to multiple measures of teacher performance. The effectiveness of one of these reforms have recently been analyzed by Thomas Dee and James Wyckoff in their paper "Incentives, Selection, and Teacher Performance: Evidence from IMPACT." So how did it do? From the abstract:
Our RD [Regression Discontinuity] results indicate that dismissal threats increased the voluntary attrition of low-performing teachers by 11 percentage points (i.e., more than 50 percent) and improved the performance of teachers who remained by

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Hard to Find Good Hitman

October 30, 2019

Outsourcing is fraught with perils. You give up some control over product quality and your supplier has different incentives. That is what happened when the Chinese businessman, Tan Youhui, sought to take out a competitor, Wei Mou. Not having the requisite skill set himself, he hired a hitman. But the hitman outsourced it to another hitman for half the contract value. Who then outsourced it again. Who then outsourced it again. Eventually, the fifth in the chain became incensed at how much the value of the contract had fallen, which eventually led to the police finding out about the plot.

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Beer Industry Structure

August 24, 2019

Mark Perry at AEI keeps generating insightful graphs. This one commemorates that the number of breweries in the US has increased to its highest level ever. There is more information about one of my favorite industries here.

To me, the interesting thing is trying to understand why we observe such a stark decline in the number of breweries for 100 years and then a rapid increase over the last three or more decades. Some insights from others’ research include:Before 1900, the minimum efficient scale had been quite small with average cost rising sharply. Most cities supported multiple breweries and, because the product spoiled quickly, most breweries only served a single city.
In the late 19th century, the geographic scope of the market increased when spoilage was reduced due to increased

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Algorithmic Gender Bias?

July 1, 2019

Last week I got to attend the always enlightening annual ZEW ICT Economics Conference. One of the Keynotes was from the always insightful, Catherine Tucker. In one part of her talk she related that her team conducted an experiment to place a generic ad for a STEM educational program on social media only to find out it was shown much more often to men/boys than women/girls. Algorithmic bias, right!?Digging a little deeper, they discovered that their bid lost out on the ad auction for females more often because others would bid higher. Ads are placed based on the results of real time auctions for "eyeballs." It turns out that men are cheap (pun intended). That is, women control so much more discretionary spending that they are more heavily courted by advertisers with higher auction bids.

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Thwarting neo-Nazis by Denying them Beer

July 1, 2019

The BBC posted a story a week ago "Beer ban leaves German neo-Nazi rock fans thirsty." Right-wingers descend on this town for a ‘music’ festival that the local courts have deemed something more.
The Dresden court justified its ban on alcohol at the festival by saying "the event has an obviously martial and aggressive character", and there was a risk that alcohol could make violence more likely.

Townsfolk worried that the attendees would simply purchase from the local grocery stores and so bought more than 200 crates of beer in the town’s supermarkets. Festival attendance fell by half. That is changing the game to obtain more desirable results.

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Concentration Increasing?

May 8, 2019

There have been reports that industry concentration has been rising in the US. If so, firms will tend to have more market power that allows them to set higher margins. If so, those lazy antitrusters need to wake up and protect competition.But it all turns out how you define the market. As my students all know, markets can be defined in relation to three dimensions: product characteristics, level of geography, and unit of time. A new paper by Rossi-Hansberg, Sarte, and Trachter examines the data at a more local level. While national concentration measures are rising slightly, more local measures are declining. This is consistent with ever more competition (although there have been claims that product differentiation is increasing). 

Perhaps the antitrust bureaucrats can go back to their

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Dolphin Incentive System

February 15, 2019

Even Dolphins will game an imperfect reward system.

I think of this is less an indictment of capitalism and more an indictment of a poorly thought out incentive system.

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Bitcoin Bubble

December 17, 2018

For a few years now, economists have been debating whether we are in a Bitcoin bubble. That its value has fallen to one-sixth its peak value about a year ago suggests the bubble has burst. However, that it still trades at five times its value two years ago indicates that it is not completely worthless.

My monetary theory friends remind us that all fiat currencies are bubbles. They will become worthless eventually, it is just a matter of speed. Bitcoin, and other crytocurrencies, have the advantage of blockchain technology for secure, anonymous transactions and so some form of cryptocurrencies are likely to survive for the long haul. This feature makes it a favorite of libertarians who are now bristling at Bitcoin being called "Beanie Babies for Libertarians."HT: Tim Wunder

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Vertical Integration in Hollywood

December 7, 2018

The WSJ reports that the US DOJ is "mulling over" repealing many rules governing how movies are distributed. The so-called Paramount decision of 1948 severely restricted movie studios’ ability contract over how movies would be displayed. In the intervening 70, this decision has been the subject of much scrutiny by economists. As related in Hanssen’s (2010)  examination of how vertical integration facilitated consumer benefit enhancing length-of-run decisions:
The passage of time has not been kind to the economic arguments underlying the Paramount decision. Kenney and Klein (1983) and Hanssen (2000) provide efficiency rationales for block booking. De Vany and Eckert (1991) and Orbach and Einav (2007) discuss how minimum ticket prices reduced monitoring costs. De Vany and Eckert (1991)

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A Rather Unique Economy of Scope

October 5, 2018

Lots of companies provide rewards to customers who recommend their products to friends. But now Tesla is offering to send any photo you want etched in glass into space for the next million years.
Perhaps most notable, though, is “Launch Your Photo into Deep Space Orbit,” a new reward for owners with one qualifying referral. The cool, fun perk involves Tesla laser-etching any photo of the owner’s choice that would be sent into deep space. Tesla did not state it explicitly on its new Referral Program page, but the laser-etched photos would most definitely be sent to orbit using rockets from Elon Musk’s private space company, SpaceX. Owners who wish to send their pictures to deep space orbit can expect a reminder on their Tesla mobile app to upload their selected photo sometime in December

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Bribing Amazon Employees

September 18, 2018

The WSJ first reported that Amazon employees have taken bribes to provide information on product reviews and even to have negative reviews simply removed.
According to the report, middlemen use social media sites like WeChat to track down Amazon employees, offering them cash to turn over internal information or to delete negative reviews. The WSJ also reports that it costs roughly $300 to take down a bad review, with brokers “[demanding] a five-review minimum” per transaction. Amazon employees have also been asked to provide e-mail addresses of customers who left negative reviews, or to provide sales information to give sellers an edge against their competitors. To combat the behavior, an Amazon spokesperson told the WSJ that it has implemented “systems to restrict and audit what

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Investing in Theranos

September 13, 2018

Our chapter on adverse selection uses IPOs as an example where sellers are more informed than buyers and so there is an opportunity for adverse selection and, perhaps, misinformation. But rarely does it blow up as big is being reported for Theranos.
The concept was irresistible: Theranos said it could take a few drops of blood from a simple finger prick to detect everything from H.I.V. to a diabetic’s A1C level. Relying on a proprietary technology to analyze the small quantities of blood, the private company offered a wide array of tests much more cheaply than existing blood tests.

Would that it had worked. Instead, the tests never were able to prove to work as advertised. It appears that the founder, Elizabeth Holmes, was able to fool the likes of George P. Schultz, Henry Kissinger,

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Smart Parking Meters

August 30, 2018

One of my favorite areas of Fort Worth is getting smart parking meters. West 7th Street is quickly becoming quite the evening destination. However, once you are there, you may have to circle a bit to find a parking spot … or park some distance away. A supply shortage means that the price is too low, especially in the evening. The city is implementing meters that will adjust price based on demand. In the longer run, more garages are also becoming available.HT: Cindy

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