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Tag Archives: 19: The Problem of Adverse Selection

“Ban-the-Box” versus Alternative Screens

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...

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Adverse Selection into Privacy Protection

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...

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Valentines Signals

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...

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Pay-How-You-Drive Insurance Works

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...

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Does this help or hurt Ex-Felons?

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...

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DC Teacher Incentives

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:...

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A novel way to screen using the felony box

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...

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Using credit history to price car insurance

In 2007, the FTC's Bureau of Economics just relased their FACTA study, which concludes that: Credit scores effectively predict ... the total cost of [auto insurance] claims. Credit scores permit insurers to evaluate risk with greater accuracy, which may make them more willing to offer insurance to higher-risk consumers ...[note: this is why you can call up GEICO, let them look at your credit report, and get an auto insurance quote over the phone]. ..as a group, African-Americans and...

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REPOST: Screening out the “social” entrepreneurs

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...

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REPOST: Nobel for figuring out how best to tie pay to performance

One of the enduring themes of out textbook is that to give employees enough information to make good decisions--and the incentive to do so--what we call "goal alignment," you have to tie pay to performance.  The not only attracts the most productive workers (adverse selection) but also motivates them to work hard once they arrive (moral hazard).  The tradeoff is that you expose the employees to risk, for which they have to be compensated.The Nobel in Economics was just awarded to two...

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