We typically advocate that competition is good, except when it is not, for example in the case of large production fix costs. Such natural monopolies then need to be regulated. Part of the debate on health care in the United States is also about competition: if health insurance is provided by a single entity, it got to be less efficient. Well, there is data that can verify this, by looking at employers that offer a choice of providers and those that do not.
Ilya Rahkovsky does this and comes to the stunning conclusion that insurance providers that have a exclusivity contract with an employer charge about 40% for the same "insurance quality units." How could this be? Exclusive providers tend to provide better quality insurance because they can subsidize it with the premiums of low quality policies. That would not be possible if they were to compete with other providers.
That said, insurance providers must have been in competition in order to obtain the exclusivity contract, so it is not quite true to state that the monopoly is welfare improving. But from the employees' perspective, it looks like a regulated monopoly in the sense that the employer can keep a leash on the insurance company by threatening to change providers, and that keeps the monopolist from exploiting all rents, it even encourages it to show goodwill to keep the contract. With multiple providers, everyone goes for the quick buck and offers lowly policies.
Tuesday, February 8, 2011
Monday, February 7, 2011
The impact of credit card cash-backs
Banks seem to really push credit card use on their customers, seeing all the junk mail, the recruitment stands in malls, campuses and airports, and the various incentives (frequent flyer miles, cash-backs). Why are they doing this? One would think the marginal customer is less profitable, and may even be detrimental to the bottom line as he is more likely to default.
Sumit Agarwal, Sujit Chakravorti, and Anna Lunn look specifically at cash-backs using administrative data and find that a 1 percent increase in cash-back leads to a US$68 increase in spending and US$115 increase in debt in the first quarter. While one can understand this would increase spending, it is puzzling to see the debt increase even more. Why would people substitute debt away from other cards? Indeed debt is not tied to this cash-back. It turns out this comes mostly from people who have previously barely used the card, thus they basically switch allegiance both in spending and debt. A reduction in the interest rate has similar consequences.
Are cash-backs good or bad. This paper shows that they are mostly used to steal customers from other cards. Such competition is good. However, the ones who pay for these rewards are the merchants, who face basically a duopoly and are caught between a rock and a hard place. Ultimately, the consumer ends up paying for these cash-backs through higher prices in the store, and those using cash or debit cards loose out.
Sumit Agarwal, Sujit Chakravorti, and Anna Lunn look specifically at cash-backs using administrative data and find that a 1 percent increase in cash-back leads to a US$68 increase in spending and US$115 increase in debt in the first quarter. While one can understand this would increase spending, it is puzzling to see the debt increase even more. Why would people substitute debt away from other cards? Indeed debt is not tied to this cash-back. It turns out this comes mostly from people who have previously barely used the card, thus they basically switch allegiance both in spending and debt. A reduction in the interest rate has similar consequences.
Are cash-backs good or bad. This paper shows that they are mostly used to steal customers from other cards. Such competition is good. However, the ones who pay for these rewards are the merchants, who face basically a duopoly and are caught between a rock and a hard place. Ultimately, the consumer ends up paying for these cash-backs through higher prices in the store, and those using cash or debit cards loose out.
Sunday, February 6, 2011
Why should I write grant applications?
My administrators insist I should go for grants. They say it raises prestige and my research would benefit from it. I have not applied for a significant grant for quite some time for a reason: it is a horrible waste of time. I do not need grants. I do my research very well without the need for support money. All I need is a pencil, paper and a computer. I can even do without a printer. I do not need to pay for data, software and subscription, as all this is available for free (thanks to open source and open access). I do not need a research assistant as I do that much faster and better myself. And I do not need summer money as I am already well paid. In other words, I am doing just fine without grants, why should I put the time and effort into maybe getting a little money I do need, that comes with all sorts of strings attached?
My administrators do not care about the impact on my research, or my welfare for that matter. They want the overhead. They are begging for money to justify their existence. I already bring lots of money to the college by teaching many, many tuition paying and public funding attracting undergraduates. In fact, from a back of the envelope calculation, my pay should double just for that. I am already subsidizing the administrators, why would they need grant overhead? They need to feed a machinery that deals with those grants. The office of research, which manages the grants, is twenty people strong. And if I hire a research assistant among the graduate students, I have to pay his or her full tuition before anything can be assigned. I cannot hire outside the university. So why would I want to hire anyone?
In some way, the administration wants me to pay for my salary through grants, a salary I have already more than earned with teaching to overflowing classrooms. To be honest, if I were successful in obtaining grants, I would leave the university and keep everything for myself. I would then be able to concentrate on research instead of putting up with all the red tape. But most funding agencies do not accept submissions from independent researchers, so I continue doing my research without grants and try to ignore these administrators. Let them show their self-importance elsewhere.
My administrators do not care about the impact on my research, or my welfare for that matter. They want the overhead. They are begging for money to justify their existence. I already bring lots of money to the college by teaching many, many tuition paying and public funding attracting undergraduates. In fact, from a back of the envelope calculation, my pay should double just for that. I am already subsidizing the administrators, why would they need grant overhead? They need to feed a machinery that deals with those grants. The office of research, which manages the grants, is twenty people strong. And if I hire a research assistant among the graduate students, I have to pay his or her full tuition before anything can be assigned. I cannot hire outside the university. So why would I want to hire anyone?
In some way, the administration wants me to pay for my salary through grants, a salary I have already more than earned with teaching to overflowing classrooms. To be honest, if I were successful in obtaining grants, I would leave the university and keep everything for myself. I would then be able to concentrate on research instead of putting up with all the red tape. But most funding agencies do not accept submissions from independent researchers, so I continue doing my research without grants and try to ignore these administrators. Let them show their self-importance elsewhere.
Friday, February 4, 2011
Want more FDI in Africa? Get a foreign-trained leader
You know the mantra: if you want to get funding for a project, you need to be well connected. It turns out the same holds true at the macroeconomic level for foreign direct investment in Africa.
Indeed, Amelie Constant and Bienvenue Tien point out that have an head of state educated abroad increases on average FDI by up to 100%. And 40% of African leaders obtained their tertiary education outside of the continent. More importantly, it is once you have some FDI flows going that the foreign connection becomes important. Indeed, for countries in the lower quantiles of FDI, foreign education of the leader has no impact. But if there significant FDI, then it matters a lot. It is not clear why, perhaps part of the story is that low FDI countries cannot attract funds no matter what. And why would foreign education matter? It is probably not because of human capital, as those with tertiary education in Africa do worse, but still better than those without tertiary education. It must be the connections.
Indeed, Amelie Constant and Bienvenue Tien point out that have an head of state educated abroad increases on average FDI by up to 100%. And 40% of African leaders obtained their tertiary education outside of the continent. More importantly, it is once you have some FDI flows going that the foreign connection becomes important. Indeed, for countries in the lower quantiles of FDI, foreign education of the leader has no impact. But if there significant FDI, then it matters a lot. It is not clear why, perhaps part of the story is that low FDI countries cannot attract funds no matter what. And why would foreign education matter? It is probably not because of human capital, as those with tertiary education in Africa do worse, but still better than those without tertiary education. It must be the connections.
Thursday, February 3, 2011
On the wisdom of Groupon
For those who are just coming back from their sabbatical in the middle of the Amazon forest, Groupon is an obnoxious coupon provider that recruits members by validating coupons only when a predefined number of users promise to use them. Also, users prepay and obtain vouchers for the purchased good. The scheme seems remarkably popular among consumers, and Groupon recently turned down a US$6 billion buyout offer from Google. While it is successful among buyers, what about sellers? There is at least anecdotal evidence that some retailers regret participating in the scheme, for example when they get swamped by vouchers.
Benjamin Edelman, Sonia Jaffe and Scott Duke Kominers analyze why businesses would want to participate. First, as for any coupon, there needs to be a reason to discriminate between customers, that is, those that consistently looks for good deals from those who do not bother. Second, it is a good way to get a new business known, and thus accept temporary losses on those deals (if you are patient enough). Third, as those coupons are primarily increasing sales, it is important that the marginal cost of the product be rather low. You do not want to be in Groupon to sell personalized cakes. And I would add that you need to either cap the number of available vouchers or be ready to increase capacity in a moment's notice. You cannot reject customers with a voucher, while you could those with only a coupon.
Benjamin Edelman, Sonia Jaffe and Scott Duke Kominers analyze why businesses would want to participate. First, as for any coupon, there needs to be a reason to discriminate between customers, that is, those that consistently looks for good deals from those who do not bother. Second, it is a good way to get a new business known, and thus accept temporary losses on those deals (if you are patient enough). Third, as those coupons are primarily increasing sales, it is important that the marginal cost of the product be rather low. You do not want to be in Groupon to sell personalized cakes. And I would add that you need to either cap the number of available vouchers or be ready to increase capacity in a moment's notice. You cannot reject customers with a voucher, while you could those with only a coupon.
Wednesday, February 2, 2011
A neolithic prisonner's dilemma
Why did humans adopt agriculture in Neolithic times? Our intuition would say because it has better nutritional outcomes. But the evidence points to the contrary: the bones of early farmers consistently show poorer health than the preceding hunter-gatherers. So why would agriculture be adopted if it lead to a disadvantage?
Robert Rowthorn and Paul Seabright say it was individually rational to adopt agriculture, even though it was detrimental to society, much like in a prisoner's dilemma. The problem of a farmer is that he needs to defend his land and his cattle. That seems an additional disadvantage with respect to hunter-gatherers. But farmers can team up in villages, and fortify them. And voilà, now that they have a secure base, they can start raiding around them instead of only defending. This is where the prisoner's dilemma comes in: it is individually rational for every farmer to dedicate resources to defense, but this lowers everyone's welfare.
And thus started the grip of the defense industry on the economy.
Robert Rowthorn and Paul Seabright say it was individually rational to adopt agriculture, even though it was detrimental to society, much like in a prisoner's dilemma. The problem of a farmer is that he needs to defend his land and his cattle. That seems an additional disadvantage with respect to hunter-gatherers. But farmers can team up in villages, and fortify them. And voilà, now that they have a secure base, they can start raiding around them instead of only defending. This is where the prisoner's dilemma comes in: it is individually rational for every farmer to dedicate resources to defense, but this lowers everyone's welfare.
And thus started the grip of the defense industry on the economy.
Tuesday, February 1, 2011
A driving median voter reduces gas taxes
If you own a car, you are not too happy when gas taxes go up: it is more money out of you pocket, however you benefit from a reduction in congestion and lower pollution as long as this tax increase also implies a reduction in gas consumption. If you do not own a car, you would view positively the increase in gas taxes, as the state can now provide more services or reduce other taxes you may be paying. However, some goods with a high share of transportation costs may be become more expensive. Does this reasoning make sense in a political equilibrium, i.e., is the level of gas taxes determined by whether the median voter is a car driver or not?
Fay Dunkerley, Amihai Glazer and Stef Proost show that it does and figure out that in the OECD a car driving median voter leads to a gas tax that is 20% lower than a walking median voter. Of course any such estimate is fraught with endogeneity: the median voter is walking because the tax is high. To overcome this problem, the authors use a dynamic setup that takes into account when a median voter starts to drive.
Fay Dunkerley, Amihai Glazer and Stef Proost show that it does and figure out that in the OECD a car driving median voter leads to a gas tax that is 20% lower than a walking median voter. Of course any such estimate is fraught with endogeneity: the median voter is walking because the tax is high. To overcome this problem, the authors use a dynamic setup that takes into account when a median voter starts to drive.
Subscribe to:
Posts (Atom)