Doctors Don’t Offer Free Check-Ups
By Chris | November 12, 2007
In the comments section of Asymmetric Information: Car Trouble, laura notes that:
“…the extra money they [mechanics] charge may be a reasonable part of return of the work they did for getting the information we do not have”
She makes a valid point that mechanics need to be compensated for their knowledge of car problems. It takes time and experience to be able to diagnosis the problem when a vehicle breaks down. It is standard for the diagnosis of a car’s problems along with an estimate for repairs to be free. The knowledge necessary to make the diagnosis is subsidized by the repair work.
Why is work done this way? Doctors don’t offer free check-ups and recover the cost of their time from the surgeries they recommend. My guess is that diagnosing a car’s problem has a very low marginal cost. Mechanics already own diagnostic tools and it is usually quite easy to recognize that a part is not working properly. Similarly, the recommended course of action is almost always straightforward: replace the part.
This is not true when it comes to health care. Often diagnosing a medical condition is the most difficult and crucial aspect of care. Doctors cannot tell my grandmother why she experiences spells of dizziness nor can they explain why my mom occasionally feels tingling in her toes. The hit television drama House provides a glimpse of how baffling some conditions can be to even the smartest medical minds. The human body is vastly more complex and interrelated than any automobile. It’s a lot harder to replace someone’s lungs then the air filter in their car. Moreover, numerous treatment options exist.
When a problem and its solution are relatively straightforward, producers will offer free quotes and consumers should generally choose the low-cost provider. Lasik eye surgery fits under this category and it has become significantly cheaper in the face of competition. When a problem and its possible solution is more complex, it makes sense to pay the producer for specific advice and avoid conflicts of interest. Most people do this already. It is why we have long-term relationships with our auto-mechanic and ask our car enthusiast friend for advice. It is why we pay a specialist for his opinion, and seek out experts with reputations they wish to keep. Obtaining information about the intricacies of an automobile or a human body is costly. When you pay for this information, it is crucial to provide the right incentives.
This is not always easy to do. As laura noted in her comment, the book Freakonomics discusses how real-estate agents have an incentive to sell your house at too low of a price. Tyler Cowen describes another example in his latest book and on his blog when he recounts hiring a guide while traveling in Morocco:
“The guides don’t cost much up front (“I am your friend. I love United States. I show you for free. Very good friend. No charge nothing.”), but at the end of the day they ask you for money. I don’t just mean ask, I mean beg, plead, cajole, and finally, if need be, demand. Avoiding this spectacle — humiliating to both parties — is itself worth at least twenty dollars. In the meantime the guides bring you around to merchants of their choosing, and receive kickbacks on anything you buy. So don’t expect the guide to do your bidding or to bring you where you want to go.”
Topics: Economics | 1 Comment »
Coffee Shop Discrimination
By Chris | November 12, 2007
I’m always a little suspicious of research studies looking for discrimination in a competitive market. So, when I read Tim Hartford’s piece over at Slate examining research out of Middlebury College on whether coffee shops discriminate against women, I wanted to take a look at the study.
Caitlin Myers from Middlebury College had five undergraduate students stake out coffee shops in the Boston area and take detailed notes on how long different customers had to wait for their order. Women have a tendency of not only ordering fancier drinks than men, but also including special requests with their orders.
“In this case [not accounting for special requests], the positive coefficient for female would be the result not of discrimination but of unobserved order complexity.”
In order to avoid this problem, the authors examined whether male employees might be responsible for longer female wait times. Neither “proportion female employees”, nor “interaction of female customer and proportion female employees” were statistically significant at the 5 percent level (although the coefficients indicated greater discrimination). In the authors’ words:
“In a coffee shop with all male employees, a female customer waits
an average of 37 seconds longer for her order than a male customer. However, in
a coffee shop with all female employees a female customer’s wait is estimated to
be 7 seconds longer than that of a male, a differential which is not statistically
significantly different from zero. Although the coefficient on the interaction
term is not significant (with a p-value of 0.31), the result is suggestive that it is
not order type but rather some action on the part of employees that is driving
the result.”
Fair enough. I don’t doubt that male employees take slightly longer than their female counterparts to serve women customers. Why might this be? Myers speculates:
“However, the source of such discrimination is not
clear. One possibility is animus-based discrimination on the part of male coffee
shop employees who wish to impose higher costs on female customers. On the
other hand, these longer waits presumably mean more time spent associating
with the waiting women, which may offset any utility gains prejudiced employees
receive from imposing greater costs on female customers. Another possibility is
that rather than reflecting ill-will towards female customers, the differential is
indicative of male servers garnering utility from interacting or being near female
customers. In this case, the differential reflects not a desire to impose a cost on
women but rather to spend time flirting, chatting with, or just being around
them.”
In other words, men are out to get women and can exercise their animosity but taking an extra 30 seconds to brew that cappuccino. Or, male employees hoping for a future date, waste women’s valuable time. The study goes so far as to use Massachusetts’ median-wage to estimate the lost earnings due to discrimination: approximately 10 cents per drink.
The study to a certain extent concedes, and I suspect, that extra requests are the root cause of wait differentials. However, going to a coffee shop is about more than just getting your drink as quickly as possible. Talking with the barista is part of the experience, and will increase wait time. Is it really surprising that women might engage in this aspect of the experience more than men do? I have never worked at a traditional coffee shop but I did spend a month working at a snack bar that sold coffee. I found women significantly more chatty than men. It isn’t hard to image that they might be more talkative with male baristas than females. Surely, male baristas aren’t the only ones looking for dates.
The study also acknowledges past research suggesting that women tip less than men. Although, I doubt the difference is large enough to have much impact on service ex ante. I know at least one reader of this blog has significant work experience at a coffee shop. Any thoughts?
Notes: The study found no statistically significant discrimination of blacks. Also, almost exactly 50 percent of the sample was female. Tim Hartford’s anticdotle observation that many of his female colleagues don’t drink coffee doesn’t seem to be representative of Boston’s coffee market.
Topics: College, Economics | No Comments »
Merit Aid
By Chris | November 9, 2007
Recently, I had the opportunity to attend a seminar by Joshua Goodman on “Who Merits Financial Aid? Massachusetts’ Adams Scholarship”. It was a refreshing surprise given the dull seminars I had attended earlier in the year. Goodman, a job market candidate at Columbia, analyzed the effects of a scholarship program in Massachusetts that awards students who meet certain benchmarks on a standardized test the equivalent of 1600 dollars in aid if they attend college in-state. Goodman concludes:
“In sum, the Adams Scholarship will spend $30 million annually to leave college atten-
dance rates unchanged while paying 85% of recipients to attend the college they would
have chosen anyway and the remaining 15% to attend colleges in the public sector rather than the private sector. This is not a sensible use of the state budget.”
Personally, the existence of in-state scholarships was a major reason I decided to attend an in-state university as an undergraduate. I agree with Goodman that it is irrational to spend lots of money to encourage a few students to attend school in-state. However, I disagree that we should focus on more need-based assistance. Merit based scholarships provide an incentive for high school students to work hard. I knew too many students in high school who gamed the financial aid system. Furthermore, I think that need-based aid creates perverse incentives for families when it comes to saving for education. More on this later.
This weekend I’ll be out of state at another Ultimate Frisbee tournament. I’ll be back posting on Sunday or Monday.
Topics: Economics, Education | No Comments »
Asymmetric Information: Car Trouble
By Chris | November 8, 2007
This past summer, I drove to Mt. Rainier to visit my sister who was working at the gift shop there. Outside of Puyallup, WA my car wouldn’t start. I took it to Sears and they informed me that I had a bad starter. They replaced the starter. It still wouldn’t start. Two days, an alternator, and battery later I was back on the road.
My Explorer made it 1500 miles across the country to my university before running into more problems. The first mechanic I took it to told me that I needed to replace both of my tie rods, my upper left ball joint, my front brakes and then get an alignment. The estimate came to over 600 dollars. I balked at the price. A fellow graduate student recommended another mechanic who charged less for parts and fixed my Explorer for less than 250 dollars.
I am pretty ignorant when it comes to cars. I can change my oil, replace a flat and that’s about it. If you’re like me, you’ve probably had experience with mechanics using asymmetric information to maximize their utility. But how widespread is the problem? As a graduate student, Henry Schneider, decided to find out. He disconnected the battery cable and drained some coolant from his Suburu before taking it to 40 different garages.
“Ten of the garages, meanwhile, recommended costly repairs that were plainly unnecessary, like replacing the starter motor or the battery.”
It looks like I’m not the only one out there replacing perfectly good starters. The cost is sunk, but its nice to know that I’m not alone in my naivety.
Topics: Economics | 1 Comment »
Fair Trade Hypocrisy
By Chris | November 8, 2007
The cover story in the most recent copy of my campus magazine, Statements, highlights the Fair Trade movement. The article, by Sara Kentzler, begins:
“Imagine farmers struggling every day to sell their crops. Their families go unfed, and for their young children school is an outlandish dream. The products these experienced farmers sell are of impeccable quality and grown in prime soils, yet they are being cheated out of the credit–and profits–they deserve.
Fair trade is a social movement that encourages higher standards for international labor, mainly in underdeveloped countries trading with powerhouses such as the U.S and Europe. The efforts are aimed at giving struggling farmers the willpower and knowledge to get into the world market with a strong foothold. Simply put, fair trade is about respect.”
To paraphrase, Ms. Kentzler is saying:
- Trade is inherently unfair. It allows rich powerful nations to exploit poor workers in developing countries.
- Workers are being cheated because they don’t get paid what Ms. Kentzler thinks they should.
- Buying from farmers at the prevailing market price disrespects them.
- If you are a decent human being, you will join the fair trade movement.
The advisor of my campus’ Fair Trade Advocates club notes in the article that a “surprising” number of departments including women’s studies, apparel marketing, anthropology and agriculture support the movement. Isn’t the department that actually studies trade glaringly absent from this list? Economists disagree about a lot of things, but they overwhelmingly support free trade. Nearly 88 percent of surveyed economists support eliminating tariffs and other barriers to trade while 85.2 percent favor eliminating agricultural subsidies. And while Fair Trade isn’t a government distortion of trade, shaming consumers into purchasing Fair Trade products has the same effect. Prices are artificially raised, and organizational busybodies decide which farmers are deserving of the higher price. More producers are drawn into the market, and prices for non-Fair Trade farmers fall.
Supporters of Fair Trade might argue that imperfect competition allows middlemen to exploit farmers. But, that is not reason enough to pay some farmers a premium over the prevailing price and then control every microcosm of their business and family lives. Why not take a less glamorous role and fight corruption or collusion by buying coffee from any farmer at the prevailing market price?
Others might recognize the futility of Fair Trade as a charitable exercise, yet argue that socially conscious products are just another example of capitalism fulfilling people’s wants and desires. Isn’t that a good thing? Not in this case. People are presumably buying Fair Trade coffee because they believe it makes the world a better place. If it makes the world worse, imperfect information and economic ignorance mean that too many Fair Trade products are being purchased. Buying Fair Trade products might make people feel warm and fuzzy inside; but they, and the world, would be better off feeling warm and fuzzy while actually helping people.
What angers me most about Fair Trade is that it promotes the already intuitive notion that trade is inherently unfair. When socially conscious consumers drink their Fair Trade coffee a few farmers are hurt. When these same consumers vote for protectionist policies under the same rationale, billions of dollars in potential gains from trade disappear.
As a consumer, I normally buy goods based on quality and value. But, when I need a caffeine fix, I can’t ignore the Fair Trade poster in my campus coffee shop’s window. The coffee might not taste much different, but complacently abdicating the moral high ground to the notion of “fair trade” creates some serious negative externalities in the marketplace of ideas.
Learn more about the Fair Trade from Wikipedia and the Economist.
Topics: College, Economics | 1 Comment »
Chinese Oil Price Controls
By Chris | November 6, 2007
The latest Economist reports:
“A price this high should also temper demand for oil. Motorists’ thirst for fuel does indeed seem to be faltering in rich countries. But as Francisco Blanch of Merrill Lynch notes, most of the incremental demand for oil comes from China, India and the Middle East, where the prices of petrol and diesel are subsidised or capped, leaving drivers with little incentive to cut back. Until the governments concerned start making consumers pay the market price, appetite for oil is likely to remain strong. There are signs of this: on October 31st the Chinese government raised the price of fuel for the first time this year.”
The Chinese government raised prices by 10 percent. With China’s robust market economy, it is easy to forget that many elements of command and control are still exercised by the Communist party. Hopefully, higher prices will curtail the growth of oil consumption in China. Last year, Chinese imports of crude oil grew 14 percent. While oil consumption in a developing country is a positive thing, consumers are purchasing too much oil if they aren’t paying its true price.
Topics: Uncategorized | 1 Comment »
If I Lived in the Northeast
By Chris | November 5, 2007
I would be at this event this weekend. Maybe, a video or transcript will be available.
Topics: Great Economists | No Comments »
Economics of Road Trips
By Chris | November 5, 2007
I haven’t posted for the last few days because I was out-of-state competing in an ultimate frisbee tournament. I’m a member of my college’s club team. As a club team, we get very little financial support from the school and have to pay for traveling expenses out of pocket. After spending a very cold first night camping, we crammed 12 players into a Best Western hotel room the following night. One of the guys paid for the room out of pocket and everyone promised to chip in 9 bucks to cover its cost. It is Monday and so far only 2 of the 11 people have reimbursed their teammate.
I can’t say that I am surprised. The same thing happens to me when I drive on road trips. And, while I make a concerted effort to reimburse others promptly, I sometimes forget. It is human nature to overlook the costs borne by others on your behalf. The increasing use of credit cards versus cash has exacerbated the problem. It is easy to postpone paying back the driver “until I have cash.” Even when people remember to chip in for gasoline they aren’t contributing to depreciation or maintenance. AAA estimated that the average cost of driving a mile is $0.52 (assuming $2.25 gas prices). If the average vehicle gets 20 miles per gallon, gasoline comprises $0.11 per mile or less than 25% of the cost of driving a mile. If drivers aren’t adequately compensated for the costs of driving, the result is an inefficiently low number of road trips.
I own a Ford Explorer and I love it. It has lots of leg and head room, is green, and takes me to my favorite fishing spots. I bought it well aware that it would get horrible gas mileage. What I didn’t realize was that owning a four-door SUV would make me the default driver at college for short trips. A spacious SUV is more convenient and comfortable than a 2-door Civic for groups traveling short distances. My friends with fuel-efficient sedans ended up driving on longer trips. And, outside of the ten-minute drive to go mountain biking, people with pickup trucks rarely drove. The social norm of contributing only for gas, if at all, has some interesting consequences. A self-interested college student has an incentive to purchase a cheaper vehicle with worse gas mileage and fewer doors than he or she would otherwise purchase. Of course, you can always buy the car that you really want and refuse to drive, but that would likely offend your peers. I knew one guy who kept his bicycle in the back of his car so he never had room for more than one extra seat.
Is that the full story? Do I offer drivers enough money to compensate them for depreciation, insurance, and maintenance? No. There are other considerations. For example, a brand new BMW costs a lot in deprecation per mile. However, while I might enjoy the leather seats and a smoother ride, the owner of the car is getting all the status benefits from owning the nice car. I don’t see the need to contribue to insurance because it is rarely correlated to miles and will be borne regardless of the trip. It is not a true marginal cost. Lastly, the driver gets the benefits of being in control. The music, temperature, choice of stops, and ultimately the occupants’ lives are in his hands.
I’ve been reading how social and emotional conventions create necessary incentives outside of traditional markets. However, in my experience, social norms fail to compel college students to contribute to the cost of road trips. Too many people simply “forget”to pay and it can be incredibly awkward to have to ask an acquaintance for 20 bucks for last week’s trip to Seattle. With close friends it is easy to take turns driving and things tend to average out. With acquaintances it’s more difficult. You can ask for gas money upfront, but that can come across as gauche and often you won’t know the cost of the trip until it is over. One suggestion for long trips is to have riders alternate paying at the pump and reimburse them with your share at the end of the trip. Or, you could buy a 1986 Ford Ranger and let someone else drive. Just don’t expect to listen to your favorite music.
Note: Since we were considering road trips, I assumed that the driver wouldn’t be driving from A to B anyway (in which case the marginal cost of an additional passenger is close to zero). Otherwise, the discussion would have involved a whole different dimension.
Topics: College, Economics | 1 Comment »
Rabbits on the Cover…
By Chris | November 2, 2007
…caught my attention when I was looking through the Economics section at Barnes and Noble last May. The book was More Sex is Safer Sex, by Steven Landsburg. In the bookstore, I made it through the first chapter which uses economic logic to support the title’s provocative claim. Landsburg argues that when conservative people with relatively few past sexual partners (a safe past) enter the pool of people looking for casual partners, the quality of the pool improves for everyone else. An interesting observation, but not awe inspiring enough to warrant use as the title. Feeling a little guilty about reading so much of the book and not excited enough to buy it, I put the book back. That was a mistake.
Earlier this week, I got the book through my library’s inter-library loan program and I read the entire book in one sitting. It was that good. Things kept getting better and better after the first chapter. I really enjoyed Landsburg’s writing style which is very lucid and conversational. As a contributor to Slate, he has received a lot of feedback from online readers on past articles. This allows him to respond to past readers questions and concerns about his arguments. Occasionally, he addresses the reader to make a point. Anticipating that some people might be opposed to valuing a human life in cost benefit analysis, he tells the reader to “grow up”. Many of his proposals are quite radical and challenge conventional wisdom. For example, he argues that you should only donate to one charity, that jurors should have access to all public information, and that Congress should be replaced with representatives supporting citizens’ whose last names starts with the same letter. While I didn’t agree with all of his proposals, Landsburg asked the right questions and kept me engaged throughout the book.
I particularly enjoyed his discussion of externalities. He explored which externalities are worthy of correcting. My neighbor may undergo severe emotional stress when I eat chicken nuggets at McDonalds because the chickens were raised in inhumane conditions (I actually knew someone like this). There would likely be an efficiency gain if my consumption of McDonanlds was taxed. Why shouldn’t this externality count? How is it different from my neighbor taking offense that my grass is too long, or my dandelions are spreading?
Landsburg’s contemplation of human rationality was probably my favorite, and the most confusing portion of the book. Why do humans lock the refrigerator door or intentionally pass by the ATM when we are running short on cash in an attempt to curtail spending? How do our emotions provide signals to others? Landsburg answers these and other questions in a robust inspection of the workings of the human mind.
I’m hoping to make book reviews a regular feature of this blog. Landsburg’s More Sex is Safer Sex set the bar high. I’ll be surprised and pleased if future books match up against this thought-provoking and enjoyable read.
Topics: Book Reviews, Economics, Great Economists | 4 Comments »
Why We Thank Soldiers
By Chris | October 29, 2007
Living in a state with a large agricultural community, I often see bumper stickers with slogans such as, “If You Ate Today, Thank a Farmer.” John Palmer over at EclectEcon captures why the economist in me is so repulsed by these messages. He eloquently writes:
“Why should I thank people who, acting to maximize their own utility, provide me with something I am willing to pay for? I would much rather thank “the invisible hand” of Adam Smith. I would much rather thank the private property rights system that provides incentives for people to produce so much food so inexpensively. I would much rather thank the common law system that enforces contracts made between willing individuals seeking gains from trade.”
I often say “Thank You” when I purchase something, but so does the clerk. Each party is made better off by the transaction. That type of thanks is very different from the gratitude expressed for a gift that has been given without regard to merit. I agree with John’s statement, but it got me thinking. If farmers are not deserving of thanks, why do we thank soldiers? Aren’t they “people who, acting to maximize their own utility, provide [taxpayers] with something [they] are willing to pay for.” Our army is made up of voluntary soldiers, engaging in mutually beneficial transactions. As an undergraduate, my roommate’s decision to join the army was largely a financial one. After three years of major-hopping with no degree in sight, he saw the army as the best way to get out from under 40,000 dollars in debt. Monetary incentives influence many soldiers decisions to enlist. John Kerry’s statement that students could get “stuck in Iraq” if they didn’t study, while lacking tact, was founded in reality.
Some people might suggest that we thank soldiers because their job entails a high degree of risk, but so do a lot of other jobs. Most people do not feel that they owe king crab fisherman special thanks when they sit down to eat at an expensive restaurant. Yet, king crab fishing is one of the United State’s most dangerous jobs. Likewise, most people who use coal-powered electricity don’t feel any special debt to coal miners who risk losing their lives in a mine collapse. But soldiers, even those paid handsomely for their efforts, are held in revere. Should they be?
I believe there is an economic reason they should. Working as a soldier is an extremely dangerous job. As the risk of death increases, a soldier’s price elasticity of supply for labor is increasingly inelastic. If there is a 80 percent chance I am going to die in the next year, doubling my salary won’t persuade me to enlist. Meanwhile, the demand for soldiers, in general, is also often very inelastic. If the Nazis are about to invade a small Eastern European country, the government will expend whatever resources it has available to defend itself. A market based equilibrium produces very few soldiers who receive extremely high compensation. The system is plagued by a prisoner’s dilemma. As a citizen I am better off if the Nazi’s are defeated. However, the marginal impact of my participation is very small. I might kill a few German soldiers, but it won’t change the impact of the outcome. Individually everyone is better off not fighting while collectively everyone is better off enlisting. During war, governments have responded to the problem by drafting soldiers. But drafts have problems of their own. People waste resources dodging them and they inefficiently allocate human capital.
Society has limited the extremity of this market failure by paying soldiers with respect and esteem. Money will not persuade a person to fight to the death, but the knowledge that he or she will die with honor and be regarded with the utmost respect, might. Some of that honor and respect will be paid by future generations who will benefit from the nation’s defense. Past societies who did not value soldiers were quickly defeated by their enemies. Why do we thank soldiers? Because we can’t afford not to (in more ways then one).
Topics: Economics | 1 Comment »
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