Marginal Revolution

Prof. Bainbridge answers 20 Questions

Alex Tabarrok

Prof. Bainbridge is the latest to undergo questioning at Crescat Sentantia. When asked about law and economics the good professor had this insightful comment:

Traditional forms of legal scholarship were mostly backward-looking. One reasoned from old precedents to decide a present case, seemingly without much concern (at least explicitly) for the effect today’s decision would have on future behavior. Yet, law is necessarily forward looking. To be sure, a major function of our legal system is to resolve present disputes, but law’s principal function is to regulate future behavior [and]... law & economics gives judges a systematic mechanism for predicting how rules will affect behavior.

Health and Status

Alex Tabarrok

A number of studies have shown a startling connection between higher social status and better health, even after controlling for income, education and other factors. Some economists are skeptical, Angus Deaton, for example, suggests reverse causality may be a factor:

The major reason that people retire from the work force is that they're sick. If you get sick in America, it does terrible things to your social status.

Two remarkable papers by Donald Redelmeier and Sheldon Singh cast some doubt on this explanation. In Survival in Academy Award-Winning Actors and Actresses Redelmeier and Singh compare the longevity of Oscar winners with nominees who did not win. The statistical hypothesis is that all that separates winners and nominees is the random fact of winning (random with respect to other factors influencing health). If winners and nominees are alike but for random factors then any differences in longevity can be causally ascribed to winning the Oscar. R and S find that winners live about 4 years longer than non-winners, a huge difference. The effect does not go away with additional controls.

Skeptics will posit other mechanisms but R and S have a lesser known but equally important paper on screenwriters who win the Academy Award. Surprisingly, they find that winning screenwriters die about 3 years earlier than non-winning nominees. At first, these two results appear to be quite contradictory suggesting some problem in the studies. But on second look there is a compelling logic to the findings. The difference between actors who win the Oscar and screenwriters is that even winning screenwriters get no respect. Who remembers a screenwriter's name? I think it's in the movie Bowfinger that Steve Martin says of the lovely ingenue something to the effect, "She's so dumb she's sleeping with the screenwriter to get to the top." Winning screenwriters have longer and more successful careers (4 star movies) than non-winning writers so income and other material factors would suggest greater longevity but even a winning screenwriter is almost surely destined to have his lines mangled by a lousy but famous actor and perhaps this stress drives them to an early grave.

IPOs bring out the bloodsuckers

Alex Tabarrok

In the late 1930s, Edward Kasner was asked to come up with the name for a large number; as legend has it, he asked his nine-year old nephew, who said "googol," and Kasner's 1940 book "Mathematics and the Imagination" popularized the term for the number 1 followed by a hundred zeroes.

Can you guess where this is going....Yup, Ted Frank at Overlawyered continues:

Kasner's great-niece, Peri Fleisher, is going public herself, complaining that her family hasn't been compensated for Google's choice of a name, and "exploring" the possibility of legal action.

How to persuade the rich, or Cannes update

Tyler Cowen

The first German film to compete in Cannes in 11 years, it [The Edukators] tells the story of three idealistic youths who break into rich people's villas and move around their furniture, leaving behind notes with messages such as: "You have too much money."

Their aim is not to steal from the rich to give to the poor, but to make their targets question their privileges. When they are surprised by one of the homeowners, they kidnap him and are forced to put their ideals into practice.

"I'm really happy to present this film in the country where the word revolution was invented," Weingartner told a news conference in this French Riviera resort.

As is often the case, the remainder of the story surpasses any comment I could offer:

Critics at Cannes clapped and cheered during scenes in which the kidnappers and their victim intelligently debate how youthful idealism eventually fades.

Weingartner avoids a simplistic ending, but leaves open the possibility that each of them is changed by the experience.

Here is the full story. Here is more information on the movie. Don't forget that the alternative title of the film is "The Fat Years are Over."

Supply curves slope upwards

Tyler Cowen

You might think that the labor supply of the dead is fairly inelastic. Well, it is not so simple as meets the eye:

These days, the icon of Renaissance art is Florence's greatest single brand and the global Michelangelo market is booming. You might imagine that as the years go by, the chances of finding a long-lost Michelangelo would shrink. But no. As one expert has observed, as the price tag on the world's greatest artists keeps soaring, so, miraculously, more hidden Michelangelo gems keep being discovered.

There is more:

According to Wallace, the rate at which Michelangelo finds are turning up - including documents, drawings, and even a candlestick - has gone from one every two years a century ago to two a year on average from 1996 onwards. In the past year, he observes, three finds have been attributed to Michelangelo, most recently a small wooden statue of Christ, which went on display at the Horne museum in Florence earlier this month.

Now here is the clincher:

Some of the most highly publicised finds have subsequently "been shot down in flames" as they fail to withstand the scrutiny of the world's experts, says Timothy Clifford, Michelangelo expert and director of National Galleries of Scotland.

Here is the full story. Most Renaissance artists did a wide variety of anonymous small commissions, especially in their early years. So there probably are "unknown Michelangelos" out there; it is less clear that we will ever know what came from his hand.

Only in Italy

Alex Tabarrok

The Italian police have a Lamborghini that, get this, they use to chase down speeders and to deliver human organs for emergency operations. Thanks to J-Walk Blog for the link.

Markets in everything: Google edition

Alex Tabarrok

At lunch recently, Tyler expressed concern about how well the Google auction would work given that no one knew what the stock would open at. Robin Hanson, famed for his role in the Pentagon "terror market," chimed in that "we could have a market in that." True, but not necessarily helpful - surely, the regress must end somewhere? Helpful or not, Robin has been proven correct as a descriptive matter. We now have something of a market, or at least a contest, in predicting the Google IPO price. See The Google IPO Swami.

Thanks to Eric Crampton for the pointer.

Patents for everything

Tyler Cowen

While browsing at Barnes and Noble this last week, I picked up the interesting title Patently Absurd: The Most Ridiculous Devices Ever Invented, by Christopher Cooper.

What struck me was how appealing many of the inventions sounded.

OK, I'm not ready to put up venture capital for "Bird Diaper" or "Dust Cover for Dog". And it was scary to read about "Firearm Mounted in a Shoe Heel," patented in 1971.

But how about a combined fork and chopsticks? A "Night Light for a Toilet," attached directly to the seat, would come in handy. I like the fork that warns when you are eating too fast. It is now well-known that slower eating is healthier and keeps your weight down. Some may prefer a wind sail for your bicycle.

The sociologist will be interested in "Interpersonal-Introduction Signaling System." Using a small hand-held device, you broadcast a signal indicating that you are interested in meeting someone. You can be rejected without (major) embarrassment on either side.

No, contrary to the impression you might sometimes get from this blog, there are not markets in everything. If you wish to be woken by light corks falling on your face, well...they tried this idea in 1882 and it did not take off. But if there is no market, at least there is a patent. Read this short article on the recent proliferation in patents in the United States. Here are some other web sites with descriptions of absurd patents.

The book, appropriately, had been remaindered. And there is always hope for the future, as at least one of their examples has come true. Amphibious motorcycle anyone?

Addendum: Check this out, maybe there really are markets in everything.

Haiti quote of the day

Tyler Cowen

So much drug money was at stake in the power struggle that culminated in Mr. Aristide's departure that Bruce Bagley, a professor at the University of Miami who has studied drug trafficking in Haiti, called the rebellion "basically a narco-coup."

"The battle was over who is going to control the drug trafficking and the profits of the drug trade," he said.

In fact it is possible that Aristide himself will be indicted for drug trafficking. Here is the full story. Here is more on Aristide and drugs.

The bottom line: Haitian politics no longer has a viable state at all, just various gangs, mostly in hock to the drug trade.

What makes a painting more valuable

Tyler Cowen

Many of the results are not surprising. Light colors sell better than dark colors, happy portrait subjects sell better than widows, and horizontal pictures are easier to hang over the fireplace. Here are a few other points of note:

1. Landscapes can as much as triple in value when there are horses or figures in the foreground. Evidence of industry usually lowers a picture's value.

2. A still life with flowers is worth more than one with fruit. Roses stand at the top of the flower hierarchy, chrysanthemums and lupins (seen as working class) stand at the bottom.

3. There is a hierarchy for animals as well. Purebred dogs help a picture more than mongrels do. Spaniels are worth more than collies. Racehorses are worth more than carthorses. When it comes to gamebirds, the following rule of thumb holds. The more expensive it is to shoot the bird, the more it adds to the value of a painting. A grouse is worth more than a mallard, and you had better show the animal from the front, not the back.

4. Water adds value to a picture, but only if it is calm. Shipwrecks are a no-no.

5. Round and oval works are extremely unpopular with buyers.

6. A Boucher nude sketch of a woman can be worth ten times more than a comparable sketch of a man.

The bottom line: Buyers prefer artworks which in some manner reflect high status.

For the full story, see "Why some Pictures Go For More Than Others," in the May 2004 issue of The Art Newspaper.

Why Alex and I are seen as "unsettling company"

Tyler Cowen

The ever-effervescent, ever-compliment-worthy Jane Galt describes her recent meeting with Alex and Tyler. The same post offers interesting observations on female genital mutilation (really) and intersexuals (really). If you lose the link, just Google the appropriate keywords.

Do deficits boost real interest rates?

Tyler Cowen

Traditional economic theory says "yes." Deficits require governments to borrow more in capital markets. The increased demand pushes up real interest rates; this effect should be especially pronounced when we are at or near full employment.

But for a long time standard empirical work said "no." Significant real interest rate effects from deficits are hard to find in the data.

A puzzle, no? More generally there are few propositions about real interest rates that I find convincing.

While the debate remains unsettled, some recent research, published by the Federal Reserve Bank of Philadelphia, offers a new spin on the problem. The claim is that expected future deficits have a significant impact on real interest rates, even if current deficits do not. Announcements that future deficits will be high, for instance, appear to raise real interest rates. If correct, this theory would allow us to resurrect a classical view of the macroeconomy. Relative price effects would reign supreme and the case for fiscal responsibility would be cemented.

I would welcome these conclusions but nonetheless I have my doubts. Once you postulate that individuals are so forward-looking, should not Ricardian Equivalence hold? Then it is the level of government spending that should matter, not the level of the deficit. And doesn't the entire hypothesis rest on the expectations theory of the term structure of interest rates? Yet the expectations theory otherwise appears to be falsified. If you don't know those technical terms, the bottom line is the following. The basic model relating deficits to other macroeconomic variables is murky, yet this hypothesis assumes a fairly simple set of relationships.

So where are we left? I'll suggest a macroeconomic law. When in doubt, opt for moderation. This holds for both deficits and future expected deficits. And I suspect Alex assents as well.

Thanks to Bruce Bartlett for the pointer. His blog is an excellent place to follow developments on fiscal policy and supply-side macroeconomics. Supply-side economics has a bad name in this country. In part some of the Reagan advisors oversold the idea that tax cuts would increase total revenue. Let's not forget that supply-side ideas, when applied in the proper context, have proven successful in many other countries.

Economist accused of treason

Tyler Cowen

If Daniel Sumner's actions be treason, as some of his critics contend, then he is glad the most has been made of it.

Sumner, an agricultural economist at the University of California at Davis, played a key role in an international trade case that is shaping up as one of the most significant defeats the United States has ever suffered on the trade front. An analysis that he wrote helped frame a preliminary decision issued two weeks ago by a World Trade Organization panel, which held that the federal subsidies paid to U.S. cotton farmers violate WTO rules because they cause overproduction, drive down world prices and impoverish farmers in developing countries.

Since Sumner served as a paid consultant for Brazil, which brought the case against Washington, he is being reviled as a traitor by some U.S. farmers. Leaders of some farm groups, furious at Sumner for helping a foreign government win a victory that could end agricultural subsidies in their current form, are vowing to retaliate by cutting off funding for other work that he does.

Here is the full story.

The cotton lobby has called the research "unethical," noting that it was produced in a state university. Sumner's Dean questioned his judgment in doing the work. And Sumner himself?

"What is this, the mafia or something? Think of it as a criminal case, and one side says, 'We'll put pressure on this guy not to participate.' That's not right, is it?"

Here is a brief bio of Sumner, to whom I offer my plaudits.

Is a bad American image bad for American products?

Tyler Cowen

Some evidence indicates yes:

"It's not like there's a massive boycott," said Miller. "Instead, it seems to be an erosion of support. It's not falling off the face of the earth, but it is clearly a warning sign for brands."

NOP found the popularity and consumption of US products had declined for the first time since the research programme was launched in 1998.

Until 2002, NOP found that brands such as McDonald's and Coca-Cola were notching up healthy annual growth in terms of use and familiarity in international markets.

However, last year NOP discovered that the growth in popularity of all major consumer brands - including those from Europe and Asia - had stalled. Over the past 12 months the positive trend has gone into reverse, with US products hardest hit.

NOP found that the number of non-American consumers who "trust" Coca-Cola had fallen from 55% to 52%, while McDonald's rating had slipped from 36% to 33%, Nike's from 56% to 53% and Microsoft had fallen from 45% to 39%.

When people were asked about brands associated with "honesty", Coca-Cola was found to have declined from 18% to 15%, McDonald's from 19% to 14%, Nike from 14% to 11% and Microsoft from 18% to 12%.

The total number of consumers worldwide who "use" US brands was found to have fallen from 30% to 27%, while non-American brands remained stable at 24%.

The NOP annual study covers 30,000 people in markets around the world, and the latest survey was conducted between January and March - a period marked by the growing crisis in Iraq.

It also found the decline in interest and respect for US products was reflected in consumers' view of American cultural values.

The percentage of consumers that believed honesty was an important attribute of American culture was found to be below 50% in a number of major markets such as France, Italy, Germany, Spain and Turkey.

In Germany, only 31% of consumers believed honesty was an American cultural attribute and in Saudi Arabia just 23% thought so.

While consumers in Muslim countries such as Egypt, Turkey and Saudi Arabia were found to be least likely to share American cultural values, NOP also found people in a number of major European markets felt their own values were significantly different to American ones.

Compared with consumers in countries such as Venezuela, Taiwan, the Philippines, Brazil and Australia - over 75% of whom say they share American values - just 65% of UK consumers say they share US values.

If a bottle of coke is branded by the Coke name, we should not be surprised if "Coke" is branded by the international reputation of the United States. Above a certain level of income, at least half of our discretionary consumption is driven by the desire to affiliate and the stories we tell ourselves about who we are and what we are doing.

(Super) Markets in Everything

Alex Tabarrok

Exercise while shopping for food? How ironic, how wry, how soooo post-modern. Surprisingly, it's not a work of art - it's a British shopping cart.

The Trim Trolley (yes, it's really called that) is about to roll into the aisles of the Tesco supermarket in Kensington for a trial run.

The futuristic, £500 shopping cart has a large center wheel with 10 levels of resistance that make it increasingly harder to push. Handlebar sensors (just like the ones on gym equipment) rate heartbeat, time, distance, and calories and fat burned. German cart company Wanzl designed the trolleys expressly for the Tesco chain and says a 40-minute shopping spree can burn up to 280 calories. That's pretty close to what you achieve on a machine at the gym.

Thanks to Marc Andreessen for the pointer.

How to maximize the return from caffeine (and other stimulants)

Tyler Cowen

Take small sips, and spread them out across the day. Don't start your morning with too much coffee, yeah that means you too. Here is the full analysis, from the ever-insightful Randall Parker. This result reminds me slightly of the Barro-Gordon model of monetary policy. Don't take your inflation all at once. If you haven't had some inflation in a while, a mild dose of inflation can provide a nice stimulus.

The Deficit Gamble

Alex Tabarrok

Here is an amusing paper, co-authored about 10 years ago by Greg Mankiw, now chairman of the Council of Economic Advisers. In The Deficit Gamble, Mankiw writes:

The conventional wisdom holds that government budget deficits crowd out capital, reduce national income, and lead to lower living standards for future generations....we propose a new view of budget deficits...a deficit is a gamble. It is an imprudent policy, because it imposes a significant burden on future generations in some realizations of history. But in most possible outcomes, the future effects of deficits are benign....We call the policy a Ponzi gamble.

In essence, deficits are a gamble that g>r, earlier Tyler made exactly this argument (I respond here).

My favorite part of the paper is this:

Our alternative view of government debt may also help explain why Ronald Reagan chose to preside over the profligate fiscal policy of the 1980s. Biographers of Ronald Reagan often note his boundless optimism. This optimism was in part due to his own unlikely rise from an actor in B movies to President of the United States. ...Put simply, an eternal optimist like Ronald Reagan may choose to accept a gamble that a realist would deem imprudent.

I ran into Mankiw recently and said, "You must be a gambling man!" He laughed but quickly averred that I shouldn't read policy into the paper. Clearly, he has learned something from the outsourcing debate. I wonder what future biographers will say of George W. Bush's optimism?

Panama Canal facts

Tyler Cowen

1. 14,000 ships go through the Canal each year; 2/3 of these are headed to or from the United States.

2. A crossing takes eight to ten hours.

3. The Canal is currently financed by tolls; one luxury cruise ship paid $226,194 for passage, an all-time record.

4. New ships are often forty feet wider than the current Panama locks. Within ten years most new container ships won't fit through the locks.

5. Any rebuilding would involve considerable flooding of territory and the relocation of Panamanian citizens.

6. The Panamanian economy is relatively healthy, but heavily reliant on canal revenue.

7. Many Panamanians are reluctant to have their country take on the full cost of reconstruction.

Here is one account of how the Canal might be rebuilt.

The bottom line: We have a classic bargaining game here. Building a broader Canal is profitable, but who should pay? The longer the Panamanians hold out, the more likely the U.S. will sweeten the pot for improvements. Since the Canal is an object of national pride, they won't just sell equity in the project. In the meantime they might give the Chinese a larger hand in the project, just to make us nervous. My prediction? The improvements will take at least five to ten years longer than they ought to.

By the way, if you've never seen the Canal, I recommend a trip to Panama. For me it is one of the world's great wonders and the country is lovely.

Why no battling gods?

Tyler Cowen

Troy, the movie version of Homer's The Iliad, is out today. Here is one report, from the May 14 Entertainment Weekly:

While Pitt's character got tweaked, the rest of The Iliad went pretty darn Hollywood. Briseis, a slave girl captured by the Greeks -- speechless in Homer's tale -- becomes a royal priestess and love interest for Achilles...More notably, no gods interfere with battles in Troy. "I didn't want them in," says screenwriter Benioff.

The screenwriter notes that activist gods would make the movie too much like The Clash of the Titans. My rhetorical question for the day is why clashing polytheistic gods make for a less broadly saleable story than do human heroes. And does this help explain why monotheistic religions have been growing at the expense of polytheism for some time now?

Thanks to Yana for the pointer to the EW article.

The Train from Nowhere

Alex Tabarrok

New book, 233 pages, quite dull, no economics. French of course. More here.

Prices versus Costs

Alex Tabarrok

Why do we favor free trade? Is it because prices are lower in other countries? No. It's because costs of production are lower in other countries. Prices and costs are not the same.

Consider, for example, the issue of drug reimportation. Why do politicians and some consumers want to reimport drugs from other countries? Is it because costs of production are lower in other countries? No. It's because prices are lower in other countries. Once one realizes this it should become obvious why drug reimportation is not "free trade" and promises little or no net benefits - drug reimportation doesn't lower costs and thus there are few efficiency gains to be had by reimportation.

Addendum: A more complete analysis of reimportation would look at the effects on consumption (slight increase in the US, potentially large reduction in the "exporting" countries) and the effects on innovation (reduced).

Outsourcing: the death of us all?

Tyler Cowen

Wherein lie the limits to outsourcing?

[German] families have to pay for either a cemetery plot or for cremation. Here, too, Woite has found a way to avoid the high price Germany's cities and towns charge for such services. He sends corpses for cremation to the neighboring Czech Republic, where costs are significantly lower. Or customers can have their deceased buried in a Czech cemetery.

Three times a week Woite's employees drive back and forth between Germany and the Czech Republic. And although German law requires corpses and ashes to be kept in graveyards, Woite takes advantage of a loophole in the law so his customers can take their loved ones home in an urn.

"Earth mixed with ashes, there's no law about that in Germany," Woite explained. "We bury over there and bring back the earth mixed with ashes, and that's what I hand over to the people."

Woite has been heavily criticized by competitors for his Czech business. They say he's irreverent, and they call the journeys to the Czech Republic "corpse tourism." But that hasn't stopped the undertaker. He's planning an organized bus trip to the Czech Republic in April so customers can see for themselves where they or their loved ones may one day be cremated.

Here is the full story. Thanks to Michael Ward for the pointer.

The optimal gas needle

Tyler Cowen

I learned yesterday that my gas needle is broken. It moves rather quickly to three-quarters of a tank, but is very sticky once it gets to half a tank. It used to be very sticky when it started on full. I could drive for two hours and it would remain on full the entire time.

I started wondering (actually I've been wondering this for years now) how an optimal gas needle should be structured. Assume that if a buyer has a bad experience with a car, such as running out of gas, he blames the car manufacturer with some probability. You might then expect that a car needle will stand on "Empty" long before the tank is empty. The needle makes you prematurely fearful and you are less likely to run out of gas.

You also might expect that the needle will be sticky at the top end of the register. Why?

When you fill your tank with gas, you have the clearest idea of exactly how much is in the tank. You are most likely to use observations from that point to gauge the fuel efficiency of the car. All other observations will be noisier. So the automaker wants to make a good impression about fuel efficiency right off the bat. This doesn't require driver irrationality, only that you measure fuel efficiency with some imperfection. You're never sure if the car gets great mileage or if the needle is just biased. But you attach some probability to the former. Economists call this a "signal extraction" problem. You suspect the needle is biased but you never know quite how much. (The technically-minded will note that once you introduce these information asymmetries, the assumption of rational expectations no longer rules out all kinds of errors; I first learned this from reading Joe Stiglitz.)

Furthermore some people refill their gas tank well before it gets to the bottom; they are just nervous nellies. These people will rarely observe the needle when it is on its path of swiftest descent. They observe how much they pay at the pump, but of course gas prices change all the time. They too will face a signal extraction problem and may overestimate the fuel efficiency of their car.

Some people will see through this entire business. But for them it doesn't matter how the needle is structured. So a "sticky at the top" needle is most likely to induce a repeat purchase of the same kind of car.

Is this good? It may slightly limit competition in the car market. People stick with a brand because they think it offers better gas efficiency, when in fact it doesn't. On the other hand, the practice makes the buyer feel good about his purchase. People think they bought a car with good mileage. The nervous nellies can rest easy. And the more irresponsible types are less likely to run out of gas.

So don't forget the subtitle of this blog: Small ideas for a much better world.

Addendum: Of course as in most game theory you can spin alternate stories. Does this tempt you to switch disciplines? Just read Thomas Nagel's recent essay on why there is something rather than nothing. Nagel is extraordinarily bright, but this is enough to bring you back into the fold.

Cognitive Liberty

Alex Tabarrok

Freedom of thought is the most fundamental right. Fortunately, it has been nearly impossible to invade the mind. New technologies, however, do threaten freedom of thought, raising many difficult problems. Should children diagnosed with ADHD who refuse to take Ritalin be refused an education? Should a mentally-ill person be drugged so that they can stand trial? Is hypersonic advertising an invasion of mental privacy?

Here's an interesting interview on these and related issues with Richard Glen Boire co-founder of the Center for Cognitive Liberty and Ethics.

Index funds, still the way to go

Alex Tabarrok

If the market is efficient then without an information advantage (non-public information) you can't expect to beat the market and thus index funds are a good way for the average investor to invest. Behavioral finance has put some dents in efficient markets theory but just because a market is inefficient that doesn't mean that beating the market is easy. Even if you knew that firm X was way overvalued, for example, shorting the stock would expose you to great risk - the price could become irrationally higher before the bubble bursts, unexpected events could increase the fundamental value to match the bubble, your capital could run out before the price drops and, of course, you could be wrong.

When you hear the term inefficient market don't think $500 bills lying on the sidewalk, think $500 bills swirling around you in a vortex of wind...at night. Inefficiency is out there but it's hard to find.

The bottom line remains that most professional money managers don't beat the market. Here's a recent reminder from James Glassman of this fact:

Charles Allmon points out that last year the poorly rated stocks of many research services outperformed their highly rated stocks. For example, Standard & Poor's one-star stocks returned 57 percent while its five-star stocks returned 43 percent. Merrill Lynch's sell-rated stocks returned 46 percent while its buy-rated stocks returned 30 percent. Schwab's F-rated stocks returned 70 percent while its A-rated stocks returned 66 percent. The biggest discrepancy came with Value Line, whose 5-rated stocks (the 100 companies with, supposedly, the worst prospects for the year ahead) returned an incredible 90 percent while the 1-rated stocks (the top prospects) returned 40 percent.

The latest hypothesis about sexual selection

Tyler Cowen

Read here, to learn why many women prefer prominent cheekbones.

Radical Prescription

Alex Tabarrok

A recent Rand study of 25 large firms found that raising the co-pay for pharmaceutical claims by just $5 reduced yearly drug costs per worker by $163.*

An interesting piece in the WSJ ("A Radical Prescription," May 20, 04, R3) suggests that this logic does not always hold. Higher co-pays can cause consumers to cut back on prophylactic and maintenance medicines. Pitney Bowes, for example, found that high-prices caused their diabetic and asthmatic workers to take their medicines irregularly resulting in sudden and expensive attacks. So Pitney Bowes took a counter-intuitive strategy - to save money they would pay for more of their workers prescriptions.

On the new plan workers began to switch to more expensive but more convenient and thus easier to maintain drugs and within a year the company was saving money.

the company was paying more for maintenance medications... [but] it was spending significantly less on rescue medicines...

[S]ignficant saving has come from fewer emergency room visits, which dropped 35% among diabetes patients and 20% among asthma patients...there were also fewer hospital admissions and doctor's office visits.

The strategy won't work for all drugs but it shows how much care must be taken in devising optimal insurance plans.

* Originally, I had said this implies a cost to benefit ratio in excess of 30 (163/5). Robert Ayers pointed out, however, that the co-pay is per drug while the savings are per year. Thus the cost-benefit ratio must be lower than 30. The original source doesn't provide the data to calculate it exactly, however. Thanks Robert!

Indian voters reject high-tech

Tyler Cowen

India appears to take a turn for the worse:

The government in Andhra Pradesh state, headed by the coalition's second-largest member and a leading proponent of India's technology revolution, was routed by the Congress party, which is also the main opposition on the national stage.

Besides signalling that high-tech prowess had not impressed the millions of rural poor, the result suggested the national election could end in a hung parliament and likely political turmoil as parties searched for new allies.

Votes from the marathon national election will be counted on Thursday but financial markets have already tumbled on fears that India's crucial economic reforms could be delayed if a weak government comes to power.

Here is the full story.

Let us not forget that India remains a badly messed-up economy. I found the following passage, from William Lewis's The Power of Productivity, illuminating:

...India has a special problem. It is not clear who owns land in India. Over 90 percent of land titles are unclear...Unclear land titles most affect industries which use a lot of land. These industries are housing construction and retailing. The result is that there is huge demand for the very little land with clear titles. Not surprisingly, the ratio of land costs to per capita income in New Delhi and Bombay is ten times that ratio in the other major cities of Asia...Also not surprisingly, India has very few supermarkets and large-scale single-family housing developments.

But it gets worse: Stamp taxes on land sales run at least ten percent. Furthermore you are often expected to pay real estate taxes, even if you will never be granted title to the actual land. It is said that the money is accepted "without prejudice." Here is a short article on how to make things better.