What happens to spending when the decider does not pay?

Taken from http://www.realclearhealth.com/articles/2017/03/27/the_root_cause_of_health_care_dysfunction_110514.html.

IBM moves from telecommuting to co-locating

This article in qz.com discusses some of the costs and benefits of telecommuting and "co-locating". Co-locating = working together in the same office building. It raises several interesting questions in my mind.

1. Do the relative costs and benefits depend on the type of work?
2. How has the development of new forms of communication and interaction affected the relative costs and benefits?
3. Where is the equilibrium wage higher, in a telecommuting job or one that requires the employee to be in an office during work hours?

Screening Applications to Law School

Which screen works better for law students, the GRE or the LSAT? Harvard says they are equally good ways to identify students suitable for Harvard Law.

Digital Monitoring of Employees

This Marketplace story describes some of the ways that employees can use devices to monitor digitally what the employees are doing: http://www.marketplace.org/2017/02/22/world/meet-workplace-sensors-are-watching-you.

1. How could an employer assess digitally the traits of job applicants to determine which ones to hire?
2. How could an employer monitor digitally what employers are doing or producing to determine which ones to reward monetarily or to promote?

This writer advocates that firms allow workers to work from home

https://qz.com/891537/if-you-dont-trust-your-employees-to-work-remotely-you-shouldnt-have-hired-them-in-the-first-place/

Here are two questions to consider:

1. What prerequisites exist for ROWE to be feasible?
2. Is ROWE always better than open-office butts-in-seats? If not, under what conditions is each more likely to be better?

How Google refines the screens it uses for job applicants

This article in Quartz talks about interview questions Google used to use to screen job applicants and how data convinced them to stop using the questions.

Reblog: Organizational design at Wells Fargo

https://managerialecon.blogspot.com/2016/11/wells-fargo-are-economies-of-scope-big.html

Was ClassPass the victim of asymmetric information?

http://nymag.com/thecut/2016/11/classpass-got-rid-of-its-popular-unlimited-plan.html

1. Who knows whether they want to take a large number of classes or a small number, the customer or ClassPass?
2. What type of user signs up for the unlimited plan?
3. Who is more likely to take a class when they are considering costs and benefits, someone on the unlimited plan or someone who is not?

Does a guaranteed return reduce risk or shift it?

http://qz.com/791481/guaranteed-returns-are-a-terrible-idea/

Contract thery uses the Rational Actor Paradigm to determine optimal contracts when information is costly and asymmetric

Nobel Prize in Economics Awarded to Oliver Hart and Bengt Holmström for Work on Contract Theory
by: Charles Duxbury and Mike Bird
Oct 11, 2016
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 

TOPICS: Contracts

SUMMARY: The 2016 Nobel Prize in Economic Sciences was awarded jointly to Oliver Hart of Harvard and Bengt Holmström of MIT for their contributions to contract theory.

CLASSROOM APPLICATION: The article informs students about this year's Nobel Prize recipients and offers brief statements about the theory of contracts. Instructors can use the article to inspire students to investigate the economics issues involved in contracts.

QUESTIONS: 
1. (Advanced) Why are contracts and a well-functioning legal system to enforce them important to the functioning of an economy? Research question. Distinguish a "complete contract" from an "incomplete contract."

2. (Advanced) What are the incentive issues in the design of contracts for executive compensation?

3. (Introductory) What is an example of a pitfall in the design of a contract for example between a buyer and supplier?

4. (Advanced) What is the incentive problem created by a government bailing out a failed bank?

Reviewed By: James Dearden, Lehigh University

A good explanation of adverse selection and Obamacare

http://www.nytimes.com/2016/09/25/upshot/football-team-at-the-buffet-why-obamacare-markets-are-in-crisis.html?ref=business&mtrref=undefined&gwh=B8ED683EFEB6C4E5B641AB874710CE3F&gwt=pay&_r=0

Adverse selection in the grass-fed beef industry?

Why Grass-Fed Beef Is on a Roll
by: Ellen Byron and Sarah Nassauer
Sep 21, 2016
Click here to view the full article on WSJ.com

TOPICS: Adverse selection, Supply and Demand

SUMMARY: Once a niche luxury, grass-fed beef is showing up in ballpark burgers and on Wal-Mart shelves. People splurge on the leaner meat despite questions about its labeling and flavor.

CLASSROOM APPLICATION: Students can examine the reasons for the increased demand for grass-fed beef. They can also discuss whether adverse selection is an issue in the industry, which leads for the call from some grass-fed beef producers for strict labeling standards.

QUESTIONS: 
1. (Introductory) Why are people willing to pay more for grass-fed beef than for conventional beef?

2. (Introductory) What is the effect of the increased demand for grass-fed beef on the equilibrium price and quantity of grass-fed beef?

3. (Advanced) Define adverse selection. Would the grass-fed beef market be subject to adverse selection?

4. (Advanced) Why do grass-fed beef producers with strict standards call for strict grass-fed beef certification?

Reviewed By: James Dearden, Lehigh University

Unintended consequences of an incentive compensation scheme?

http://money.cnn.com/2016/09/08/investing/wells-fargo-created-phony-accounts-bank-fees/index.html

"The phony accounts earned the bank unwarranted fees and allowed Wells Fargo employees to boost their sales figures and make more money."

How could WF reduce the chances of similar mistakes AND maintain a program that encourages employees to cross-sell?

Addendum:

Wells Fargo to Pay $185 Million Fine Over Account Openings
by: Emily Glazer
Sep 09, 2016
Click here to view the full article on WSJ.com

TOPICS: Principal-Agent Problem

SUMMARY: Wells Fargo, the largest U.S. bank by market value, must pay $185 million related to a regulatory enforcement action over "widespread illegal practice" around account openings, sales targets and compensation incentives. The bank fired about 5,300 employees during the government's examination. Related article: The San Francisco bank, with its folksy stagecoach logo, has positioned itself as a solid, Main Street lender that avoided the excesses of the financial crisis. That image is now in danger.

CLASSROOM APPLICATION: Students can examine the effect of sales incentives on the decisions by Wells Fargo employees to pursue underhanded sales practices. "The sales tactics and practices, which were fueled by an incentive structure that rewarded employees on the more products they sold, got out of hand, according to regulators."

QUESTIONS: 
1. (Introductory) Why do sales incentives create the willingness of employees to engage in underhanded sales practices?

2. (Advanced) What is the "principal-agent problem"? Is the Wells Fargo case an example of workers (agents) not acting in the best interest of a principal (Wells Fargo)?

3. (Advanced) What actions could Wells Fargo take to regain its positive reputation?

Reviewed By: James Dearden, Lehigh University

More moral hazard in health care

Big Driver of Medicare Spending: Doctors Doing More Tests in Their Offices

by: Christopher Weaver and Coulter Jones
Aug 10, 2016
Click here to view the full article on WSJ.com

TOPICS: Health Economics, Moral Hazard

SUMMARY: New medical devices allow doctors to test patients themselves, leading to fast-growing Medicare payouts, according to the latest data.

CLASSROOM APPLICATION: Instructors can use the article as a case of moral hazard with hidden information. One issue to analyze is whether the financial incentives offered by Medicare cause excessive use in the sense of economic efficiency of medical treatments.

QUESTIONS: 
1. (Advanced) Define moral hazard. What is moral hazard with hidden information? Would a physician profiting from ordering medical tests for patients create an environment of moral hazard with hidden information?

2. (Introductory) Does the article offer anecdotal evidence that changes in Medicare sets up payments for new services causes inefficiently excessive use of the services?

3. (Advanced) Does a physician's exceptional use of a medical test or treatment in which the physician owns the necessary equipment indicate that the physician is responding to financial incentives? What other factors could explain the physician's exceptional use? How could economists determine whether the financial incentives motivate the physician?

Reviewed By: James Dearden, Lehigh University

Why Organizations Fail

Taken from https://dl.dropboxusercontent.com/u/2021568/GRPublishedJELFinal.pdf

Why do organizations fail?

“Organizations fail due to incentive problems (agents do not want to act in the organization’s interests) and bounded rationality problems (agents do not have the necessary information to do so)” (https://dl.dropboxusercontent.com/u/2021568/GRPublishedJELFinal.pdf, p. 137).

“Agents fail to act together because they do not want to (an incentive problem) or they do not know how to (a bounded-rationality problem). Incentive problems arise due to the presence of asymmetric information or imperfect commitment, which lead agents to act according to their own biases or preferences rather than in the interest of the organization (e.g., Holmstrom 1979; Shavell 1979). Bounded-rationality problems arise due to agents’ cognitive limitations and finite time, which means that even if they want to, agents cannot compute the solution to every problem, nor can they make themselves precisely understood by others (e.g., Simon 1955; Marshack and Radner 1972; Arrow 1974)” (https://dl.dropboxusercontent.com/u/2021568/GRPublishedJELFinal.pdf, p. 138-9) .

What creates incentive problems?

https://dl.dropboxusercontent.com/u/2021568/GRPublishedJELFinal.pdf identifies 4 reasons that employees (agents) and owners have different interests.

1. Short-Termism (p.141)
2. Decentralized Authority and Coordination Failures (p. 147).
3. Communication failures (p.155)
4. Inability to Adapt to Change Due to Organizational Rigidities (p. 163)

What problems occur in the absence of incentive conflicts?

https://dl.dropboxusercontent.com/u/2021568/GRPublishedJELFinal.pdf identifies 2 failures in the absence of incentive conflicts.

1. Hierarchy and the Allocation of Talent (p. 175)
   “organizational failures arise when those giving directions lack the required talent” (p. 176)
2. Coarse Communication and Code Incompatibility (p. 179)

What conclusions do the authors draw?

https://dl.dropboxusercontent.com/u/2021568/GRPublishedJELFinal.pdf draw 6 conclusions.

1. “One general thread throughout our survey concerns the danger of high-powered incentives attached to objectively measured outcomes. … high-powered incentives drive individuals to seek high-probability payoffs in the short term at the expense of exposing the organization to low-probability, catastrophic failures (section 2) and also drive individual effort away from cooperation among team members (section 3)” (p. 183).
2. “The general response suggested by the literature to multitasking failures has three components” )p. 183).
1. “rely on low-powered incentives and on incentives linked to inputs, rather than outputs (Prendergast 2002)” (0. 183).
2. “ the firm is a “subeconomy” and can use a broad set of tools—including decision rights, task assignments, relational contracts, culture, and hierarchies—to solve the motivation and coordination problems it faces” (p. 183).
3. “ to avoid multitask issues, organizations can rely variously on: selecting the “right” type of agents, such as agents who are intrinsically motivated by the aims of the organization (Prendergast 2007, 2008); developing an identity (Akerlof and Kranton 2005; and Bénabou and Tirole 2011); and creating a sense of mission (Dewatripont, Jewitt, and Tirole 1999)” (p. 183).
3. “Another critical source of failures is miscommunication (section 4) …  Truthful communication requires aligned incentives within the organization, for which not only monetary incentives, but also intrinsic motivation in the form of identity or mission, is desirable” (p. 183).
4. “Our survey also suggests that managers must be mindful of the long-term consequences of their decisions (section 5). …  our analysis illustrates how short-term efficiency gains must be weighted against the constraints they place on future cooperation and change” (pp. 183-4).
5. “Finally, organizations must resolve coordination failures in the presence of bounded rationality (section 6)” (p. 184).
6. “A broad message of organizational economics is that organizations exist when there are contractual imperfections and other limitations on collective action that make markets even less effective than organizations. Our models highlight a variety of such imperfections and show how they are responsible for the (mostly inevitable) trade-offs we identify inside organizations” (p. 184).

Making information symmetric in the sex industry

http://qz.com/621994/trust-and-crime/

Could asymmetric information be a problem for the buyer?

Pricing floor space in malls

Mall Owners Push Out Department Stores
by: Suzanne Kapner
Jul 11, 2016
Click here to view the full article on WSJ.com

TOPICS: Microeconomics

SUMMARY: Once the linchpin of American shopping malls, department stores are being displaced by newer types of retailers that do a better job of driving shoppers to the centers and lifting overall mall sales.

CLASSROOM APPLICATION: Students can evaluate the reason for mall owners to set rents based on the amount of mall traffic stores generate. They can also examine the reasons for the decline in department store sales and the decrease in value of department stores to mall owners. One note in the article is that department stores are not closing fast enough.

QUESTIONS: 
1. (Advanced) Why did mall owners set lower rents for department stores than for other retailers? What was the benefit to mall owners of having department stores?

2. (Introductory) What factors explain the decrease in department store sales?

3. (Advanced) Why are department stores not closing fast enough?

Reviewed By: James Dearden, Lehigh University

What determines the drugs your doctor prescribes for you?

Even Cheap Meals Influence Doctors' Drug Prescriptions, Study Suggests
by: Peter Loftus
Jun 21, 2016
Click here to view the full article on WSJ.com

TOPICS: Moral Hazard, Statistics

SUMMARY: Doctors who received a single free meal from a drug company were more likely to prescribe the drug the company was promoting than doctors who received no such meals, according to a study.

CLASSROOM APPLICATION: Students can critically evaluate the study examining the relationship between industry-sponsored meals and physician prescriptions. In particular, instructors can stress the difference between a correlations between meals and prescriptions and the causal effect of meals on prescriptions. Students can also discuss whether

QUESTIONS: 
1. (Introductory) The study reports, "Receipt of industry-sponsored meals was associated with an increased rate of prescribing the brand-name medication that was being promoted. The findings represent an association, not a cause-and-effect relationship." Does this statistical association between meals and prescription decisions imply that the meals influence doctors' drug prescriptions?

2. (Advanced) Is it possible that pharmaceutical reps promote (i.e., detail) drugs that are most effective? If so, could the detailing improve economic efficiency by its promotion of effective drugs?

3. (Advanced) What types of studies should be done to determine (1) whether pharmaceutical detailing has a causal effect on the prescriptions physicians write, and (2) whether detailing improves economic efficiency by providing information about pharmaceuticals?

Reviewed By: James Dearden, Lehigh University

Discounts for Drugs

Here are some questions to consider as you read the article. Does asymmetric information afflict the markets for prescription drugs? If so, who knows the most, the drug company, the patient, the doctor, or the health insurance company? Does a "claw-back" clause that gives an after-the-fact discount to the health insurance company if the drug fails to deliver as much as expected be a possible solution to problems created by asymmetric information? Who can determine whether the drug fails to deliver as much as expected and how? Health Insurers Push to Tie Drug Prices to Outcomes by: Peter Loftus and Anna Wilde Mathews May 11, 2016 Click here to view the full article on WSJ.com TOPICS: Contracts, Pricing SUMMARY: Health insurer Cigna will get extra price discounts from drugmakers if new cholesterol medications don't help patients as much as expected, a significant step in a broader push to tie the cost of drugs to how well they work. CLASSROOM APPLICATION: The article raises interesting issues about contracts: the costs of enforcing contracts (tracking patient experiences) and the reliability of drug trials as indicators of general experience with drugs. QUESTIONS:  1. (Advanced) Are drug trials perfect predictors of drug efficacy in large populations? 2. (Introductory) Why are health insurers and pharmacy-benefit managers pushing to tie drug prices to efficacy? 3. (Advanced) How does the ownership of data about drug efficacy affect the negotiation of value-based contracts? Reviewed By: James Dearden, Lehigh University

Can you trust your financial advisor?

The Intelligent Investor. Is Your Broker Good or Bad?