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Showing posts with label car. Show all posts
Showing posts with label car. Show all posts

Thursday 28 October 2021

Information Asymmetry

From the Economist Schools Brief


 IN 2007 the state of Washington introduced a new rule aimed at making the labour market fairer: firms were banned from checking job applicants’ credit scores. Campaigners celebrated the new law as a step towards equality—an applicant with a low credit score is much more likely to be poor, black or young. Since then, ten other states have followed suit. But when Robert Clifford and Daniel Shoag, two economists, recently studied the bans, they found that the laws left blacks and the young with fewer jobs, not more.

Before 1970, economists would not have found much in their discipline to help them mull this puzzle. Indeed, they did not think very hard about the role of information at all. In the labour market, for example, the textbooks mostly assumed that employers know the productivity of their workers—or potential workers—and, thanks to competition, pay them for exactly the value of what they produce.

You might think that research upending that conclusion would immediately be celebrated as an important breakthrough. Yet when, in the late 1960s, George Akerlof wrote “The Market for Lemons”, which did just that, and later won its author a Nobel prize, the paper was rejected by three leading journals. At the time, Mr Akerlof was an assistant professor at the University of California, Berkeley; he had only completed his PhD, at MIT, in 1966. Perhaps as a result, the American Economic Review thought his paper’s insights trivial. The Review of Economic Studieagreed. The Journal of Political Economy had almost the opposite concern: it could not stomach the paper’s implications. Mr Akerlof, now an emeritus professor at Berkeley and married to Janet Yellen, the chairman of the Federal Reserve, recalls the editor’s complaint: “If this is correct, economics would be different.”

In a way, the editors were all right. Mr Akerlof’s idea, eventually published in the Quarterly Journal of Economics in 1970, was at once simple and revolutionary. Suppose buyers in the used-car market value good cars—“peaches”—at $1,000, and sellers at slightly less. A malfunctioning used car—a “lemon”—is worth only $500 to buyers (and, again, slightly less to sellers). If buyers can tell lemons and peaches apart, trade in both will flourish. In reality, buyers might struggle to tell the difference: scratches can be touched up, engine problems left undisclosed, even odometers tampered with.

To account for the risk that a car is a lemon, buyers cut their offers. They might be willing to pay, say, $750 for a car they perceive as having an even chance of being a lemon or a peach. But dealers who know for sure they have a peach will reject such an offer. As a result, the buyers face “adverse selection”: the only sellers who will be prepared to accept $750 will be those who know they are offloading a lemon.

Smart buyers can foresee this problem. Knowing they will only ever be sold a lemon, they offer only $500. Sellers of lemons end up with the same price as they would have done were there no ambiguity. But peaches stay in the garage. This is a tragedy: there are buyers who would happily pay the asking-price for a peach, if only they could be sure of the car’s quality. This “information asymmetry” between buyers and sellers kills the market.

Is it really true that you can win a Nobel prize just for observing that some people in markets know more than others? That was the question one journalist asked of Michael Spence, who, along with Mr Akerlof and Joseph Stiglitz, was a joint recipient of the 2001 Nobel award for their work on information asymmetry. His incredulity was understandable. The lemons paper was not even an accurate description of the used-car market: clearly not every used car sold is a dud. And insurers had long recognised that their customers might be the best judges of what risks they faced, and that those keenest to buy insurance were probably the riskiest bets.

Yet the idea was new to mainstream economists, who quickly realised that it made many of their models redundant. Further breakthroughs soon followed, as researchers examined how the asymmetry problem could be solved. Mr Spence’s flagship contribution was a 1973 paper called “Job Market Signalling” that looked at the labour market. Employers may struggle to tell which job candidates are best. Mr Spence showed that top workers might signal their talents to firms by collecting gongs, like college degrees. Crucially, this only works if the signal is credible: if low-productivity workers found it easy to get a degree, then they could masquerade as clever types.

This idea turns conventional wisdom on its head. Education is usually thought to benefit society by making workers more productive. If it is merely a signal of talent, the returns to investment in education flow to the students, who earn a higher wage at the expense of the less able, and perhaps to universities, but not to society at large. One disciple of the idea, Bryan Caplan of George Mason University, is currently penning a book entitled “The Case Against Education”. (Mr Spence himself regrets that others took his theory as a literal description of the world.)

Signalling helps explain what happened when Washington and those other states stopped firms from obtaining job-applicants’ credit scores. Credit history is a credible signal: it is hard to fake, and, presumably, those with good credit scores are more likely to make good employees than those who default on their debts. Messrs Clifford and Shoag found that when firms could no longer access credit scores, they put more weight on other signals, like education and experience. Because these are rarer among disadvantaged groups, it became harder, not easier, for them to convince employers of their worth.

Signalling explains all kinds of behaviour. Firms pay dividends to their shareholders, who must pay income tax on the payouts. Surely it would be better if they retained their earnings, boosting their share prices, and thus delivering their shareholders lightly taxed capital gains? Signalling solves the mystery: paying a dividend is a sign of strength, showing that a firm feels no need to hoard cash. By the same token, why might a restaurant deliberately locate in an area with high rents? It signals to potential customers that it believes its good food will bring it success.

Signalling is not the only way to overcome the lemons problem. In a 1976 paper Mr Stiglitz and Michael Rothschild, another economist, showed how insurers might “screen” their customers. The essence of screening is to offer deals which would only ever attract one type of punter.

Suppose a car insurer faces two different types of customer, high-risk and low-risk. They cannot tell these groups apart; only the customer knows whether he is a safe driver. Messrs Rothschild and Stiglitz showed that, in a competitive market, insurers cannot profitably offer the same deal to both groups. If they did, the premiums of safe drivers would subsidise payouts to reckless ones. A rival could offer a deal with slightly lower premiums, and slightly less coverage, which would peel away only safe drivers because risky ones prefer to stay fully insured. The firm, left only with bad risks, would make a loss. (Some worried a related problem would afflict Obamacare, which forbids American health insurers from discriminating against customers who are already unwell: if the resulting high premiums were to deter healthy, young customers from signing up, firms might have to raise premiums further, driving more healthy customers away in a so-called “death spiral”.)

The car insurer must offer two deals, making sure that each attracts only the customers it is designed for. The trick is to offer one pricey full-insurance deal, and an alternative cheap option with a sizeable deductible. Risky drivers will balk at the deductible, knowing that there is a good chance they will end up paying it when they claim. They will fork out for expensive coverage instead. Safe drivers will tolerate the high deductible and pay a lower price for what coverage they do get.

This is not a particularly happy resolution of the problem. Good drivers are stuck with high deductibles—just as in Spence’s model of education, highly productive workers must fork out for an education in order to prove their worth. Yet screening is in play almost every time a firm offers its customers a menu of options.

Airlines, for instance, want to milk rich customers with higher prices, without driving away poorer ones. If they knew the depth of each customer’s pockets in advance, they could offer only first-class tickets to the wealthy, and better-value tickets to everyone else. But because they must offer everyone the same options, they must nudge those who can afford it towards the pricier ticket. That means deliberately making the standard cabin uncomfortable, to ensure that the only people who slum it are those with slimmer wallets.

Hazard undercuts Eden

Adverse selection has a cousin. Insurers have long known that people who buy insurance are more likely to take risks. Someone with home insurance will check their smoke alarms less often; health insurance encourages unhealthy eating and drinking. Economists first cottoned on to this phenomenon of “moral hazard” when Kenneth Arrow wrote about it in 1963.

Moral hazard occurs when incentives go haywire. The old economics, noted Mr Stiglitz in his Nobel-prize lecture, paid considerable lip-service to incentives, but had remarkably little to say about them. In a completely transparent world, you need not worry about incentivising someone, because you can use a contract to specify their behaviour precisely. It is when information is asymmetric and you cannot observe what they are doing (is your tradesman using cheap parts? Is your employee slacking?) that you must worry about ensuring that interests are aligned.

Such scenarios pose what are known as “principal-agent” problems. How can a principal (like a manager) get an agent (like an employee) to behave how he wants, when he cannot monitor them all the time? The simplest way to make sure that an employee works hard is to give him some or all of the profit. Hairdressers, for instance, will often rent a spot in a salon and keep their takings for themselves.

But hard work does not always guarantee success: a star analyst at a consulting firm, for example, might do stellar work pitching for a project that nonetheless goes to a rival. So, another option is to pay “efficiency wages”. Mr Stiglitz and Carl Shapiro, another economist, showed that firms might pay premium wages to make employees value their jobs more highly. This, in turn, would make them less likely to shirk their responsibilities, because they would lose more if they were caught and got fired. That insight helps to explain a fundamental puzzle in economics: when workers are unemployed but want jobs, why don’t wages fall until someone is willing to hire them? An answer is that above-market wages act as a carrot, the resulting unemployment, a stick.

And this reveals an even deeper point. Before Mr Akerlof and the other pioneers of information economics came along, the discipline assumed that in competitive markets, prices reflect marginal costs: charge above cost, and a competitor will undercut you. But in a world of information asymmetry, “good behaviour is driven by earning a surplus over what one could get elsewhere,” according to Mr Stiglitz. The wage must be higher than what a worker can get in another job, for them to want to avoid the sack; and firms must find it painful to lose customers when their product is shoddy, if they are to invest in quality. In markets with imperfect information, price cannot equal marginal cost.

The concept of information asymmetry, then, truly changed the discipline. Nearly 50 years after the lemons paper was rejected three times, its insights remain of crucial relevance to economists, and to economic policy. Just ask any young, black Washingtonian with a good credit score who wants to find a job.


Saturday 29 April 2017

Whiplash: the myth that funds a £20bn gravy train

Patrick Collinson in The Guardian


Ten years ago I was in a country lane in Leicestershire, indicating to turn right to go into a hotel for a family event. Seconds later my car was a write-off after a young driver careered round the bend, smashing into the rear of my VW Golf. Fortunately I stepped out uninjured. And from that moment I was pestered, again and again, to make a false whiplash claim.

One of the hotel’s guests was first in. “You’ve got to get down the doctors, tell them your neck is really hurting. You’ll easily get £3,000,” said one (I’m summarising here). But my neck, while a little stiff, wasn’t in pain. Others told me I was mad not to apply. But a decade later there is no evidence the crash caused anything other than a mild sprain that lasted a couple of days. And certainly not deserving of the £3,000-£6,000 that is routinely paid out to “victims” of even the mildest of rear-end shunts.

Now one brave consultant neurosurgeon, who has carried out thousands of operations involving neck and back issues, has declared that whiplash is a myth, nothing more than a multibillion-pound gravy train for lawyers, doctors and the victims suffering from “mainly non-existent injuries”.

In a remarkable piece for the Irish Times, Dr Charles Marks, a lecturer at University College Cork, says the medical profession is as guilty as the lawyers. “For 20 years I wrote medical reports which were economical with the truth … the truth being, there was very little wrong with the vast majority of compensation claimants that I saw. I was moving with the herd.” In Ireland, where payouts have reached levels that even the most avaricious ambulance-chasing lawyer here can only dream of, a doctor can earn as much as £3,000 a week in fees after spending 20 minutes with someone involved in a minor car crash, then writing a largely templated report. “It’s a fee of around €350 and you can easily do 10 a week,” Marks says.

Yet whiplash is “almost impossible to prove”, says Dr Marks, with patients self-diagnosing pain that can never be detected using sophisticated imaging techniques such as MRI and bone scans. “All whiplash is minor. Moderate or permanent whiplash is simply non-existent.”

He cites one study of 40 “demolition derby” drivers in the US who had an average of 1,500 collisions each over a couple of years. Compare that to a mild shunt in slow-moving traffic that, somehow, warrants payouts of thousands. Yet just two of the demolition derby drivers reported post-participation neck pain that lasted more than three months.

Dr Marks adds that in Greece and Lithuania, where there is no expectation of financial gain from whiplash, chronic neck pain following a car crash appears simply not to exist.

But one (British) consultant in Ireland is barely sufficient evidence. So I spoke to another whiplash expert, Dr Stuart Matthews, consultant surgeon in major orthopaedic trauma at the Leeds Teaching Hospitals. He sounded even more dismissive than Dr Marks. “There is not a single test that shows abnormality directly attributable to this condition. Diagnoses are purely on the say-so of the person involved. Many orthopaedic surgeons do not believe it is a genuine condition.”

He says early research that provided medical endorsement for whiplash claims has subsequently been rejected. “It’s the emperor’s new clothes. People just go along with it, there is a bandwagon.”

Neck sprain is genuine, he says, but recovery is relatively quick with little evidence of significant physical injury.

Yet the victims of whiplash receive £2bn a year in payouts, a fair chunk of which goes to personal injury lawyers. That’s £20bn over the past decade, paid for out of galloping increases in car insurance premiums. The forthcoming election means that reforms to whiplash payouts, promised in the prison and courts bill, have been shelved.

A new government, of whatever complexion, should reinstate the reforms – and order a major medical review to determine if we have all been conned for years.

Tuesday 12 April 2016

Three cars with explosives seized near Puttingal temple

IGNATIUS PEREIRA in The Hindu



Two of the cars had registration numbers of Kollam district and one of Thiruvananthapuram district, say police.


Police said the cars, found parked in a suspicious manner, came to their attention on Sunday night after some nearby residents made complaints.

A day after the temple tragedy, in which the death toll rose to 109, three cars laden with explosives were seized by the police about 500 metres away from the Puttingal Devi temple at Paravur on Monday.

City Police Commissioner P. Prakash said the cars, found parked near the temple, came to the notice of the local people late on Sunday. They alerted the police. On Monday morning, the police cordoned off the area and examined the cars, which were found packed with explosives, some of which were of high intensity.

Since the State police did not have the expertise to defuse them, the task has been assigned to experts of the Petroleum and Explosives Safety Organisation camping at Paravur for the investigation into Sunday’s explosions. Mr. Prakash said two of the cars carried Kollam registration numbers and one Thiruvananthapuram. Their ownership was being verified with the Transport Department.

Meanwhile, three more persons succumbed to burns on Monday. Among the dead, 14 bodies are yet to be identified.

A total of 879 people were injured and 305 of them were under treatment in various hospitals, an official statement issued by the office of the Health Minister said. There are 61 persons being treated at the Thiruvananthapuram Medical College Hospital (MCH), 30 at Kollam District Hospital and the rest in various private sector hospitals in both districts. Union Minister for Health J.P. Nadda visited the MCH on Monday and reviewed the facilities there.

The highest number of deaths, 59, was at the Kollam District Hospital.Meanwhile, the Crime Branch CID, which took over the investigation from the Paravur police, has registered cases against six persons. Among those listed in the case are four members of the Puttingal Devi Temple Devaswom Committee, fireworks contractor Varkala Krishnankutty, who is in a critical condition after suffering burns, and Kazhakuttam Surendran. Five of the accused are absconding.

They have been charged under Sections 304 (culpable homicide not amounting to murder ) and 188 (disobedience to order duly promulgated by public servant) of the Indian Penal Code and Section 3 of the Explosives Act (unlawfully and maliciously causing explosion that endangers life and property).

(With inputs from C. Maya)

Thursday 21 January 2016

Wait for a bus and then tell me the market knows best

Deregulation of buses in 1986 was a disaster for those unable to afford a car. Municipalisation is the key to a fairer system

Owen Jones in The Guardian


 

Liverpool’s Queen’s Square bus station. Since 1986, ‘bus trips in big cities outside London have collapsed from 2bn to 1bn a year’. Photograph: Christopher Thomond for the Guardian


Of the issues differentiating the metropolitan mindset in the capital from opinions voiced elsewhere, the starkest is probably transport. We hear much about the overcrowded rail network in London and the south east, where fares are among the most expensive in Europe. Of course we do: much of the national media works from London. And we have warm words for the buses in the capital, where since Ken Livingstone’s first mayoral administration, starting in 2000, the mayoralty and Transport for London have assumed regulatory powers, determining prices and frequency with dramatic success.

Travel outside London, however, and Britain’s deregulated bus system reveals itself as the source of widespread, justified disgruntlement – an overpriced, inefficient, poor-quality mess. According to a report to be published this week, since deregulation in 1986 – unleashed with the promise that “more people would travel” – bus trips in big cities outside London have collapsed from 2bn to 1bn a year. In London, on the other hand, where everything from how much we pay to which routes exist is decided by the mayor and Transport for London, bus use since the 1980s has gone in the opposite direction: from around 1bn to more than 2bn trips a year. Britain’s bus privatisation disaster is a story of profit before need, and a discomfiting tale for those who believe the private sector automatically trumps the public realm.

I asked Twitter for bad experiences of buses, and turned my feed into one long howl of anguish. Chronic delays, “virtually no evening travel”, old “clapped-out buses”, infrequency, poor punctuality, extortionate prices: these were common complaints. “No evening and barely a weekend bus service in Helmsley, North Yorks,” complained one. “Need a car to live here.” Another cry of frustration: “Costly, cash only, fragmented among several providers, no unified ticketing, virtually ends at 1800 hours, v[ery] poor on Sunday.”

It is the less well-off who suffer most. Fewer than one in three of the poorest tenth of the population own their own car. With our bus system in such a state, it is unsurprising that those with the least money are three times more likely to use a cab than the richest.


Our journey towards the great British bus disaster is uncovered in meticulous detail in the report, by Ian Taylor and Lynn Sloman. “Bus users in Britain inhabit different worlds,” they note, ranging from London’s centrally regulated bus system to rural dwellers who “live in a third world with a skeletal service or, in some places, no service at all”. Whatever Margaret Thatcher’s programme of deregulation in the 1980s offered, the opposite happened: fares rose, services worsened and bus use fell.

Private bus companies have one motive, after all: making profit, rather than catering to the needs of their users. Between 2003 and 2013, £2.8bn ended up as dividend payments in the bank balances of shareholders, rather than invested in improving bus services. About 40p in every pound of their total revenues comes directly from the taxpayer: yet another example of Britain’s publicly subsidised “free market” economy.

Bus services are a hopelessly confused patchwork of provision. Some tickets you can use with different providers, some you can’t. You may find enough buses at peak hours but struggle to catch one at other times. If you live in a rural area, you may struggle to find any buses to catch at all. Local authorities can pay for services deemed crucial for local communities, but they do so at great expense. Often the buses themselves are from another age: cold, noisy, rickety vehicles driven by woefully underpaid drivers. Those who can afford to insulate themselves by using their own vehicles can minimise the inconvenience, but that’s not an option for the less fortunate.

Our rail system, we debate. We know that a decisive majority of Britons want to see our railways publicly owned. But where is the debate about rescuing Britain’s bus services?

Bringing buses into accountable, municipal ownership would transform the system. Consider France, or Germany where apparently 88% of local public transport trips are on publicly owned trams, trains or buses, but also look closer to home. In 2013, after running a £8m surplus, municipally owned Lothian Buses in Edinburgh reported satisfaction rates of 96%, beating all competition in Britain. Nottingham City Transport – majority shareholder the city council – has satisfaction rates of 92% in “one of the least car-dependent cities” in Britain.


Here’s what municipalisation can achieve, say Taylor and Sloman. A “comprehensive network” for all communities, without allowing private companies to cherrypick the most profitable routes or obliging local authorities to intervene at “disproportionate cost”. Rather than having a bewildering array of fares, there could be “simple, area-wide fares” that – as in London – could be used across all transport services, from trains to buses, with daily costs capped. Instead of passengers being stuck for the best part of an hour at a freezing bus stop after changing buses, timetables could be coordinated, and public money be spent improving services, not frittered away as shareholder dividends.

We hear so little about buses, undoubtedly, because in London they are good enough for the middle classes to use, while outside the capital those with sharper elbows often avoid them. But here is surely an issue for Labour to champion. Those who suffer the most are often in areas where Labour could do well to try to win support, such as Cornwall, and in many Tory-dominated rural communities. Municipal ownership, with bus passengers encouraged to help run services, would improve the lives of many poorer citizens. There would also be fewer cars on the road. Whether or not Lady Lindsay of Dowhill ever really said “Anybody seen in a bus over the age of 30 has been a failure in life”, the stigma could be overcome for the public good.

Putting the great bus privatisation disaster on the agenda would be another reminder that the inherent superiority of the market is not a foregone conclusion.
This is a rich country. If we cannot even produce a decently functio
ning bus service for our citizens, we need to start asking ourselves some serious questions.

Tuesday 25 August 2015

10 funniest jokes of the Edinburgh fringe

Source: The Guardian

1. Darren Walsh: I just deleted all the German names off my phone. It’s Hans free.
2. Stewart Francis: Kim Kardashian is saddled with a huge arse … but enough about Kanye West.
3. Adam Hess: Surely every car is a people carrier?
4. Masai Graham: What’s the difference between a hippo and a Zippo? One is really heavy, the other is a little lighter.
5. Dave Green: If I could take just one thing to a desert island, I probably wouldn’t go.
6. Mark Nelson: Jesus fed 5,000 people with two fishes and a loaf of bread. That’s not a miracle. That’s tapas.
7. Tom Parry: Red sky at night: shepherd’s delight. Blue sky at night: day.
8. Alun Cochrane: The first time I met my wife, I knew she was a keeper. She was wearing massive gloves.
9. Simon Munnery: Clowns divorce: custardy battle.
10. Grace the Child: They’re always telling me to live my dreams. But I don’t want to be naked in an exam I haven’t revised for.
Honourable Mentions
Jenny Collier: I never lie on my CV, because it creases it.
Ian Smith: If you don’t know what introspection is, you need to take a long, hard look at yourself.
Tom Ward: I usually meet my girlfriend at 12:59 because I like that one-to-one time.
Gyles Brandreth: Whenever I get to Edinburgh, I’m reminded of the definition of a gentleman. It’s someone who knows how to play the bagpipes, but doesn’t.
Ally Houston: Let me tell you a little about myself. It’s a reflexive pronoun that means “me”.
James Acaster: Earlier this year I saw The Theory of Everything – loved it. Should’ve been called Look Who’s Hawking, that’s my only criticism.