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How Well Do Incentive Programs in the Workplace Work?

Posted by Josh Wright on May 1, 2012

WSJ has an interesting story about the growing number of employer efforts to import “game” like competitions in the workplace to provide incentives for employees to engage in various healthy activities.  Some of these ideas sound in the behavioral economics literature, e.g. choice architecture or otherwise harnessing the power of non-standard preferences with a variety of nudges; others are just straightforward applications of providing incentives to engage in a desired activity.

A growing number of workplace programs are borrowing techniques from digital games in an effort to encourage regular exercise and foster healthy eating habits. The idea is that competitive drive—sparked by online leader boards, peer pressure, digital rewards and real-world prizes—can get people to improve their overall health.

A survey of employers released in March by the consulting firm Towers Watson and the National Business Group on Health found that about 9% expected to use online games in their wellness programs by the end of this year, with another 7% planning to add them in 2013. By the end of next year, 60% said their health initiatives would include online games as well as other types of competitions between business locations or employee groups.

How well do these programs work in practice?  The story reports mixed evidence of the efficacy of the various game-style competitions; this is not too surprising given the complexity of individual incentives within organizations and teams.

Researchers say using videogame-style techniques to motivate people has grounding in psychological studies and behavioral economics. But, they say, the current data backing the effectiveness of workplace “gamification” wellness programs is thin, though companies including WellPoint Inc. and ShapeUp Inc. have early evidence of weight loss and other improvements in some tests.

So far, “there’s not a lot of peer-reviewed evidence that it achieves sustained improvements in health behavior and health outcomes,” says Kevin Volpp, director of the University of Pennsylvania’s Center for Health Incentives and Behavioral Economics.

Moreover, some employees may feel unwanted pressure from colleague-teammates or bosses when workplace competitions become heated, though participation is typically voluntary.

Incentives are powerful; but when and how they matter depends upon institutions.  Gneezy et al have an excellent survey of the literature in the Journal of Economic Perspectives, where they conclude:

When explicit incentives seek to change behavior in areas like education, contributions to public goods, and forming habits, a potential conflict arises between
the direct extrinsic effect of the incentives and how these incentives can crowd out intrinsic motivations in the short run and the long run. In education, such incentives seem to have moderate success when the incentives are well-specifified and well-targeted (“read these books” rather than “read books”), although the jury is still out regarding the long-term success of these incentive programs. In encouraging contributions to public goods, one must be very careful when designing the incentives to prevent adverse changes in social norms, image concerns, or trust. In the emerging literature on the use of incentives for lifestyle changes, large enough incentives clearly work in the short run and even in the middle run, but in the longer run the desired change in habits can again disappear.

HT: Salop.

 

Posted in behavioral economics, behavioral economics, economics, health care | 2 Comments »

Book Review of Cohen & Wright on Family Law & Economics

Posted by Josh Wright on April 25, 2012

From Lucy Heckman:

The Research Handbook on the Economics of Family Law consists of a series of essays about perspectives on the commercial relations of human activities outside of the commercial world, specifically marriage and child-bearing.  The work addresses such topics as factors that influence marriage, trends in marital stability, divorce and divorce law and the role of economics, the economics of infant feeding, and the relation between early access to birth control and its influence on a woman’s education, career, and fertility. All of the essay topics are varied and each contributor takes a different approach to his or her topic. Some of the essays rely heavily on surveys and literature on the topic, others use empirical economics, while others take a purely legal approach to the topic. Along with addressing marriage, divorce, and childrearing there are some unexpected topics such as abortion access, prostitution, and incentives for partnering. This is an enlightening text on the subject of law, economics, and social institutions that will be useful for students in law and economics, specifically those studying family law.

The book is available here.

 

Posted in economics | Comments Off

Summary Judgment Granted in Mayer Laboratories v. Church & Dwight

Posted by Josh Wright on April 25, 2012

Judge Edward Chen in the Northern District of California granted Church & Dwight’s motion for summary judgment as to Mayer Laboratories antitrust claims involving Church & Dwight’s shelf space agreements with retailers in the condom market.  Church & Dwight is the manufacturer of Trojan brand condoms.  Specifically, Mayer argued that Church & Dwight’s shelf space share discounts with retailers — all units discounts triggered upon the retailer committing a specified percentage of its condom shelf space to Trojan products — prevented Mayer from competing by denying it access to retailer shelf space and thus allowed Church & Dwight to unlawfully monopolize the condom market.

Judge Chen’s opinion is available here (and at 2012 WL 1231801).  Judge Chen’s opinion is lengthy and correspondingly thorough; summary judgment was granted on a number of independent grounds, including lack of antitrust injury, failure to demonstrate substantial foreclosure, and insufficient evidence of monopoly power.  I was the economic expert witness for Church & Dwight in the case (along with my colleague at Charles River Associates, Serge Moresi, who filed a rebuttal report) and am obviously quite pleased with the outcome and that Judge Chen relied upon my analysis in reaching these conclusions.

Notwithstanding my private interest in the case, I suspect our readers will find the opinion interesting both respect to the handling of economic evidence, but also with respect to the analysis of shelf space share discounts, which have been the focus of some recent speeches by agency economists.  Judge Chen’s opinion also directly addresses both traditional foreclosure based analysis of allegedly exclusionary agreements as well as the more novel “tax effect” theories.  While I cannot comment on the case directly, I thought some of our readers might be interested in seeing the opinion.

Professor Wright, a recognized authority on vertical contractual arrangements at the George Mason University School of Law, filed expert and rebuttal reports in anticipation of trial. Serge Moresi, CRA’s Director of Competition Modeling, filed a rebuttal report in response to the claims of Mayer Laboratories’ economic experts. Professor Wright and Dr. Moresi explained why, both factually and conceptually, the opposing experts’ claims were substantially flawed. Relying extensively on the evidence and analysis presented by CRA’s economic experts, the Court granted summary judgment in Church & Dwight’s favor with regard to each of the antitrust claims raised in this case.

Posted in antitrust, economics, exclusionary conduct, exclusive dealing, monopolization | 1 Comment »

CEO Vacations and Stock Prices

Posted by Josh Wright on April 19, 2012

An interesting looking empirical piece from David Yermack (NYU), Tailspotting: How Disclosure, Stock Prices and Volatility Change When CEOs Fly to Their Vacation Homes.  I haven’t read it closely yet.  Here’s the abstract:

This paper shows close connections between CEOs’ vacation schedules and corporate news disclosures. Identify vacations by merging corporate jet flight histories with real estate records of CEOs’ property owned near leisure destinations. Companies disclose favorable news just before CEOs leave for vacation and delay subsequent announcements until CEOs return, releasing news at an unusually high rate on the CEO’s first day back. When CEOs are away, companies announce less news than usual and stock prices exhibit sharply lower volatility. Volatility increases immediately when CEOs return to work. CEOs spend fewer days out of the office when their ownership is high and when the weather at their vacation homes is cold or rainy.

HT: Salop.

Posted in corporate governance, economics, scholarship | Comments Off

Happy 98th Birthday to Armen Alchian!

Posted by Josh Wright on April 13, 2012

The great economist Armen Alchian turned 98 yesterday.  Armen is the father of the UCLA tradition in economics.  I had the great honor of having Armen on my dissertation committee and cannot imagine being prouder of my association with him.  Armen’s contributions to economics as diverse as they are penetrating.  Armen was one of the few economists capable of producing fundamental insights and advancements in macroeconomic and microeconomic theory, quantitative methods, as well as produce pathbreaking work in the economics of property rights and the theory of the firm.

Armen’s classic paper with Harold Demsetz (AER, 1972) coupled with Klein, Crawford and Alchian’s seminal analysis of vertical integration and the holdup problem (JLE, 1978) give him a prominent spot in the theory of the firm literature and transaction cost economics.  Those papers rank 12th and 30th, respectively, in  Kim et al‘s list of the top economics papers since 1970.   Alchian’s other scholarly contributions are remarkable.  Consider his collected works in two volumes.  Perhaps most well known among them are neither of the two papers discussed above but “Uncertainty, Evolution and Economic Theory” (1950), in which Armen lays out the case for a survival principle to be applied to efficient individual behavior – notwithstanding heuristics and irrational motivations.  Armen was ahead of his time in considering (along with the work of Becker and others at the time) rationality as an outcome of market institutions rather than merely an assumption.  Alchian’s work on learning and the costs of production was equally pathbreaking (see Reliability of Progress Curves in Airframe Production, 1963).

Armen’s contributions to economics as a teacher were equally remarkable.  Nobel Laureate William F. Sharpe captures some of this in his autobiographical exposition explaining Alchian’s influence on his own career:

Armen Alchian, a professor of economics, was my role model at UCLA. He taught his students to question everything; to always begin an analysis with first principles; to concentrate on essential elements and abstract from secondary ones; and to play devil’s advocate with one’s own ideas. In his classes we were able to watch a first-rate mind work on a host of fascinating problems. I have attempted to emulate his approach to research ever since. When I returned to pursue the PhD degree, I took a field in microeconomics with Armen and he also served as chairman of my dissertation committee.

Former FTC Chairman Timothy Muris and my GMU colleague characteristically cuts to the heart of matters:

Armen Alchian was unexcelled in teaching economics to lawyers. He often presented economics socratically – a technique familiar to lawyers. For years Armen was one of the most popular instructors in Henry Manne’s programs for teaching economics to lawyers. In short courses, he taught literally hundreds of federal judges and law professors.

TOTM readers will be familiar with my annual posts calling for a Nobel Prize for Alchian.  Susan Woodward, a former co-author of Alchian, has authored a wonderful chapter on Alchian’s contributions to law and economics that will appear in the Cohen & Wright Pioneers of Law and Economics volume.

As Armen’s long-time collaborator William Allen put it in his own letter to the Nobel Committee on Armen’s behalf:

Economics is a broad discipline in methodology, as the Committee is fully aware, ranging from detailed historical, institutional, legalistic description to totally abstract, arcane theory. All such approaches, techniques, and emphases are appropriate. But there is much specialization among the members of the fraternity. And, increasingly, the profession has dealt in rigorous, elegant manipulation, even when the work is purportedly empirical—and even when the substantive results hardly warranted such virtuoso flair. Professor Alchian is a splendid technician, and he has contributed significantly and conspicuously to general “theory.” But, in contrast to many, he has always appreciated that the final payoff of Economics is elucidation of the real workings and phenomena of the world. I know of no one at any time who has had a finer sense of how to use economic analytics to explain the world. Sometimes the explanation requires involved, complex analysis, and Professor Alchian does not fear to use the tools which are required; what is uncommon is his lack of fear in using the MINIMUM tools which are required. In large part, his peculiar genius (the word is used advisedly) is to make extraordinarily effective use of elemental, and often elementary, techniques of analysis. And a host of people—many of whom are now in strategic positions in universities, in government, in the legal system, in the world of business and finance—have enormously benefited from the tutelage of Professor Alchian. … I present Armen Alchian as a giant—a giant who, because of his lack of pretension, is easily overlooked by laymen and even by some supposed professionals—who has greatly honored his profession and uniquely contributed to its usefulness. He would grace the distinguished fraternity of Nobel Laureates.

Well said.  Here are some Alchian links for interested readers:

William Allen is right that it is precisely because of Armen’s lack of pretension Armen Alchian is too often overlooked as a true intellectual giant and ambassador of economics.   Here’s hoping the Nobel Committee bestows the award upon in recognition of his contributions.
Happy 98th Birthday, Armen.

Posted in armen alchian, economics, nobel prize | 3 Comments »

Steve Salop Wins Global Competition Review Academic Excellence Award

Posted by Josh Wright on April 9, 2012

Congratulations to my friend, colleague, and occasional TOTM contributor Steve Salop (Georgetown Law) on winning Global Competition Review’s Academic Excellence Award this year.  From the announcement:

Around 1,500 Global Competition Review (GCR) readers cast their votes, honoring outstanding individuals in such areas as competition law and economics around the world. GCR is the world’s leading antitrust and competition law journal and news service. The Academic Excellence Award recognizes a highly regarded academic and was presented to Professor Salop at GCR’s 2nd Annual Charity Awards Dinner in Washington, DC. In addition to being a senior consultant to CRA, Dr. Salop is a professor of economics and law at the Georgetown University Law Center in Washington, DC, where he teaches antitrust law and economics and economic reasoning for lawyers.

Congratulations Steve.

Posted in announcements, antitrust, economics, scholarship | Comments Off

Gary Becker, the Economic Approach to Crime, and Guerilla Grafters

Posted by Josh Wright on April 8, 2012

Fruit trees in a number of cities, including San Francisco, are prevented from bearing fruit in the name of “protecting” pedestrians from slip and falls and keeping away insects and vermin.  In response to these regulations, a group of Guerilla Grafters has emerged to — you guessed it — graft fruit bearing branches onto the non-fruit bearing city trees.

But grafting trees to bear the occasional pear is not all fun and games, apparently.  San Francisco officials consider the renegade arborists to be engaged in a serious offense (San Francisco Examiner):

While the grafters’ activities might seem harmless, Public Works Director Mohammed Nuru said the renegade gardeners are running afoul of the law.

“The trees that are in the right of way, they’re not for grafting,” he said. “The City considers such vandalism a serious offense. There would be fines for damage to city property.”

Nuru had not heard of Guerrilla Grafters, but said he would ask his staff to investigate. Meanwhile, he added, if the grafters have ideas about urban agriculture, they should discuss them with city officials.

NPR embeds one reporter with grafter Tara Hui on a covert grafting operation.  The first thought that crossed my mind as I read the story was skepticism that the costs associated with fallen fruit on city trees could be significant.  The second was hope the story had overestimated the prevalence of this type of regulation.  There is also some interesting law and economics.  The cops and robbers angle in the NPR story with Hui attempting to avoid detection for fear of sanction by the city authorities in the way of fines for vandalism was also interesting.  From the standard Beckerian model of rational criminal behavior we see Hui’s sensitivity to changes in the “price” of engaging in guerilla grafting (that is, the probability of detection weighted by the sanction she will pay if caught) and investments to avoid detection.

But what about the economic benefits?  Here’s Hui’s account:

“If we say where it is, they could come after me,” says Tara Hui, a fruit tree grafter. She’s talking about city officials, who manage the trees and say it’s illegal to have fruit trees on sidewalks.  So let’s just say we’re in some Bay Area city in a working-class neighborhood, at a line of pear trees that bear no pears.

Hui and two assistants pull out a knife, reach into a plastic bag filled with twigs no bigger than your pinkie, and cut from a fruit bearing pear tree. She says it’s an Asian pear, and that she’s grafting it onto a flowering pear tree.  They whittle a wedge into one end of their twig, then cut a groove into a similar-sized twig on the city tree. They join the two, like tongue and groove carpenters. And when their grafted twig eventually grows into a branch.

“There will be a much better looking tree that actually will provide fruit for people that come by,” Hui says.

Hui’s motives to break the law are straightforward.

“We don’t have a supermarket and we have very few produce stores [here],” she says. “What better to alleviate scarcity of healthy produce in an impoverished area than to grow them yourself and to have it available for free.”

For a recent and illuminating paper on the law and economics of criminal behavior which attempts to incorporate conventional critiques of the economic approach — for example, that criminals lack self-control, have non-standard preferences or do not act in their own self-interest — into the standard model, see Murat Mungan’s Law and Economics of Fluctuating Criminal Tendencies.  Mungan’s main goal is to show that the standard economic approach is capable of modification so as to absorb more realistic assumptions and that it gains explanatory power by doing so.

HT goes to Steve Salop for pointing me to the Guerilla Grafter story.

Posted in behavioral economics, economics, regulation | 3 Comments »

Halbert White, RIP

Posted by Josh Wright on April 4, 2012

Renowned UCSD economics professor, and founder of Bates White, Halbert White died on Saturday.  His CV is here.  James Hamilton offers a touching tribute and wonderful summary of White’s important work in econometrics here.  Of White standard errors, perhaps his most well known contribution, Hamilton explains:

An example arises in ordinary regression analysis, in which a common assumption is that the variance of the regression model’s error is the same for all observations. Suppose that assumption is wrong, and instead the variance depends in an unknown way on the various explanatory variables. Hal found that it is possible to characterize how that dependence would affect the reliability of the inference from the regression, and construct modified t-statistics or F-statistics that take this into account. This was such a useful contribution that it is now a standard option a user can easily select in any decent regression software package. Hal once lamented to me that this was an example of a contribution that became so successful and widespread that people forgot who came up with it in the first place. Hal’s proposed adjustments are often described as “robust standard errors” or “heteroskedasticity-consistent standard errors”, though I have always introduced them to my students as “White standard errors”.

Hamilton ends with a nice description of Hal’s personal and professional interactions with colleagues:

I used to have lunch each week with Hal, Clive Granger, Rob Engle, and others, at which people would bring up econometrics questions they’d been working on. If you had something important and difficult for which you needed a solution, it was a good idea to save the topic for discussion until Hal got there. I remember a number of occasions when the rest of us would struggle with something for 15 minutes, and then Hal would arrive and provide the key insight within 60 seconds. It was an incredible resource to have somebody like that around.

I must also say that he was one of the kindest and dearest people I have known. He didn’t have insecurities or something to prove about who he was– anybody with any sense would recognize his towering intellect. It was always a joy and honor to sit with him in seminars, and learn yet another new thing from his off-hand remarks and insights. And, since he wrote more in his lifetime than I would be able to read in mine, I can take some comfort in the fact that there is much more that I have yet to learn from this gentle and noble man.

Go read the whole thing.  I always have considered myself fortunate to have the opportunity to interact with Professor White a little bit while at UCSD as an undergraduate.  Rest in Peace.

Posted in economics, nobel prize | 1 Comment »

Potential Problems with an FDA Model for Regulating Financial Products

Posted by Thom Lambert on April 2, 2012

New York Times columnist Gretchen Morgenson is arguing for a “pre-clearance”  approach to regulating new financial products:

The Food and Drug Administration vets new drugs before they reach the market. But imagine if there were a Wall Street version of the F.D.A. – an agency that examined new financial instruments and ensured that they were safe and benefited society, not just bankers.  How different our economy might look today, given the damage done by complex instruments during the financial crisis.

The idea Morgenson is advocating was set forth by law professor Eric Posner (one of my former profs) and economist E. Glen Weyl in this paper.  According to Morgenson,

[Posner and Weyl] contend that new instruments should be approved by a “financial products agency” that would test them for social utility. Ideally, products deemed too costly to society over all – those that serve only to increase speculation, for example – would be rejected, the two professors say.

While I have not yet read the paper, I have some concerns about the proposal, at least as described by Morgenson.

First, there’s the knowledge problem.  Even if we assume that agents of a new “Financial Products Administration” (FPA) would be completely “other-regarding” (altruistic) in performing their duties, how are they to know whether a proposed financial instrument is, on balance, beneficial or detrimental to society?  Morgenson suggests that “financial instruments could be judged by whether they help people hedge risks – which is generally beneficial — or whether they simply allow gambling, which can be costly.”  But it’s certainly not the case that speculative (“gambling”) investments produce no social value.  They generate a tremendous amount of information because they reflect the expectations of hundreds, thousands, or millions of investors who are placing bets with their own money.  Even the much-maligned credit default swaps, instruments Morgenson and the paper authors suggest “have added little to society,” provide a great deal of information about the creditworthiness of insureds.  How is a regulator in the FPA to know whether the benefits a particular financial instrument creates justify its risks? 

When regulators have engaged in merits review of investment instruments — something the federal securities laws generally eschew — they’ve often screwed up.  State securities regulators in Massachusetts, for example, once banned sales of Apple’s IPO shares, claiming that the stock was priced too high.  Oops.

In addition to the knowledge problem, the proposed FPA would be subject to the same institutional maladies as its model, the FDA.  The fact is, individuals do not cease to be rational, self-interest maximizers when they step into the public arena.  Like their counterparts in the FDA, FPA officials will take into account the personal consequences of their decisions to grant or withhold approvals of new products.  They will know that if they approve a financial product that injures some investors, they’ll likely be blamed in the press, hauled before Congress, etc.  By contrast, if they withhold approval of a financial product that would be, on balance, socially beneficial, their improvident decision will attract little attention.  In short, they will share with their counterparts in the FDA a bias toward disapproval of novel products.

In highlighting these two concerns, I’m emphasizing a point I’ve made repeatedly on TOTM:  A defect in private ordering is not a sufficient condition for a regulatory fix.  One must always ask whether the proposed regulatory regime will actually leave the world a better place.  As the Austrians taught us, we can’t assume the regulators will have the information (and information-processing abilities) required to improve upon private ordering.  As Public Choice theorists taught us, we can’t assume that even perfectly informed (but still self-interested) regulators will make socially optimal decisions.  In light of Austrian and Public Choice insights, the Posner & Weyl proposal — at least as described by Morgenson — strikes me as problematic.  [An additional concern is that the proposed pre-clearance regime might just send financial activity offshore.  To their credit, the authors acknowledge and address that concern.]

Posted in economics, financial regulation, Hayek, Knowledge Problem, law and economics, regulation | 4 Comments »

The Law and Economics of Any Willing Provider Laws

Posted by Josh Wright on March 31, 2012

While I’m posting about health care regulation, I’d like to point TOTM readers to a short article with Jonathan Klick (University of Pennsylvania) summarizing the economics and empirical evidence surrounding “Any Willing Provider”(AWP) laws for the Washington Legal Foundation.   We write:

This analysis evaluates the antitrust law ramifications of proposals requiring pharmacy benefit managers (“PBMs”) to open up their networks to “any willing provider” meeting the same terms and  conditions as other network members. Providers which have failed to meet a PBM’s terms have frequently sought the enactment of any-willing-provider (“AWP”) legislation (or comparable administrative action). A recent federal proposal, The Pharmacy Competition and Consumer Choice Act of 2011 (“the Act”)1 — provides a useful model for this analysis. Both economic analysis and available empirical evidence suggest  the bill will harm consumers by restricting competition.

In the paper, we describe the anticompetitive effects of AWP legislation and the benefits of selective contracting which are undermined by such laws.  On the existing empirical evidence, we conclude:

The empirical research on the topic consistently indicates that AWP laws increase per capita  healthcare spending generally and pharmaceutical expenditures in particular directly. The related literature  on the effect of these laws on HMO penetration also suggests these laws may increase spending indirectly given that the laws lead to lower penetration and HMOs control costs better than indemnity insurance plans.  These results are consistent with economic theory regarding selective contracting.

The article is available here.

Posted in antitrust, economics, exclusive dealing, federal trade commission, health care, MFNs | Comments Off

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