How to Allocate Flu Vaccines?

In the Wall Street Journal today, there is an article that discusses the important, but tricky question of how limited vaccines should be allocated in the event of a national emergency. The question is relevant due to concerns that have arisen over the past few years over the avian flu.

The author of the article, Sharon Begley, reports on a paper that questions the conventional wisdom on the issue:

In May, scientists at the National Institutes of Health stirred things up with a paper calling into question the policy that aims to save the most lives by first vaccinating the old, the very young and the sick, putting last those who are two to 64 years of age.

The value of a life, they argued, depends on age. A 60-year-old has invested a lot (measured by education and experience) in his life, but has also reaped most of the returns. A child has minimal investment. A 20-year-old has great investment but has reaped almost none of the returns. Conclusion: To maximize investment in a life plus years of life left, 13- to 40-year-olds should have first claim on rationed vaccine, explains NIH's Ezekiel Emanuel.

What do you guys think? If you only have a certain number of vaccines, who should get first priority?

This is a pretty controversial question, so I urge you to read the whole article before commenting and to keep the comments civil and well thought-out.

(Source: Greg Mankiw's Blog)

What type of economist should get the Nobel Prize?

I know that I have been posting about nothing but the Nobel Prize this past week, so you guys might be tired of it, but has been a convenient way to introduce you to the work of current economists.

Economist Greg Mankiw has an interesting question posted on his blog about what type of economist tends to get the Nobel Prize. He states that

There was an apparent consensus that the Nobel committee prefers rewarding people for a few path-breaking works, rather than judging an entire career of contributions. Is this optimal?

If the goal is to provide researchers with the right incentives, it may not be. It is as if a baseball team paid players based only on the number of home runs. We would have too many players swinging for the bleachers and too few base hits. In economics, maybe we get too many of the best people trying to create new paradigms and too few engaged in more routine, applied research.

What do you guys think? Should they be giving Nobel Prizes to the economists that come up with a few pathbreaking ideas (the home run hitters)? Or to economists that have larger quantities of consistent, solid research (the batting average leaders)? Which would be better for the field of economics? Which would be better for society as a whole in terms of advancing knowledge and having better economic policies?

Ig Nobel Prizes

Since we have been discussing the impending Nobel Prizes, the "Ig Nobel" Prizes are also given out each year, and they are a lot less prestigious, but also a lot more entertaining. They are given out for research that is unusual and/or humorous, and as I quoted last year on this blog, for research that "cannot or should not be reproduced."

A list of this year's winners are listed here.

A couple of the more unusual ones:

ORNITHOLOGY: Ivan R. Schwab, of the University of California Davis, and the late Philip R.A. May of the University of California Los Angeles, for exploring and explaining why woodpeckers don't get headaches.

CHEMISTRY: Antonio Mulet, José Javier Benedito and José Bon of the University of Valencia, Spain, and Carmen Rosselló of the University of Illes Balears, in Palma de Mallorca, Spain, for their study "Ultrasonic Velocity in Cheddar Cheese as Affected by Temperature."

Nobel Series: William Baumol

William Baumol is an economist at NYU and was the co-author of the intro textbook that I used in college. The main theory of his that I am familiar with and would like to highlight is called "Baumol's cost disease," which sounds more gruesome than it is.

Basically, Baumol's cost disease explains why productivity grows so fast in some sectors while it lags behind in others. In particular, the term refers to the fact that it is difficult to increase productivity in labor-intensive industries, like the arts or education. To use an example from Baumol himself, it takes the same amount of musicians to play a string quartet as it did 300 years ago. Or to use an example from education, the number of students that can be taught by one teacher is the same as it was 50 years ago. In fact, it may even be less now since there is more of a focus on low student-teacher ratios.

Therefore, while other industries like manufacturing clothing and printing books become more productive due to technological innovation, service industries do not due to the fact that they are labor-intensive goods. Therefore, the costs to produce those service goods remains higher than other goods. This could be an explanation for why the prices of medical care and tuition have been increasing so much while the prices of computers and most other manufactures have been decreasing or increasing at a slower rate.

Here is an article from The New Yorker that discusses the application of Baumol's cost disease further and references a newer study that confirms these ideas.

Can you think of any other examples of industries or goods and services that suffer from Baumol's cost disease?

Nobel Series: Gordon Tullock

Another economist who has been discussed as a possible Nobel winner is Gordon Tullock. Dr. Tullock is known for his work in public choice economics (which basically applies economic logic to how government makes decisions). He is mostly known for introducing the idea of "rent-seeking behavior."

Rent-seeking behavior is where an individual or business seeks to gain by changing the economic environment instead of through a productive activity. To make the idea more clear, here are some examples:

• A group of businesses join together to form a cartel and agree to raise prices.
• An industry pays lobbyists to get Congress to pass a bill giving subsidies to the industry.
• One country invades another to take natural resources, like oil.
• A union tries to negotiate higher wages without increases in productivity.
• Any type of theft of property.

The basic idea in all of the examples is that the action is not adding to the total welfare to society, merely providing more profit or resources to the rent seekers (many times just transferring resources from one group to another).

As a sidenote, one of his colleagues at George Mason University posted this about how Tullock always comes up with great insults. Here is my favorite:

The other day Gordon asked me to read one of his papers and Ipointed out a few typos. "Excellent," he said, "this will surely be your greatest contribution to economics."

Can you think of any other examples of rent-seeking behavior? Any ways in which you try to gain without providing any productivity?

Nobel Series: Oliver Williamson, part 2

Williamson's work in transaction cost economics sheds light on the question of what determines the length of a contract. For instance, why is my contract with The Walker School a 1-year contract? Why do some companies give contracts of 3 to 5 years (informally through a trial period)? Why do temp agencies have people whose job is to work for contracts of as little as a day or a few hours?

Part of the reason comes down to the type of investments involved in the transactions. The basic conclusion is that the more "relationship-specific" the investments, the longer the length of the contract. As an example, job-training can be looked at as an investment from both the employer and the employee side. In situations where the employer has to spend a lot of time training employees in skills that are very specific to their company (like a technical job where the software is company-specific), we would expect to see longer contracts. Whereas, in a temp agency where the only training involved is in office skills that can be used in any job (therefore, not very relationship-specific), the contracts can be very short.

An interesting article in Financial Times by economist Tim Harford talks about this very issue. He discusses marriage as a unique long-term contract and how it relates to corporate examples of contract length and relationship-specific investments.

Any other examples of "long-term contracts" that you know of that might have to do with how specific the investments involved are? Reactions to the Harford article?

Nobel Series: Oliver Williamson, part 1

The first possible Nobel economist that I will profile is Oliver Williamson, the one whose work I am most familiar with from graduate school.

He is the economist most responsible for the field of transaction cost economics. Transaction costs are the costs of an economic exchange. As an example, if you decide to buy a car, the price of the car is one of many costs you have to incur. You also have to research to find what kind of car you want, spend time driving to dealerships or looking through classifieds to find the car you want, and finally spend time negotiating on the price or terms of the deal. All of these are transaction costs. These type of costs are many times ignored in the theoretical realm of economic models, but Williamson brought attention to their effect.

Here is a review of one of Williamson's better known works by a UCLA law professor. He adds this assertion on Williamson and transaction costs:

Williamson's core idea is the theory of transaction cost economics. We can analogize transaction costs to friction: they are dead weight losses that reduce efficiency. They make transactions more costly and less likely to occur. Among the most important sources of transaction costs is the limited cognitive power of human decisionmakers.

Can you think of any other examples where transaction costs are important other than when buying cars? Are there cases where transaction costs can cause you to not make a purchase that you would make if they did not exist?

Economics of Tipping

Stephen Dubner, co-author of the bestseller Freakonomics, asks why people do not tip flight attendants. He basically argues that flight attendants do the same type of service that you find in a lot of other jobs where the workers do receive tips (waiting tables, hotel bellmen, etc.). Any ideas on why people do not tip flight attendants? What makes it different from those other service jobs?

I think the rules about tipping are generally interesting/confusing. For instance, why is the tip in restaurants based on the value of the meal instead of the number of people at the table? I would think that the number of people at the table has a bigger impact on the amount of work a waiter (or waitress) has to do.

Also, if a tip is supposed to be a reward for a good job of service, why not have a convention where half of the tip is given at the beginning of the meal and half at the end? This strategy might encourage better service since I doubt giving a big tip encourages better service unless you go to a restaurant often enough for the server to recognize you and that you tip well.

Also, here is a link to a post I had last year on economic research on small ways that a server can increase the size of their tips.

(Source: Freakonomics)