Environmental Economics

Danged if you do, danged if you don't

Just when we were getting to know each other, goodbye Knowledge Networks

From the inbox:

It is my pleasure to inform you that, in a relatively short period of time, GfK has successfully integrated Knowledge Networks into our North American custom research business, enabling us to better serve your business needs and bring even more value to our relationship.

As an important step in the integration process we have decided to officially retire the Knowledge Networks brand. Rest assured that the online panel assets that you are familiar with, such as KnowledgePanel® ...

Knowledge Networks quickly became the gold standard for economic online surveys. I have no reason to think that GfK might mess that up, but uncertainty has been created. Has anyone received a price quote lately?

Making me feel old

From Brookshire and Neill (1992) in the introduction to the special benefit transfer section of Water Resources Research, volume 28, number 3 (page 654):

Quite often the details that are necessary to test the potential usefulness of a study are difficult to obtain. As universities upgrade their computer systems, data sets disappear. We could go on at length about the problems of maintaining data sets left unattended in university computing centers.

Product placement

Dan Petrolia in an AJAE review of the International Handbook on Nonmarket Environmental Valuation:

The title of this volume gives the impression that it comes in the spirit of, and perhaps extends the work of, previous similarly-titled works, including The Handbook of Contingent Valuation (Alberini and Kahn 2006) and The Handbook of Environmental Economics: Valuing Environmental Changes (Mäler and Vincent 2005). This is misleading. It is certainly not a handbook; it is simply an edited collection of related papers. That said, it is worth reading. As Klaiber and Smith write in their chapter: “We take as given that anyone looking at this volume likes to learn…. Nonetheless, we all realize in reading technical material that there is too much to master and too little time to do it. So a couple of examples might help to convince readers it is worth the effort to learn…” (p. 223). This statement captures the main contribution of this volume: it presents the reader with a series of novel approaches and challenges for non-market valuation, but also provides readers motivation in the form of real applications. Also, given that it covers both stated preference (SP) and revealed preference (RP) methods, it serves as a nice complement to this year’s release of Preference Data for Environmental Valuation (Whitehead, Haab, and Huang 2011), which focuses on the merging of these two sources of data for improved welfare estimation....

I don't recall any payment being made to Dan for this mention, so thanks!

Mark Thoma and I seem to be in agreement on health care (sort of)

Here is Mark Thoma's (Economist's View) take on the individual mandate:

The Supreme Court ruled today that the health care mandate is a tax, and hence constitutional. A majority of the Justices ruled that the penalty that must be paid if someone refuses to buy insurance is a form of tax that Congress can impose under its taxing power. That is, of course, good news for supporters of health care reform since a mandate, or something like it, is needed to stop health care markets from breaking down due to what economists call an "adverse selection" problem.

The intent of the mandate is to overcome this adverse selection problem. Adverse selection, a type of market failure, plagues insurance markets of all types, and health care is no exception. The problem is that providers of health insurance do not have as much information about the health of the people buying the insurance as they have about themselves. The health insurance companies try to overcome this informational disadvantage through check-ups prior to granting coverage, health histories, and other means, but even so individuals are better informed about their current health and their health histories than the insurance companies.

I have a slight disagreement with Mark (although agree with the basics of what he says).  In my view the larger problem here is the moral hazard created by the incentive to underinsure (or undertake riskier behavoior) if the underinsured know someone else will cover the expense.  Nevertheless the end result is the same:  Without the mandate (or some equivalent guarantee of universal participation), private insurance markets will inefficiently price insurance.

What am I missing in the whole health care mandate debate?

I'm a simple man.  And by simple I mean I seek the simplest solution to complex problems.  At times that means I miss the nuance and detail that is really at the heart of many complex problems, but that doesn't stop me from offering simple analysis.

So here's my economist take on the national health insurance, health care mandate, Obamacare, socialism...whatever...debate....

It's all about the risk pooling. 

Insurance markets work when non-systemic risks are pooled across a population.  Let's use car insurance as an example.  For the most part, the probability of me getting in an accident is independent of the probability of you getting in an accident unless you happen to be driving next to me at 75 mph while I eat a Whopper with one hand and check my Facebook status with the other.  By pooling the independent risks, insurance companies can offer relatively low priced insurance against one or the other of us getting in an accident.  So states require (mandate) that in order to drive, you must have insurance, thereby reducing the external costs of my bad habits on you.  If you don't have insurance, you aren't supposed to drive and if you are caught driving without insurance you face stiff penalties.  The result: Users of the product that causes the risk (driving) have insurance--most of the time.  You can choose not to buy insurance and not drive.

So what about healthcare?  Shouldn't it work the same way?  In theory, yes.  Users of health care could be required to buy insurance against catastrophic outcomes.  By pooling the risks across large populations, the individual cost of health care will be lower than the expected cost to you if you bore the full risk of your own health.  Risk pooling reduces costs and protects againsts catastrophic outcomes.  And, just as with car insurance, if you choose not to buy health insurance, you lose the right to consume healthca...oh, wait. 

Human decency has to be factored in.

In the absence of health insurance, individuals can still not be denied health care (at least emergency care, which is expensive).  So what happens when an individual chooses to forego health insurance?  The cost of the uninsured care, guaranteed by human decency, gets rolled into the premium of those already insured.  In other words, health care costs rise.  Further, if individuals know that health care will be provided regardless of the willingness or ability to pay or willingness or ability to be insured, there is a perverse incentive to underconsume health insurance and further reduce the size of the risk pool in the insurance market (we call that moral hazard). 

So what are the possible solutions?

1. Rely on people to 'do the right thing.'  But each person's definition of right might be different.  While I think it is right to participate in the insurance market, others might think it is right to take advantage of the rules of the game. And as we know, economic incentives are powerful things.
2. Have the government act as the insurer of last resort.  This is the model we currently have.  The government offers subsidized insurance for those who are unable to afford health insurance (medicare/medicaid) and then acts as the insurer of last resort for the unisured.  The result: the cost of providing insurance to the uninsured and underinsured are passed on to the insured through higher taxes and higher insurance premia.
3. Mandate that everyone buy health insurance and play by the same rules, and penalize those who opt out.  The results 'should' be more efficiently priced insurance premia for those already insured, reduce costs of providing health care to those unable to afford insurance, and a less morally hazardous (I made that up) risk pool.

So what am I missing?

Let me have it.

Whither t = 1.92?

There are a couple of interesting posts at Economist's View and Marginal Revolution about publication bias in political science and economics journals. Publication bias exists if journal referees and editors tend to reject papers that exhibit statistically insignificant results while the same quality papers with statistically significant results tend to get rejected less often (where statistically significant is defined as a 95% chance that your regression coefficient is not equal to zero). In addition to publication bias, there is evidence of a researcher response. Here is a picture of spike in t-statistics a little greater than 1.96 and a dearth a little below in empirical papers published in political science:

Source: Kevin Drum

In other words, researchers massage their data to just ... get ... the p-value ... to 0.05 because they know their chances for rejection are greater than at t=1.92. As for me? I'm perfectly content with p=0.10 so you should scour my publications for a spike at t > 1.645.

My favorite line of the abstract posted at MR is this one:

Note that [t-stat] Inflation is larger in articles where stars are used in order to highlight statistical significance ...

 

Why we're the smartest blog around

I'm not sure what reminded me of this, but this quote from the greatest sitcom ever (John and I disagree on this) explains alot about my life:

Well ya see, Norm, it's like this. A herd of buffalo can only move as fast as the slowest buffalo. And when the herd is hunted, it is the slowest and weakest ones at the back that are killed first. This natural selection is good for the herd as a whole, because the general speed and health of the whole group keeps improving by the regular killing of the weakest members. In much the same way, the human brain can only operate as fast as the slowest brain cells. Excessive intake of alcohol, as we know, kills brain cells. But naturally, it attacks the slowest and weakest brain cells first. In this way, regular consumption of beer eliminates the weaker brain cells, making the brain a faster and more efficient machine. That's why you always feel smarter after a few beers.

Is that a little smile on Mark Trail's face?

Mark Trail, 6/27/12

You always hear that you are not supposed to climb a tree when a bear is chasing you (you are not supposed to run either, but somehow, Liz and Mike, after splitting up, have regrouped and found the same easily climbable dead tree). However, based on some Google, I've learned that black bears are great climbers but grizzlies, not so much. So maybe Liz and Mike are going to be OK (cupcake*). And we've also learned that Mike dropped the gun so that Mark Trail could shoot the bear.

*Note: My daughter asked me to write "cupcake" here.

More Ash Holes* Found in Ohio

Ohio Department of Agriculture officials have confirmed the presence of emerald ash borer in Belmont, Crawford, Knox and Madison counties.

Residents are being urged to use caution when transporting firewood to help protect against the artificial spread of this and other insect pests.

In June of 2011, the Ohio Department of Agriculture’s emerald ash borer quarantine was officially rescinded because the pest has been found throughout most of the state, including Wayne National Forest.

via www2.nbc4i.com

That's the 'Screw It, We Give Up' policy solution.

*I'm not sure that joke will ever get old