I haven’t paid Typepad enough to be able to change background colours, and I can’t work out how to post mp3 files, but I’d still like to at least acknowledge and support Dean Gray Tuesday.
Alex Tabarrok at Marginal Revolution claims that Adverse selection is NOT the problem. This is not surprising given his enthusiasm for Markets Everywhere. Most of the comments address the empirical aspects of one particular case, which is the insurance industry. But while I can’t get at the papers he references (they are behind the institutional subscriber firewall) I think there is a more general issue here about asymmetric information.
For me, the key line in the post is this:
You can buy a decent used car, for example just get it inspected or certified. Only if such adjustments are illegal, or in some other way not allowed, will adverse selection become important.
But the whole thing about asymmetric information is surely that information is not non-existent, but it is costly. No one thinks that the lemons scenario is more than a first-order approximation, and signalling and screening make second-order corrections, but the problem may still remain and be important. The information problem becomes central to the whole practice of the industry, as anyone reading an insurance contract will know. Alex Tabarrok is very close to saying that costs can be neglected as long as adjustments are "illegal, or in some other way not allowed". This claim that transaction costs are unimportant seems to be one of the dividing lines between market enthusiasts (AT) and market sceptics (me).
What is more, there is often a collective action problem in obtaining that information that is particularly important when the buyers are those who are ill-informed. When the seller is ill-informed, it may be the case that they can compensate: I think that Alex Tabarrok is right that, for example, the insurance company knows as much about my life expectancy as I do, and I know considerably less about the details of my coverage than they do. I would say that in this case overcoming asymmetric information becomes a fixed
cost, leading to economies of scale in the insurance industry (which at
least in Canada is an oligopoly with fewer members by the year) and leading to market failures of a variety of types. On the other hand, when the consumer is ill-informed, the collective action problem is real.
My favourite example of an asymmetric information problem comes from beer-drinking in the UK. Small independent breweries have no mechanism for establishing a reputation (and thereby overcoming the lemons problem) unless there is a critical mass of well-informed beer drinkers who will transmit that reputation to others. In the 1970’s the beer industry in the UK was in a
Catch-22 that is typical of asymmetric information problems: there was no demand for real ale because there was no supply, and there was no supply because there was no demand. The big breweries offered low quality, but predictability. AT would have claimed, I believe, that the market was working.
The problem has been resolved to some extent by the efforts of the Campaign for Real Ale (CAMRA), who included a prominent Trotskyist in their leadership and had a strong anti-big-business slant. Their efforts have led to 300 new breweries being set up, while in the 50 years before their formation not one was founded. CAMRA has moved the equilibrium in the market, which is presumably evidence that it was failing before. And unless AT is prepared to
accept anti-business volunteer lobbying and protest groups in the requirements for a properly functioning market, it would seem that the problem was fixed by a successful organization overcoming the collective action problem.
So yes, I think asymmetric information, including adverse selection, is really a problem in many markets.
Update: on asymmetrical information in insurance, see December 18th’s Dilbert.
Two-thirds of the way down the oddly-named Lionel Shriver’s column "Nativity scenes are out, carols are banned, and don’t dare wish anyone merry Christmas: the festive season, US-style" is some interesting stuff about how freely-made consumer choices takes us to places we don’t want to be. She writes it well, as you would expect from the author of "We Need to Talk About Kevin".
Books make good gifts this year, since discounts offered by UK chains are now as drastic as 50%. But don’t imagine that high-street behemoths alone are sacrificing for the affordability of your winter presents. Publishers are out of pocket, as are authors like me. Discount deals in trade for volume are not yet as unsustainable as in the dairy industry; the 17p per litre that supermarkets pay for milk is often less than it costs to produce. But publishing has become less profitable, and so has writing books.
I don’t know what the answer is. Wal-Mart-writ-large seems the natural end point of capitalism, which thrives on economies of scale. With the clout to demand rock-bottom prices from suppliers and pass the savings to customers, big fish eat little fish until the commercial ocean floats only a few whales. Hence the local greengrocer gives way to Sainsbury’s, the family-owned hardware store to Home Depot, the independent bookseller to Waterstone’s (now mounting a take-over bid for Ottakar’s). Alan Bennett’s appeal to buy his book from independents is laudable but unrealistic. I can’t ask prospective buyers of my own novels to pay full-price, when I purchase most books on Amazon myself. Aside from a few toffs who spurn the ambience of the cut-rate, we’re all going to buy our milk, nails, and hardbacks where they’re cheapest.
In the big picture, everyone is the poorer when producers and employees are low-balled, and thus pump less money into the economy. But who shops with an eye to the big picture? In the short-term, Wal-mart employees are so poorly paid that the only place they can afford to shop is Wal-mart.
This is pretty much exactly the argument I make in Chapter 1. If we don’t want to end up with nothing but Wal-Marts, we need to take collective action, not individual action.
A timely reminder by This Magazine. Victims of December 6, 1989
Barbara Klucznik Widajewicz
Update: remembrance also posted by Feministe.
I found out this evening that Google Earth has a data update that covers many cities in the UK. Well, that was my evening wasted. You can now see the whole area where I grew up in detail, right down to the car in my Mum’s driveway (of a couple of years ago). Very addictive.
Via Brad DeLong, an essay in the Los Angeles Times about the difficulties of reconstruction in New Orleans: On Their Own in Battered New Orleans – Los Angeles Times.
The article picks up on two ways in which sensible individual choices may lead to very different outcomes.
What seems to have happened is that the US government has decided that the free market will take care of rebuilding New Orleans, as "the agencies that were stepping up to help guide the city’s comeback have stepped back down again" and "[t]o an extent almost inconceivable a few months ago, the only real
actors in the rebuilding drama at the moment are the city’s homeowners
and business owners."
Reconstruction of a city is different from buying cauliflower though, and the article quotes Thomas Schelling as saying "There is no market solution to New Orleans… It essentially is a problem of coordinating expectations. If
we all expect each other to come back, we will. If we don’t, we won’t. But achieving this coordination in the circumstances of New Orleans seems impossible."
The LA Times interviews one woman who is trying to decide whether to return and rebuild or to just move out. She would like to rebuild, but only if she would be surrounded by a neighbourhood. There is no sense rebuilding in a wasteland:
As a work crew gutted 1249 Granada Drive on Monday, heaping appliances,
sofas and sheetrock in a 6-foot pile on the curb, Laurie Vignaud
suddenly realized her only evidence that any of her neighbors had
returned since Katrina was similar heaps outside their houses.
But do those piles mean that Granada Drive residents are ready to
rebuild, or simply are picking through the wreckage and trying to buy
time by stopping the mold’s spread?
"I keep looking at all this stuff and wondering whether they’re
coming back or not," said Vignaud. "It’s crazy, like a riddle I can’t
What is needed here is co-ordinated, collective action rather than individual, market-like behaviour. And those communities that have ways of co-ordinating such activity are the ones who are returning:
In fact, a few neighborhoods appear to have solved the riddle, or
at least to have taken a good run at it. But the ways in which they
have says much about the daunting dimensions of the problem facing the
rest of the city.
On the northern edge of the city is New Orleans’ Greek Orthodox
community and its church, Holy Trinity Cathedral. As warnings about
Katrina grew darker in the days before the storm, community leaders
matched up families to whisk the elderly and infirm out of danger. In
the days immediately after, they mobilized to come back again.
"We ran it like a business," said John D. Georges, the parish
council president and chief executive of Imperial Trading Co., a
regional supplier of convenience stores.
Father Anthony Stratis worked the phones and sent out e-mails to
find parishioners. Parish council member Dr. Nick Moustoukas followed
up by wiring money to the neediest. Ten days after the storm, Georges
and council member Christ Kanellakis helicoptered in to rescue the
church’s chalice and tabernacle.
By acting in concert, members of the Greek community have in
effect provided each other with an immense self-insurance policy,
guaranteeing that if one family rebuilds, others will. And, should more
enticement be needed, the church, according to Georges, Moustoukas and
others, is providing returning families with thousands of dollars of
cash aid, has organized bulk purchases of new appliances and has
arranged for crews that repaired the cathedral to be introduced to
people whose houses are in need of work.
By the time the cathedral reopens for its first full service in
two weeks, its marble interior walls will have been repaired, its lawn
will have been resodded and Holy Trinity will be back in business.
The second way in which individual choice may go wrong in New Orleans is not so much about the relationship among the citizens of the city, it is more about the relationship between citizens and government. If citizens are to return, they need a commitment from the government that the city will be made safe. Meanwhile. the government is backing off:
"If they put back good levees to the [Category 3] level authorized
before Katrina and we can get a commitment to build them slowly up to
Category 5, people will come back," said Walter Isaacson, a News
Orleans native, former editor of Time magazine, former chairman of CNN
and co-chairman of the Louisiana Recovery Authority, a new state board
appointed by Gov. Kathleen Babineaux Blanco to oversee reconstruction.
"It won’t be a purely rational decision, but they’ll come."
But the corps has made it clear that it has no intention of making any such grand commitment soon.
In part, the problem is cost; estimates of what it would cost to
bring the city’s levees up to Category 5 range from $4 billion to more
than $30 billion. In addition, the corps’ budget is perhaps the most
closely controlled of any in the federal government, with Congress
ear-marking almost every dollar to particular projects, leaving the
corps little maneuvering room.
But there also appears to be a sense among senior corps officials
that local demands for greater protection, if indulged, would be
"It’s of interest to me," New Orleans district commander Col.
Richard P. Wagenaar told the Los Angeles Times several weeks ago, "that
all the political leaders, all the business leaders and all the
homeowners were all perfectly comfortable with the system on Aug. 28,"
the day before Katrina made landfall. "They knew full well it was being
built to Category 3, and everybody was fine with that," he said.
But when a storm of greater strength struck and overwhelmed the
levees, Wagenaar said, people "suddenly wanted to look back and say,
‘Hey, what happened?’ " The implication: When would calls for still
more ever end?
The concern is apparently one of moral hazard, that by investing in New Orleans the agencies will simply encourage demands for more. I have no way of knowing if there is any basis whatsoever to the concerns (although in other circumstances, such as health care, the concern is overrated as Malcolm Gladwell recently explained). But it is clear that without a real commitment from the government, New Orleans won’t rebuild quickly.
This is what happens when you have a government who doesn’t believe that governments can be useful. It is too bad.
The number amd variety of things you can plug into the USB port on a computer is getting ridiculous. A search for "USB Power" on the wonderful Engadget gives a stupendous list of improbable items, including:
1. USB powered gloves
Posted by Thomas Ricker on 10/31/2005
and we mean anything that can be made… can be made better with a
little USB power. Add a bit of camouflage and you’ll understand why
we’re lovin’ on these new craptastic USB heated gloves
2. USB-powered Verilux Natural Spectrum Book and Travel Light
Posted by Evan Blass on 10/17/2005
when we are in and around our local library sucking down free WiFi, we
notice several people (not the ones sleeping in the over-stuffed
chairs, mind you) peering into strange stacks of
3. USB-powered Deco Lights
Posted by Ryan Block on 9/24/2005
Alek’s online Christmas decorations control system turned out to be a
hoax, a light must’ve gone off in someone’s head. Yup, you guessed what
comes next in the long line of illustrious
4. Logitech intros V20 USB-powered laptop speakers
Posted by Donald Melanson on 8/29/2005
just introduced a new pair of speakers designed for use with laptops.
We can’t tell you anything about the most important part — how they
sound — but we do know that the V20s will set you
5. Thanko’s USB-powered iShaver
Posted by Ryan Block on 8/11/2005
it powered by electricity? Because if it is, we want to see it powered
by USB. And if it isn’t… we want to see it powered by USB. So thanks,
Thanko, for your latest, the iShaver. Probably works
6. Boynq USB-powered light
Posted by Thomas Ricker on 6/4/2005
anyone who needs (or more importantly, is willing to use) the Boynq
D-Light USB-powered Lamp is going to look good embalmed in a pasty
orange glow. But here you have it, another whacky
7. USB-powered lava lamp
Posted by Peter Rojas on 5/24/2005
pretty sure that the sheer geekiness of plugging this into a USB port
kills whatever swinging bachelor pad/hippie love nest vibe you might be
trying to create, but Lava World International is
8. eMagin USB powered OLED 3D visor
Posted by Barb Dybwad on 3/16/2005
promise of the near view display is there, though prior implementations
have been poor. A head-mounted screen should theoretically provide the
equivalent to a very large disply viewed from a few
9. The USB-powered thermal wrist protector
Posted by Ryan Block on 2/22/2005
USB-powered thermal wrist protector/strap on Engadget that facilitates
one’s ceaceless habit of sitting in front of the computer, researching,
purchasing, and using USB-powered gadgets via
10. The USB-powered blue-glo Mac mini Skirt
Posted by Peter Rojas on 2/16/2005
so at the end of the day it’s still just an acrylic pedestal for the
Mac mini, but Plasticsmith must know how to get on our good side,
because now they’ve busted out a USB-powered version of
11. The USB-powered piezo negative ionizer
Posted by Ryan Block on 2/9/2005
call it aeroionotherapy–some believe in it, some don’t–and it’s
supposed to relieve you of restlessness, anxiousness, depression, and
high blood pressure if you charge the air in a room with
12. The USB-powered desktop fan/clock radio
Posted by Peter Rojas on 1/27/2005
this point it seems like pretty much everything that can be turned into
a USB-powered gadget has been (not to mention a few things that
probably should never have been led down that path), so
13. USB-powered fake flowerpot speaker
Posted by Peter Rojas on 11/29/2004
know, it’s hard enough already trying to convince people who drop by
the house that we’re not insane, so the last thing we’re going to do is
completely confirm that by plugging this USB-powered
14. USB-powered air humdifier
Posted by Peter Rojas on 11/26/2004
probably want to keep lots of moisture away from your PC, so that you
won’t, you know, destroy it, but if you can’t quite resist, a shop in
Japan is selling a USB-powered air humidifier. Would
15. The USB-powered Santa
Posted by Peter Rojas on 11/17/2004
honest, do you really need to put up any other Christmas decorations
besides this USB-powered, drum playin’ Santa Claus which regales you
with Jingle Bells, Joy to the World, The First Noel, and
16. USB-powered Christmas Tree and snow man
Posted by Peter Rojas on 10/25/2004
It really wouldn’t be an Engadget Christmas without this USB-powered snow man or Christmas Tree on your desk, would it?
17. The USB Power Pack
Posted by Peter Rojas on 9/30/2004
know us. We can’t resist anything USB-powered. We’re totally suckers
for it, which is why we we’re giddy at the prospect of this portable
battery pack which we picked up at Compact-Impact that
18. Mini Power Minder, a new kind of USB power
Posted by Ryan Block on 9/15/2004
can’t think of too many examples of times when we need to shut down a
bunch of stuff at the same time as our computers since most anything
connected to them needs recharging anyway (excepting
19. USB-powered gadgets!
Posted by Peter Rojas on 6/10/2004
The New York Times has just uncovered this crazy new trend: USB-powered gadgets! Anyone else heard of this before?
20. The Cleanlon USB-powered air purifier
Posted by Peter Rojas on 6/4/2004
we missed this from the other day, but the New York Times actually
reviewed one of those USB-powered air purifiers. The only thing about
reviewing the Cleanlon is that they couldn’t tell if
21. USB powered frangrance diffuser
Posted by Peter Rojas on 5/10/2004
scary is that this isn’t even the first one of these: it’s a USB
powered fragrance-oil diffuser (basically a fancy Glade Plug-In) from
Osmooze called the USB P@d that actually let’s you
22. USB-powered fragrance-oil burner
Posted by Peter Rojas on 3/6/2004
fact that it’s sold out implies that somebody has been buying this, but
we’ve been scratching our heads at the prospect of Arvel’s USB-powered
fragrance-oil burner, which is supposed to help make
23. Socket Mobile Power Pack
Posted by Dan Wu on 12/3/2004
Mobile Power Pack has 7200mAh of juice in its battery, allowing you to
charge cellphones, Pocket PCs, Palm devices, Nintendo GBA/DS, and
digital cameras, but the best part is that it has a
24. The Buffalo BSKP-CU201/BK Skype conference phone
Posted by Thomas Ricker on 11/25/2005
Skype handsets are coming fast and furious these days. Now Buffalo
brings us the ingeniously named BSKP-CU201/BK handsfree USB kit which
features an integrated speaker and omnidirectional mic
25. Azio Dual-Link Charger does USB, car lighter
Posted by Marc Perton on 10/11/2005
seen a handful of hydra-headed chargers, which let you juice up your
cellphone via USB, car cigarette lighter or other power sources, and we
suspect that Azio’s Dual-Link Charger isn’t that
… and that’s just the first 25 of the 156 in the list. A flashing pencil sharpener, an aquarium, a humidifer, a battery charger, noise-cancelling headphones. The world of gadgets is getting weirder and wonderfuller.