Adverse selection is so the problem

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 … Continue reading

Who shops with an eye to the big picture?

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 … Continue reading

On Their Own in Battered New Orleans – Los Angeles Times

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 … Continue reading

USB Christmas

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

Continue reading