Monthly Archives: March 2009

With the economy slowing down, I have seen an outburst of “pay-what-you-want” options where customers of, say, coffee shops are encouraged to pay what they consider the product or service is truly worth. Is this sustainable in the long term, or will people take advantage of it, gaming the system into failure?
John Wegman, London

Dear John,

While we economists realise that people pay money even when they don’t legally have to, few of us have studied exactly when or why. One exception is Paul F., the “bagel man” made famous by Stephen J. Dubner and Steven D. Levitt, the authors of Freakonomics. Paul F., a retired economist, delivered bagels to offices, along with a box for payment. He specified prices and kept careful track of payment rates – a little under 90 per cent.

Pay-what-you-want goes further than this simple honesty system, and might work better because it stands a chance of persuading affluent customers to pay over the odds. Most retailers devote great ingenuity to this task of “price discrimination”; it would simplify things a lot if customers simply complied.

Yet I am doubtful. A major attraction of pay-what-you-want is free publicity, whether for an ageing rock band or the new café on the block. The more businesses try it, the less publicity each will receive. I wonder, too, whether customers continue to contribute more than they must after the thrill of the new wears off: the economists John List and Uri Gneezy once conducted an experiment to see if temporary workers tried harder if unexpectedly paid a generous wage. The answer: yes, but the gratitude wears off in a matter of hours.

Still, pay-what-you-want has to be worth a try. If the journalists look elsewhere and the customers become ungrateful, it’s a simple matter to install a cash register.

Questions to economist@ft.com

Even those addicted to alcohol drink less when costs rise, says economist Tim Harford. Because we all respond to prices – even to the point of the day we die or give birth.
If Chief Medical Officer Sir Liam Donaldson has his way, one day we will have to pay at least 50p a unit to buy booze. That’s £1.50 for a large can of strong lager. Most off-licence and supermarket booze costs less than that, so it would certainly change the cost of a drink.
But would it make any difference to hardened drinkers? Many people think not. After all, a tenner would still pay for 20 units – nearly a week’s safe drinking, or some people’s idea of a good night out.
So many people think this would punish ordinary drinkers without deterring the winos, brawlers and wife-beaters. The government won’t touch it. Conservative health spokesman Andrew Lansley says it’s an idea more to do with economics, than medicine.
The odd thing is most economists will think Sir Liam is on to something. Raise the price of drink, we figure, and people will drink less. That’s because people respond to prices in the most unlikely situations.
Margaret Mitchell commented in Gone with the Wind: “Death, taxes and childbirth! There’s never a convenient time for any of them.”
She was wrong: it turns out that death and childbirth can be, and are, rescheduled thanks to tax incentives…

Continued at BBC News Magazine.

For readers in London:

Find reason in a crazy world: join Tim Harford a.k.a ‘The Undercover Economist’ discusses his newest book…
Tim Harford
The Logic of Life
WATERSTONE’S GOWER STREET
Thursday, 19 March 2009, 6:00PM
Tickets £3/£2 – redeemable against the promoted book on the night. Avalaible from the store.

In his bestselling new book, Undercover Economist,Tim Harford – author/prolific columnist and presenter of Radio 4′s ‘More or Less’ explains how there can be logic behind even the most irrational of behaviour. He will answer some of life’s mysteries including, Why is your boss overpaid? Why do people smoke? For more info or tickets call the store or events@gowerst.watertsones.co.uk.
Further details: 020 7636 1577

In other words, it’s a free talk if you buy the book. Do come and say hello.

There are two ways to take anti-malarial drugs: the expensive way, which helps the world; and the cheap way, which helps only the patient. Most Africans cannot afford the expensive way and, as a result, the world’s most effective anti-malarial drug may lose its potency.

That drug is artemisinin, available either by itself as a “monotherapy”, or with other drugs as a more costly artemisinin combination therapy, or ACT. For now, the monotherapy is excellent from the patient’s perspective. Yet the ACT is greatly preferred by global health wonks, because monotherapies tend to encourage drug resistance in the malaria parasite.

This is no mere theoretical concern: malaria is now highly resistant to a previous wonder drug, chloroquine, and researchers have detected signs of resistance to artemisinin in areas where monotherapies are widely used.

The remainder of the aricle can be read here. Please post your comments below.

Our son (aged 14) has been going to a local school and has made friends and settled in. But we are not happy. We think the school is poor, with a high teacher turnover, low expectations, poor exam grades and now a bad report from school inspectors. We’re thinking of moving him to a different school but we don’t want to disrupt his education. What should we do?
John and Julia, London

Dear John and Julia,

The economists Eric A. Hanushek, John Kain and Steven Rivkin have looked at data on Texas schools. They conclude that moving children repeatedly is disruptive both to the child and to his peers, but that a one-off move causes only temporary disruption to studies, especially if carried out at the end of an academic year. The researchers also found that in the cases where children were moved to better schools, they achieved a lasting improvement in academic performance.

A similar conclusion emerges from the research of another economist, Bruce Sacerdote, who looked into the aftermath of the Katrina disaster. After Hurricanes Katrina and Rita, about 200,000 Louisiana children had to switch schools. Unsurprisingly, test scores took a sharp turn for the worse. Yet Sacerdote finds that for those evacuees who left schools in urban New Orleans, which had a terrible reputation, test scores recovered within two years. College enrolment rates also improved. Three years after the disruption, children who began in bad schools ended up doing better than if Katrina had never struck.

My conclusion is that your son can thrive after a school move, but only if the new school really is superior. I am not sure what criteria you used to select the current one, but you might want to revise them before choosing the next. If I was your son, I’d be wondering why you think you will be second time lucky.
Tim Harford

Questions to economist@ft.com

I never realised how topical “Why Your Boss is Overpaid” was going to become when I wrote the chapter. Now I’ve made a video about one of the ideas.
Further reading here.

Al Roth, of repugnant markets and kidney-exchange fame, reports an exciting new development on his market designer blog:

Mostly in kidney exchange, all the surgeries are done simultaneously. The reason is that if two patient-donor pairs are exchanging kidneys, and if one pair were to donate a kidney to the other first, and the other were subsequently unable or unwilling to reciprocate, the pair that donated the kidney would be severely harmed; not only wouldn’t they get the kidney they had been counting on, but they would have donated their donor’s kidney and thus be unable to participate in a future exchange. But if there is an altruistic donor who doesn’t have a specific patient in mind, and if he or she gives to a patient-donor pair, and they can’t subsequently continue the chain, that is a loss, but no one is irreparably harmed. So, when chains begin with an undirected donor, they don’t have to be simultaneous, since the costs of a breach are less.

In other words, when someone comes forward offering to donate a kidney to nobody in particular, he or she can set off an avalanche of kidney donations by creating the possibility of many kidney swaps. The paper (New England Journal of Medicine) is here.  Nice to be reminded that clever market designs are good for something, isn’t it?

Oscar Wilde once commented that a cynic knows the price of everything and the value of nothing. We economists often find this barb directed at us. That is unfair; economists have always argued for an analysis that incorporates the value of everything. It is also ironic, because if new “neuroeconomic” research is correct, economic models manage to incorporate value as well as price, it is the human brain that can’t keep up.

Economists have no problem with the idea that you might value a lazy Sunday afternoon more than a kiss, and a kiss more than a poke in the eye. If so, we say that the utility of the lazy Sunday afternoon is more than the utility of the kiss, which is more than the utility of the poke in the eye. Utility is not an appeal to some warm fuzzy feeling: it’s just a way of describing, in a mathematically convenient way, the fact that you won’t choose the poke in the eye if the lazy Sunday afternoon is on offer. The theory is quite capable of reflecting the range of things that humans value.

In fact, the theory allows for far more subtle discriminations than we seem to be capable of. The human brain simply may not be wired up to deal with lots of different levels of value. A series of psychological experiments, many dating back to the 1950s, shows that we cannot distinguish between more than about five degrees of … well, almost anything: sweetness in a solution; saltiness; the pitch of a note; brightness; the intensity of an electric shock; the length of a line; or the pungency of a smell. The details vary, but the level of consistency is surprising.

The remainder of the article can be read here. Please post comments below.

I have a parking spot in a local garage and want to tip the people who work there so I continue to get good service. Assuming I take the car out once a week, should I tip the attendant $2 every time or pay a lump sum of $104 at the end of the year?
GHD, New York

Dear GHD,

Classical economic theory suggests there is little to choose between the two options. However, recent advances in “neuroeconomics” are providing insights into the way that our brains process different kinds of reward. I asked the neuroscientist Ben Seymour, of University College London, to advise.

He counselled against both of your systems. The Christmas bonus will be diminished because it will tend to be compared with other income and outgoings, and both tend to be larger at Christmas. The regular income makes more sense, but Dr Seymour fears that if you are too predictable, the parking attendant’s brain will start to encode two dollars as “no surprise” and thus dismiss them. If you miss a payment it will seem like spite.

Other possibilities include a steadily rising tip, which the attendant’s brain should simply register as “better and better” – but this plan requires lots of change and can seem odd.

Then there is the “lottery” tip, where you offer the attendant a 1/52 chance each week of receiving $104. (Ask him to pick the Ace of Spades from a deck of cards.) Too shifty-looking, I feel – which is a shame, because many people tend to enjoy such gambles.

The ideal tip would combine security and the excitement of surprise. Why not tip him a dollar a week plus an extra $5 every month or so? Such a policy should maximise the appreciation of your behaviour. Perhaps it is no surprise that it is what most people instinctively do anyway.

Questions to economist@ft.com

I’ve been wanting to make a video explaining Thomas Schelling’s model of racial segregation for a long time. Here it is!

More about Thomas Schelling here in my “Lunch with the FT” piece shortly after he won the Nobel prize.

The Undercover Economist: a guide

Publishing schedule: Excerpts from "The Undercover Economist" and "Dear Economist", Tim's weekly columns for the FT Magazine, are published on this blog on Saturday mornings.
More about Tim: Tim also writes editorials for the FT, presents Radio 4's More or Less and is the author of "The Undercover Economist" and "The Logic of Life".
Comment: To comment, please register with FT.com, which you can do for free here. Please also read our comments policy here.
Contact: Tim's contact address is: economist@ft.com
Time: UK time is shown on posts.
Follow: A link to the blog's RSS feeds is at the top of the page.
Follow on Twitter
FT blogs: See the full range of the FT's blogs here.