Incentives – Page 16 – artdiamondblog.com

“A Foolish Faith in Authority Is the Worst Enemy of Truth”

(p. A21) Several years ago I grew concerned about my postmenopausal mother’s risk of osteoporosis. I tried to convince her to initiate hormone replacement therapy. She didn’t listen to me. Instead, she spoke with her gynecologist, who–contrary to best medical evidence at the time–recommended against such treatment. I would eventually be thankful my mother listened to the gynecologist who had known her for decades instead of me and the published medical reviews I was relying on. Some years later my mother was diagnosed with early breast cancer. Had she been on estrogen replacement, it is likely that her tumor would have progressed more rapidly. The gynecologist likely saved my mother’s life.

Studies published in the medical literature are mostly produced by academics who face an imperative to publish or watch their careers perish. These academics aren’t basing their careers on their clinical skills and experiences. Paradoxically, if we allow the academic literature to set guidelines for accepted practices, we are allowing those who are often academics first and clinicians second to determine what clinical care is appropriate.
Consciously or not, those who provide the peer review for medical journals are influenced by whether the work they are reviewing will impact their standing in the medical community. This is a dilemma. The experts who serve as reviewers compete with the work they are reviewing. Leaders in every community, therefore, exert disproportional influence on what gets published. We expect reviewers to be objective and free of conflicts, but in truth, only rarely is that the case.
Albert Einstein once noted that “a foolish faith in authority is the worst enemy of truth.”

For the full commentary, see:

NORBERT GLEICHER. “‘Expert Panels’ Won’t Improve Health Care; Government reliance on medical studies will make it harder to discard false prophecies and dogmas.” The Wall Street Journal (Mon., October 19, 2009): A21.
(Note: the online version of the commentary is dated Sun., Oct. 18.)

Health Care Incentives and Information Improve When Patients Are Payers

Nobel Prize winning economist Vernon Smith sees that the current health care system is an incentive and information “nightmare.” The third parties, who pay, have neither the incentive nor the information to reward the providers who do a good job. And patients, who have the information, do not have the power or incentives to reward those who do a good job. And since providers are not being rewarded for doing a good job, they will only avoid becoming cynical bureaucrats as long as they are mission-driven saints.
A better system, that goes a long way toward Smith’s “solution,” has been suggested by Susan Feigenbaum, who suggests that third parties provide payments directly to patients, who then may choose what services to buy from which providers.
Here is the core of Smith’s analysis:

(p. A11) The health-care provider, A, is in the position of recommending to the patient, B, what B should buy from A. A third party–the insurance company or the government–is paying A for it.

This structure defines an incentive nightmare.
. . .

I don’t know whether this problem has a solution. If it does, I think it requires us to find mechanisms whereby third-party payment is made to the patient, B, who in turn pays A, supplemented with any co-payment from B for services. Hence, from the moment B seeks services from A both know who is going to be paying A for what is delivered. A and B each has need for what the other brings to the table, and this structure carries the potential for nurturing the relationship between A and B. B is empowered to become better informed about the services recommended by various A’s that he might choose among, and the A’s might find it particularly important to build good reputations with B’s.

For the full commentary, see:
VERNON L. SMITH. “The ABC Dilemma of Health Reform; Third-party payment creates a big incentive problem.” The Wall Street Journal (Sat., OCTOBER 16, 2009): A11.
(Note: ellipsis added.)

Feigenbaum’s prescient suggestion for reform can be found in:
Feigenbaum, Susan. “Body Shop’ Economics: What’s Good for Our Cars May Be Good for Our Health.” Regulation 15, no. 4 (Fall 1992): 26-27.

Amazon Rebels Against Hawaii Tax

After Amazon’s rebellion, summarized in the quote below, the Governor of Hawaii vetoed the tax, and Amazon has now invited its former affiliates to rejoin the program.
Lesson: sometimes entrepreneurial enterprise can fight the government, and win.

(p. B7) Amazon.com Inc. has informed its marketing affiliates in Hawaii that it is ending its business with them to avoid collecting sales tax in the state.

Lawmakers in Hawaii, following in the footsteps of North Carolina and Rhode Island, have passed legislation that would require companies to collect sales tax if they have marketing affiliates in the state. Affiliate marketers run blogs or Web sites and get a sales commission by featuring links to outside e-commerce sites.

For the full story, see:
GEOFFREY A. FOWLER. “Amazon Cuts Ties to Affiliates in Hawaii.” Wall Street Journal (Weds., JULY 1, 2009): B7.

Democrats Continue Earmarks for Those Who Donated to Their Campaigns

(p. A5) WASHINGTON — A House panel approved a big Pentagon spending bill this week that included nearly 150 items tucked in by lawmakers on behalf of companies and other entities whose employees donated to their campaigns.

The Democratic Congress and President Barack Obama swept into power on a promise to reform the process of lawmakers trying to dictate in detail how funds are spent, known as “earmarks.” When Mr. Obama signed a spending bill for the current fiscal year in March, he said the earmark-laden legislation should be an “end to the old way of doing business, and the beginning of a new era of responsibility and accountability.”
But as lawmakers work their way through spending bills for the next fiscal year, which begins Oct. 1, earmarks appear alive and well — including those written for companies, foundations, and universities whose employees and political-action committees gave money to the campaigns of congressmen doing the earmarking.
The $636.3 billion 2010 defense-spending bill passed Wednesday by the House Appropriations Committee includes more than 1,100 earmarks, totaling more than $2.7 billion.
Members of the Defense Appropriations Subcommittee — the 18 members of Congress who wrote the bill — secured a total of 148 earmarks worth $461 million for entities whose employees have given $822,765 in campaign donations to those lawmakers since 2007. The data were compiled by the nonpartisan Taxpayers for Common Sense, which analyzed nearly 400 earmarks.

For the full story, see:
JAKE SHERMAN. “Bill Shows Earmarks Are Alive and Well.” Wall Street Journal (Sat., JULY 25, 2009): A5.

The Case for Patent System Reform

(p. A13) The Patent Office now gets some 500 million applications a year, leading to litigation costs of over $10 billion a year to define who has what rights. As Judge Richard Posner has written, patents for ideas create the risk of “enormous monopoly power (imagine if the first person to think up the auction had been able to patent it).” Studies indicate that aside from the chemical and pharmaceutical industries, the cost of litigation now exceeds the profits companies generate from licensing patents.

For the full commentary, see:

L. GORDON CROVITZ. “OPINION: INFORMATION AGE; Why Technologists Want Fewer Patents.” The Wall Street Journal (Mon., JUNE 15, 2009): A13.

Our “Patently Absurd” Patent System

(p. A15) The Founders might have used quill pens, but they would roll their eyes at how, in this supposedly technology-minded era, we’re undermining their intention to encourage innovation. The U.S. is stumbling in the transition from their Industrial Age to our Information Age, despite the charge in the Constitution that Congress “promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”
. . .

Both sides may be right. New empirical research by Boston University law professors James Bessen and Michael Meurer, reported in their book, “Patent Failure,” found that the value of pharmaceutical patents outweighed the costs of pharmaceutical-patent litigation. But for all other industries combined, they estimate that since the mid-1990s, the cost of U.S. patent litigation to alleged infringers ($12 billion in legal and business costs in 1999) is greater than the global profits that companies earn from patents (less than $4 billion in 1999). Since the 1980s, patent litigation has tripled and the probability that a particular patent is litigated within four years has more than doubled. Small inventors feel the brunt of the uncertainty costs, since bigger companies only pay for rights they think the system will protect.
These are shocking findings, but they point to the solution. New drugs require great specificity to earn a patent, whereas patents are often granted to broad, thus vague, innovations in software, communications and other technologies. Ironically, the aggregate value of these technology patents is then wiped out through litigation costs.
Our patent system for most innovations has become patently absurd. It’s a disincentive at a time when we expect software and other technology companies to be the growth engine of the economy. Imagine how much more productive our information-driven economy would be if the patent system lived up to the intention of the Founders, by encouraging progress instead of suppressing it.

For the full commentary, see:
L. GORDON CROVITZ. “OPINION: INFORMATION AGE; Patent Gridlock Suppresses Innovation.” Wall Street Journal (Mon., JULY 14, 2008): A15.
(Note: ellipsis added.)

“Clear Relationship in Rice Farming Between Effort and Reward”

(p. 236) What redeemed the life of a rice farmer, however, was the nature of that work. It was a lot like the garment work done by the Jewish immigrants to New York. It was meaningful. First of all, there is a clear relationship in rice farming between effort and reward. The harder you work a rice field, the more it yields. Second, it’s complex work. The rice farmer isn’t simply planting in the spring and harvesting in the fall. He or she effectively runs a small business, juggling a family workforce, hedging uncertainty through seed selection, building and managing a sophisticated irrigation system, and coordinating the complicated process of harvesting the first crop while simultaneously preparing the second crop.

And, most of all, it’s autonomous. The peasants of Europe worked essentially as low-paid slaves of an aristocratic landlord, with little control over their own destinies. But China and Japan never developed that kind of oppressive feudal system, because feudalism simply can’t work in a rice economy. Growing rice is too complicated and intricate for a system that requires farmers to be coerced and bullied into going out into the fields each morning. By the fourteenth and fifteenth centuries, landlords in central and Southern China had an almost completely hands-off relationship with their tenants: they would collect a fixed rent and let farmers go about their business.
“The thing about wet-rice farming is, not only do you (p. 237) need phenomenal amounts of labor, but it’s very exacting,” says the historian Kenneth Pomerantz. “You have to care. It really matters that the field is perfectly leveled before you flood it. Getting it close to level but not quite right makes a big difference in terms of your yield. It really matters that the water is in the fields for just the right amount of time. There’s a big difference between lining up the seedlings at exactly the right distance and doing it sloppily. It’s not like you put the corn in the ground in mid-March and as long as rain comes by the end of the month, you’re okay. You’re controlling all the inputs in a very direct way. And when you have something that requires that much care, the overlord has to have a system that gives the actual laborer some set of incentives, where if the harvest comes out well, the farmer gets a bigger share. That’s why you get fixed rents, where the landlord says, I get twenty bushels, regardless of the harvest, and if it’s really good, you get the extra. It’s a crop that doesn’t do very well with something like slavery or wage labor. It would just be too easy to leave the gate that controls the irrigation water open a few seconds too long and there goes your field.”

Source:
Gladwell, Malcolm. Outliers: The Story of Success. New York, NY: Little, Brown, and Co., 2008.
(Note: italics in original.)

Democratic 1997 Tax Break Fed Housing Bubble

Source of graph: online version of the NYT article quoted and cited below.

(p. A1) “Tonight, I propose a new tax cut for homeownership that says to every middle-income working family in this country, if you sell your home, you will not have to pay a capital gains tax on it ever — not ever.”
— President Bill Clinton, at the 1996 Democratic National Convention
Ryan J. Wampler had never made much money selling his own homes.
Starting in 1999, however, he began to do very well. Three times in eight years, Mr. Wampler — himself a home builder and developer — sold his home in the Phoenix area, always for a nice profit. With prices in Phoenix soaring, he made almost $700,000 on the three sales.
And thanks to a tax break proposed by President Bill Clinton and approved by Congress in 1997, he did not have to pay tax on most of that profit. It was a break that had not been available to generations of Americans before him. The benefits also did not apply to other investments, be they stocks, bonds or stakes in a small business. Those gains were all taxed at rates of up to 20 percent.
The different tax treatments gave people a new incentive to plow ever more money into real estate, and they did so. “When you give that big an incentive for people to buy and sell homes,” said Mr. Wampler, 44, a mild-mannered native of Phoenix who has two children, “they are going to buy and sell homes.”
By itself, the change in the tax law did not cause the housing bubble, economists say. Several other factors — a relaxation of lending standards, a failure by regulators to intervene, a sharp decline in interest rates and a collective belief that house prices could never fall — probably played larger roles.
But many economists say that (p. A22) the law had a noticeable impact, allowing home sales to become tax-free windfalls. A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.
Vernon L. Smith, a Nobel laureate and economics professor at George Mason University, has said the tax law change was responsible for “fueling the mother of all housing bubbles.”

For the full story, see:
VIKAS BAJAJ and DAVID LEONHARDT. “1997 Tax Break on Home Sales May Have Helped Inflate Bubble.” The New York Times (Fri., December 19, 2008): A1 & A22.
(Note: ellipses added.)
(Note: the online version of the article is dated December 18, and has the somewhat different title: “The Reckoning; Tax Break May Have Helped Cause Housing Bubble.”)

“Ryan J. Wampler made nearly $700,000 on three sales of his own homes in eight years.” Source of caption and photo: online version of the NYT article quoted and cited above.

Even Dogs “Have a Sense of Fairness”

For the full commentary, see:

Page, Clarence. “Vouchers and Obama Daughters.” Omaha World-Herald (Sat., Nov. 15, 2008): 7B.
(Note: ellipsis added.)

“This series of photos from the National Academy of Sciences shows a dog being asked for its paw and obeying, left. In the second photo, the dog watches its partner in the experiment receive a food reward that it didn’t receive. In the third photo, the dog refuses to give its paw and avoids looking at the experimenter.” Source of caption and photos: online version of the Omaha World-Herald article quoted and cited below.

(p. 2A) Ask them to do a trick, and they’ll give it a try. For a reward, they’ll happily keep at it.

But if one dog gets no reward and then sees another dog get a treat for doing the same trick, just try to get the first one to do it again.
Indeed, the animal may turn away and refuse to look at you.
Dogs, like people and monkeys, seem to have a sense of fairness.
. . .
In the experiments described in today’s edition of Proceedings of the National Academy of Sciences, Range and colleagues experimented with dogs that understood the command “paw” to place a paw in the hand of a researcher. It’s the same game as teaching a dog to “shake hands.”
. . .
The dogs sat side by side with an experimenter in front of them. In front of the experimenter was a divided food bowl with pieces of sausage on one side and brown bread on the other.
The dogs were asked to shake hands and could see what reward the other dog received.
When one dog got a reward and the other didn’t, the unrewarded animal stopped playing.

For the full story, see:
Associated Press. “It’s a Dog’s Life Only When Someone Else Gets Treat.” Omaha World-Herald (Tues., Dec. 9, 2008): 2A.
(Note: ellipses added.)

Inability to Patent Sulfa, Delayed Its Marketing

When new uses of old, unpatentable drugs are discovered, there seems to be inadequate incentive to publicize them, and bring them to market. (For example, I think I have seen research suggesting that aspirin and fish oil capsules, are as effective in fighting heart disease as some newer drugs, but are nonoptimally utilized because of perverse incentives.) Maybe a revision of the patent law should be considered that permits some patenting of new uses of old drugs and substances?

(p. 172) It was wonderful that this powerful, inexpensive medicine was now available, but for a year after the Pasteur Institute announcement, no one marketed it seriously in its pure form as a medicine. Because it was not patentable, it was difficult for major chemical or drug firms to see a way to make much of a profit from it. It was not until months after the Pasteur group’s first publication on sulfa that the president of Rhône-Poulenc, an industrial supporter of Fourneau’s laboratory, visited the Pasteur Institute to hear about it. After talking with the researchers he decided to launch Septazine, a variation on pure sulfa that he felt was different enough to allow patenting—and hence profits. Septazine reached the marketplace in May 1936.

Source:
Hager, Thomas. The Demon under the Microscope: From Battlefield Hospitals to Nazi Labs, One Doctor’s Heroic Search for the World’s First Miracle Drug. New York: Three Rivers Press, 2007.

French Entrepreneur Fourneau Was Against Law, But Used It

The existence and details of patent laws can matter for creating incentives for invention and innovation. The patent laws in Germany and France in the 1930s reduced the incentives for inventing new drugs.

(p. 141) German chemical patents were often small masterpieces of mumbo jumbo. It was a market necessity. Patents in Germany were issued to protect processes used to make a new chemical, not, as in America, the new chemical itself; German law protected the means, not the end. . . .
. . .
(p. 166) Fourneau decided that if the French were going to compete, the nation’s scientists would either have to discover their own new drugs and get them into production before the Germans could or find ways to make French versions of German compounds before the Germans had earned back their research and production costs—in other words, get French versions of new German drugs into the market before the Germans could lower their prices. French patent laws, like those in Germany, did not protect the final product. “I was always against the French law and I thought it was shocking that one could not patent one’s invention,” Fourneau said, “but the law was what it was, and there was no reasons not to use it.”