Free, marginal cost pricing and policy

Chris Anderson managed to get an article, and then a book of the article (a pet peeve of mine, but we’ll move on) out of the idea that ‘free’ is a big deal. Better than a low low price, free avoids ‘mental transactions costs’ and is all round a Big New Thing. One thing that I don’t think he mentioned is that the ‘free’ of the internet revives to practical relevance an old insight from textbook economics which was theoretically clear but always of less use than some economists appreciated because of the practical difficulties of implementing it. (Sound familiar?)

There’s always been a ‘textbook’ case for governments to help subsidise from general revenue their own or even other service providers’ fixed costs to make marginal cost pricing (as supported by Economics 101) financially viable. But the incentive perversities and institutional complexities of doing so were usually formidable. If you issue subsidies for fixed costs, how will you get those fixed costs met at lowest cost? How will you prevent various tricks to maximise fixed costs to further lower marginal costs? How do you even define fixed costs in contradistinction to marginal costs – there can be difficulties making the distinction in practice.

Web 2.0 platforms will often provide a much cleaner opportunity to trial these ideas. Take, for example, the Australian firm CultureAmp, which successfully sells browser based employee engagement software to large and small firms whilst also offering a cut down free version. Government could negotiate with CultureAmp and its competitors to fund one of them to supply a full suite of web-based services within a certain jurisdiction for free. (It might make more sense to do this for businesses within a certain size also as larger businesses may well require customisation). Continue reading

My Trip . . .

In case anyone’s interested I did an interview on ‘my trip’ overseas recently which if you fancy a bit of light and slightly educational entertainment is here.

Anyway, the main burden of my remarks is that we’re losing ground within the leaders group on eGov and Government 2.0 (which I see as somewhat different things). The UK have been stepping up the pace and are now way ahead of us on the digital agenda including the PIMS agenda – personal information management services - which we’ve barely begun to work on.

This year every student studying at MIT will be given their own bitcoin wallet and $100 in bitcoin. Sounds like a fantastic way to kick off an ecosystem to build the internet of money!

We’re not distinguishing ourselves in this area. The UK has had three PMs pushing the digital agenda – Blair, Brown and Cameron. The US has had Silicon Valley pushing things along and Obama driving things with all sorts of highly talented people brought into the administration.

Us? Not so much, from either party.

Medical Marijuana Laws and Teen Marijuana Use

Amazing that this is such a big deal, that we can administer morphine but not medical marijuana to alleviate pain. The paper is here.


While at least a dozen state legislatures in the United States have
recently considered bills to allow the consumption of marijuana for
medicinal purposes, the federal government is intensifying its
efforts to close medical marijuana dispensaries. Federal officials
contend that the legalization of medical marijuana encourages
teenagers to use marijuana and have targeted dispensaries operating
within 1,000 feet of schools, parks and playgrounds. Using data from
the national and state Youth Risk Behavior Surveys, the National
Longitudinal Survey of Youth 1997 and the Treatment Episode Data Set,
we estimate the relationship between medical marijuana laws and
marijuana use. Our results are not consistent with the hypothesis
that legalization leads to increased use of marijuana by teenagers.

by D. Mark Anderson, Benjamin Hansen, Daniel I. Rees – #20332 (CH HE LE)

Cash for clunkers

Cash for Corollas: When Stimulus Reduces Spending
by Mark Hoekstra, Steven L. Puller, Jeremy West – #20349 (EEE IO PE)


Cash for Clunkers was a 2009 economic stimulus program aimed at increasing new vehicle spending by subsidizing the replacement of older vehicles. Using a regression discontinuity design, we show the increase in sales during the two month program was completely offset during the following seven to nine months, consistent with previous
research. However, we also find the program’s fuel efficiency restrictions induced households to purchase more fuel efficient but less expensive vehicles, thereby reducing industry revenues by three billion dollars over the entire nine to eleven month period. This highlights the conflict between the stimulus and environmental objectives of the policy.

Australian economic reform: The next generation

As published on the Lowy Interpreter on 14 July 2014.

Growth in HALE index, Intangible GDP, net national income and GDP, 2005-2014.

John Edwards’ Beyond the Boom tilts effectively against Australia’s congenitalHanrahanism. It points out the extent to which we managed to finance the wild ride of the boom (the massive surge in mining investment, from 2% to 7% of GDP) without blowing out our current account deficit and foreign debt or setting off an inflationary spiral as we’ve done in the past.

We did it with a floating exchange rate, superior macro-economic policy and higher savings. How many people are aware of these facts as recited by Edwards?

By 2013, Australia’s rate of workforce participation was higher than the US, once cited as a country far ahead of Australia in respect of that indicator. Australia’s rate of investment was far higher than Japan or Germany, to which Australia had usually been unfavourably compared in this respect. Its rate of saving was also far higher than Japan or Germany, recognised as saving paragons.

Edwards is strangely muted on the role of compulsory superannuation in lifting savings, perhaps because he’s aware of its huge and inequitable cost to the budget. (Naïve question: If we want to lift household savings, we can use compulsion or incentives. Why do we use both?)

What’s more, as Edwards points out, much of our investment occurred not in physical structures — buildings, plant and equipment — but in human capital, in the skills of our people. The Herald/Age Lateral Economics (HALE) index of well-being takes GDP and adjusts it for some of the major inadequacies of GDP in measuring well-being. And our measure (see graph above) corroborates Edwards’ story, with human capital rising faster than GDP.

For instance, consistent with the figures Edwards cites, the proportion of the workforce with Certificate III qualifications or above has risen from 40.7% in 2003 to 52.3% in 2013. These changes scored a squillionth of the column inches devoted to the mining boom, but they matter more. From mid-2005 to the latest quarter reported, real GDP has grown by 28%. Net national income (NNI) captures the rise in the terms of trade and so lifts our measured economic growth to 33%. The HALE index takes NNI as a better starting point for measuring welfare than GDP and, even with rising obesity and mental illness weighing it down, human capital increases our measured increase in well-being another ten percentage points to 43%.

Does this mean we’re out of the woods? Well, yes and no! Continue reading

Employee satisfaction and corporate performance: it helps if firms can profit from the additional satisfaction they provide

Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around The World
by Alex Edmans, Lucius Li, Chendi Zhang – #20300 (CF LE LS)

We study the relationship between employee satisfaction and abnormal stock returns around the world, using lists of the “Best Companies to Work For” in 14 countries. We show that employee satisfaction is associated with positive abnormal returns in countries with high labor market flexibility, such as the U.S. and U.K., but not in countries with low labor market flexibility, such as Germany. These results are consistent with high employee satisfaction being a valuable tool for recruitment, retention, and motivation in flexible labor markets, where firms face fewer constraints on hiring and firing. In contrast, in regulated labor markets, legislation already provides minimum standards for worker welfare and so additional expenditure may exhibit diminishing returns. The results have implications for the differential profitability of socially responsible investing (“SRI”) strategies around the world. In particular, they emphasize the importance of taking institutional features into account when forming such strategies.

How patents block innovation: just where you’d expect they would

Patents and Cumulative Innovation: Causal Evidence from the Courts
by Alberto Galasso, Mark Schankerman – #20269 (IO PR)

Cumulative innovation is central to economic growth. Do patent rights facilitate or impede follow-on innovation? We study the causal effect of removing patent rights by court invalidation on subsequent research related to the focal patent, as measured by later citations. We exploit random allocation of judges at the U.S. Court of Appeals for the Federal Circuit to control for endogeneity of patent invalidation. Patent invalidation leads to a 50 percent increase in citations to the focal patent, on average, but the impact is heterogeneous and depends on characteristics of the bargaining environment. Patent rights block downstream innovation in computers, electronics and medical instruments, but not in drugs, chemicals or mechanical technologies. Moreover, the effect is entirely driven by invalidation of patents owned by large patentees that triggers more follow-on innovation by small firms.