How Do You Stop Sea Captains From Killing Their Passengers?
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In the 1940’s, the paleontologist von Koenigswald was searching for early human remains on Java and decided to enlist the help of the locals in his search by offering them “ten cents for every piece of hominid bone they could come up with.” Unfortunately for von Koenigswald (and for his findings), he discovered too late that the locals “had been enthusiastically smashing large pieces into small ones to maximize their income.”
From http://freakonomics.blogs.nytimes.com/2009/10/20/when-youre-...
(The story is from the book A Short History of Nearly Everything, which is one of the best books I've ever read. The amazing thing about the book is that it is in fact a short history of nearly everything.)
Combine the difficulty of getting incentives right with the inherent problems of Government and a dangerous mix results. For example, every time a subsidy is created, a special-interest group sprouts up dedicated to preserving the subsidy in perpetuity, long after it has outlived its utility.
There's a king who wants have very rich and flavorful soup, so he tells his chef that, for every drop of grease floating in his bowl, he will pay a coin. The greedy chef wants to maximize his pay, so he dumps a lot of oil into the soup. Of course, this results in a single oil slick across the entire top of the bowl, so the king pays him only a single coin.
My favorite "Incentives matter" story is FedEx - they were having a hell of a time getting drivers to get packages shipped on time. They tried all sorts of things - threatening, praising, performance reviews, training, etc.
None of it worked.
Then they changed their pay from "per hour" to "per shift" - you work a shift, you get paid a certain amount. Go home when you complete your shift, regardless of how long it takes you.
Right away, their on time rate went massively up - in fact, a lot of shifts started being completed early at that point.
So what happened next? Did FedEx management cut pay since the job was easier than they previously thought?
You would think that with the explosion of personal shipping in the last fifteen years caused by the Internet, that these companies would have figured out residential deliveries by now but, if anything, it's become worse.
Nope. Not once, ever.
But then again, I don't use FedEx Home Delivery, as they are not actually FedEx. (FedEx contracts that out to random local trucking companies. The express deliveries are the ones they handle themselves, and fortunately everything I get via Amazon Prime is either UPS or FedEx Express.)
They do indeed: http://www.braunconsulting.com/bcg/newsletters/winter2004/wi...
(When I was a contractor for Bank of America, I got the same Bank of America business cards that everyone else did. Contracting does necessarily mean "setup this one webserver" or "deliver these 83 random boxes today"; it can also be a full-time thing.)
I assume they don't mind the reputation damage because the price is what matters in the "home delivery" business. They care that their $100 overnight letters get delivered on time; your 60 pound box of laundry detergent doesn't mean much to them.
I try to find some consolation in believing that me reporting them will have some effect.
A HTC Wildfire is around $50 with subscription, and once all couriers have them we intend to extend the system as much as we can. Lots of cute stuff should be possible with a combination of camera/barcode reader/gps/internet device.
Unfortunately for me, I wasn't close friends with the manager of the store. He gave all the shortest runs to all his mates, making it nigh on impossible to get a bonus unless you suffered his patronage.
2) Price it at $5,000. No one would actually pay that price of course.
3) Let people who have Medicare get them. Send the bill to Medicare, which is obligated to pay because it's a covered medical appliance.
Every so often someone would call up and ask about some odd item on their bill, and it would end up being some bullshit charge for something they didn't get, or a carefully selected charge that was similar to, but not really, they service that was actually provided.
But since most of the time the costs were covered by some other party most people didn't bother inspecting their bills or statements, or bother looking closely at what was charged.
My second, immediately following thought, was "Pay them to not kill passengers."
That's progress - how to get simple incentives right is a lot more obvious now to economically literate folk than it was back then.
(A) Articulating exactly what you want
(B) Measuring that accurately
(C) Keeping out things you don't want
Today, this micro-regulation is politically popular as voters can more easily comprehend the direct effects of regulation as opposed to the indirect effects of broad incentives. For example, we force drug companies to perform very extensive clinical trials for new drugs and this makes us feel safe. But simply increasing the liability drug companies face for producing harmful drugs may be more effective and would certainly be a lot cheaper (as much as 90% of the cost of a new drug is meeting FDA requirements). But I doubt voters would feel as safe in a regime of broad incentives even if it worked better.
That's one reason the health industry is currently lobbying to move it in exactly the opposite direction of what you propose: they want less broad liability, and are willing to accept more FDA micromanagement in return if that's what it takes. The proposed bargain is something like: the FDA should tell us what to do, and if we follow their rules, we should be shielded from all liability.
What is less studied are the regulators themselves. They rarely impose the kind of regulation that opens industry actions to sunshine and converts them to common knowledge.
There is a substantial body of theory that shows that the price system breaks down in the face of informational asymmetry. But regulators don't go for it since it does not make them more powerful. That's human nature. And it's fine with businesses, who would prefer to answer to the One rather than the Many. Preserves barriers to entry.
Really? I'll take it that you're not including marketing (which is where most of the money goes), as that doesn't kick in until the new drug is going to be approved.
Does that 90% include things like clinical trial, which should be done anyway?
Marketing includes discount/free drugs for low-income folk, samples (which many doctors use the same way), and telling doctors what the drug does.
Which of those do you want to reduce?
And you know this how? And where exactly?
I'll assume that you're referring to ads.
> It's easy to tell the drug companies are awash in money dealing with them.
Oh really? I see significant ad campaigns for 4-8 drugs. Even 20 would be a small fraction of the total drug portfolio of a single company, and there are multiple companies.
But assuming that you have some number of lives-saved in mind, you have to ask yourself if that number is worth delaying pharmaceutical research. Maybe your counter-factual world is downright apocalyptic - I don't think that's likely. But if so it makes sense to have strict regulation. There are some scholars of the issue that think the lives-saved number of FDA regulation is negative, in which case of course the cost is not worth it.
edit: I removed an illogical claim that may make follow up comments make less sense.
Which says to me you are just pulling numbers out of thin air here.
Of course I'm totally wrong about the 90% delay I put in this last comment, I was thinking about this on the way to the office. If we're thinking about the added cost of regulation we have to compare the cost of regulation to what drug companies would spend on clinical trials in an alternative regime, and that number is not $0.
Incentives aren't the solution to everything, sometimes regulation works better. For instance, you're liable for all the damage you cause while on the road, and yet we still need road rules to stop people from behaving like dicks (and even then, it barely works).
Heck, you don't even have to do it with shelf companies. Hi there, I'm BigCompany, and I'm willing to license this drug which I think might work to any startup that feels like selling it! Or if that would expose me to liabiilty, I'm willing to license this substance which I developed which may or may not be useful as a drug. That would still be a win-win situation.
It's easy (and convenient) to blame this on the government. I'm somewhat familiar with the pharma industry (payed for my house), and I can tell you that at least some of these "regulatory" costs are things like flying doctors to expensive shindigs, to coordinate the research they're doing for you.
On this note, if a govt. agency throws a multi-thousand dollar party, it's a scandal, but those kinds of costs are built into the way (privatized) pharma operates.
It's easy to waste millions when you're making billions, and you don't have to answer to taxpayers.
This "government is wasteful" meme ignores the fact that there are powerful non-government actors milking the government.
Quite the opposite. The taxpayers only wake up once every 4 years, and even then they buy the crap that's shoveled at them, and the fearmongering ("OK, we may have made a few mistakes, but you still have to vote for us because the other side is evil"). Anything that happens between now and the next election will be largely forgotten, and anyone who tries to remind the electorate will be shouted down for "negative campaigning".
On the other hand, the shareholders are watching the actions of the corporations every day of the year. I'm not personally doing so, but I pay a variety of mutual fund managers to do it. If they can't maximize my return by steering clear of corporations that are flushing money away, I'm going to fire the fund manager and put my money elsewhere.
And that's why you'll never see a private organization as poorly run as a government agency, at least for any period of time. The quality of education we get is absurd for the money thrown at it. The amount of time it takes for a highway construction project to be completed (not to mention the number of workers I see loafing around when the town is filling potholes) would never be tolerated in industry. I could go on all day...
This "government is wasteful" meme ignores the fact that there are powerful non-government actors milking the government.
This is certainly true. But it doesn't absolve government of its responsibility as stewards of our money. The fact that government is just so huge that this is impossible is just another symptom of the root problems.
The recent financial meltdown should have made it abundantly clear that the "watchers" were in fact not watching and at times were colluding with those they were supposed to be watching to get a cut of the take. Shareholders do not watch companies for waste, they just watch the stock price (and maybe the bottom line if they are particularly dilligent.) In many cases government agencies are better managed than corporations of an equivalent size; there are usually better internal auditing and fraud controls in place and if you get caught trying to defraud a government agency you are more likely to go to jail than if you were to perform a similar fraud against a corporation.
That's true, but it's a very specific example that has a clear explanation in two parts, those being the government and the private sector together creating the problem.
First, there was the government (e.g., Barney Frank's efforts) that was forcing industry to accept risks that industry would have avoided under more natural market conditions. Second, forced to absorb those risks, industry experimented with ways to mitigate and dissipate that risk -- but the experiment failed badly.
It showed that nobody knew how to properly model the situation -- neither the regulators nor the industry. And for that reason, it's not really an instructive lesson to draw conclusions about industry. We've learned those particular lessons now, so you shouldn't see this repeated again.
Shareholders do not watch companies for waste, they just watch the stock price
That is patently absurd. It's not even true for any responsible individual investor, but for any fund manager that would be outright negligence -- and then the yields of his funds would tumble, and even the stupidest of individual investors would throw him out on his ear.
By contrast, I offer government idiocy, programs that have blatantly failed by any objective measure, yet continue to be money black holes. Consider public education, and the war on (some) drugs. Both actively damage society, and waste uncountable sums of money in doing so.
In many cases government agencies are better managed than corporations of an equivalent size; there are usually better internal auditing and fraud controls in place
Citations, please? Here are some counters: Aside from my examples above, consider Medicare, a well-known money pit that politicians have said they'll clean up for years if not decades. Indeed, government does all it can to prevent us from seeing the depths of its waste. I have a friend here in NJ who works tirelessly to uncover government waste, and the reason it's such a big job is the constant resistance to the use of open public records laws.
And the military (the remainder quoted from http://www.wanttoknow.info/corruptiongovernmentmilitary ):
"'According to some estimates we cannot track $2.3 trillion in transactions,' Rumsfeld admitted. $2.3 trillion -- that's $8,000 for every man, woman and child in America." -- CBS News, 1/29/02, U.S. Secretary of Defense raises evidence of government, military corruption
"A GAO report found Defense inventory systems so lax that the U.S. Army lost track of 56 airplanes, 32 tanks, and 36 Javelin missile command launch-units. When military leaders were scrambling to find enough chemical and biological warfare suits to protect U.S. troops, the department was caught selling these suits as surplus on the Internet 'for pennies on the dollar.'" -- San Francisco Chronicle, 5/18/03
"The Defense Department spent an estimated $100 million for airline tickets that were not used over a six-year period and failed to seek refunds even though the tickets were reimbursable." -- New York Times, 6/9/04
If you're sharp, you'll already see where this is headed.
The problem is that Medicare, while not quite a monopsony, is so large that they can call the shots pretty much as they like. Where other healthcare insurance providers (say, Aetna) still exist, Medicare's market share -- and thus power in the market -- is many times larger than the biggest of them. That being the case, Medicare can largely dictate unilaterally the terms under which it's willing to pay out. And that is the very raison d'etre for my wife's department.
So while other providers show greater expenses for administrative costs, Medicare's own expenses for the equivalent is far lower. But that doesn't mean that, in the larger picture of the patient's care, these expenses are not being incurred.
Medicare's size and market power allows them to demand that providers (e.g., my wife's hospital) offload a huge amount of the administrative costs, doing much of what ought to be Medicare's own work (by comparison with what's done by and for other carriers) for them. This means that while Medicare isn't paying directly for it, the administrative expenses are still incurred in the course of patient care; it's just that the costs are hidden from Medicare books, and must be amortized across the rest of the hospital accounting.
This means that half of the expenses the hospital pays for my wife and her department are really Medicare expenses, but don't show up on Medicare books -- instead, they're amortized as a fixed expense across the whole hospital.
This is simply not true in any useful sense. What is Lockheed Martin's entertainment budget? How much money did Pfizer spend on airline travel for doctors? What percentage of the doctors who flew in better than coach seats could have flown in coach?
There's no way for a share-holder to reasonably find out this information.
> And that's why you'll never see a private organization as poorly run as a government agency, at least for any period of time.
This is just dogma. As long as the overall organization is profitable, sub-domains can be spectacularly unprofitable for surprisingly long. You just don't get to see it as an outsider.
> But it doesn't absolve government of its responsibility as stewards of our money.
So, how do they do that wrt sub-contracting? They try to cover their butts with more and more regulation. Then the same people who are robbing them blind scream about government interference.
Inefficiency is built into most of the large human structures. In large corporations few people have real incentives towards the bottom line, so we have industries that live off their cash cows while the rest of the organization is a complete mess.
You are also discounting the fact that inefficiencies are not necessarily a sufficiently important factor in productivity. American military contractors are some of the worst providers of value in terms of efficiency, yet their ability to play the political and legal game gives them all the advantage they need.
Each drug gets passed through to a holding company that funds R&D and assumes liability. How do you hold Pfizer or Novartis resonsible for a drug they don't "own"?
However, the moral questions are quite obvious, and it seems obvious to me that there would be consumer watchdog groups (like Consumer Reports) that would keep us abreast of these antics. Even if the law can't pierce the corporation, crowdsourcing and reputation certainly can.
I'm not a corporate lawyer but in my experience in the financial markets it is simply impossible to avoid liability while holding equity. Maybe there are some loopholes but it is not nearly as easy as you suggest.
Pay a company for distribution and logistics expertise and make that transfer-pricing arrangement profitable for the logistics company.
Then, what profit remains goes to the company owning the patent on the drug (and the liability). The parent company could hold limited partnership stakes, convertible bond and/or options with a fixed term (which might be conveniently the same length as the patent term). If the drug "survives" 17 or 20 years without significant lawsuits, call in the options and claim your equity. If the drug explodes and tanks the discovering company, the parent company holds options, bonds or LP shares that are now worthless. Still, they're in business.
(Note: there are other reasons why CAFE-type standards might be a good idea, but they are far from the most effective way to reduce fuel use).
On March 12 1996, two Romanian stowaways, Radu Danciu and Petre Sangeorzan, were discovered on the container ship Maersk Dubai and ordered overboard on a makeshift raft, approximately 70 kilometres off the coast of Gibraltar. On May 18 of the same year, en route to the Port of Halifax, another Romanian, Gheorghe Mihoc, was found hiding in a large cargo container and forced overboard at knife point by Captain Sheng Hsiu and four of his officers. A fourth stowaway, Nicolae Pasca, was discovered by Filipino crew member Rodolpho "Rudy" Miguel and kept hidden until the ship arrived at Halifax, where eight Filipino crewmen (including Miguel) jumped ship and reported the incident to the authorities.
Upon arrival in Halifax the Maersk Dubai was stormed by the Royal Canadian Mounted Police (RCMP) and Captain Hsiu and his Taiwanese officers were arrested and charged with first degree murder. The radio operator attempted to escape by jumping into the Halifax harbour and was later arrested. Captain Hsiu attempted to deny access to the ship under international shipping laws...
https://secure.wikimedia.org/wikipedia/en/wiki/Maersk_Dubai_...
I learned about this story because it's part of the theme of the concept album Magellan's Wake, by Savatage (which is largely the same as the more popular "Trans-Siberian Orchestra")
A good example of an incentive problem that's recently unfolded: now nearly 50% of US households have no federal income tax liability.
Edit: It's nearly 50%. It was 38% in 2007, 47% in 2009. Also, 40% of households "make a profit from the federal income tax system, meaning they get more money in tax credits than they would otherwise owe in taxes".
http://www.usatoday.com/money/perfi/taxes/2010-04-07-income-...
Another way to escape federal tax liability (up to ~$90,000 income) is to live outside the US 11 months / year
I don't get why more Americans aren't enraged about the United States' treatment of emigrants. For citizens of most other countries, if you don't live there and you don't make money there, you don't pay taxes there.
I say this as someone about to start a job in Europe myself; it's somewhat of a sore point with many people ("America not good enough for you?"). The current economy being bad is really the only thing that makes it relatively easy to smooth over, because I can fall back on, "well nobody in the U.S. was hiring in my area and this opportunity in Europe came up", and people sorta understand because everyone's willing to believe that the U.S. job market is bad right now.
Mostly I can't think of the constituency that would support lowering taxes on emigrants. Republicans are usually the enthusiastic tax-cutters, but emigrants are even less popular among Republicans than among Democrats, partly due to heartland-patriotism type of culture, and partly because the expat vote is skewed Democratic.
http://www.heritage.org/budgetchartbook/top10-percent-income...
People become eligible for more federal benefits as they earn less so it may net out to less than 0%, but I don't have a citation for that.
http://www.usatoday.com/news/opinion/editorials/2010-04-16-e...
http://finance.yahoo.com/news/Nearly-half-of-US-households-a...
About 47 percent will pay no federal income taxes at all for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That's according to projections by the Tax Policy Center, a Washington research organization.
Also, the irs.gov site has tons of data with various breakdowns.
[edit] Thanks, that helps, but I still don't understand what you think is being correctly or incorrectly incentivized here.
When a majority of a countries people are not paying for the country or (worse) profiting off the government, then they have no incentive to keep government spending under control. This leads to the increase of tax money coming from fewer and fewer citizens until the whole thing collapses. Paying for something means that you pay more attention and be more critical of failures.
Of course people have little incentive to find out which policies will bring actual good results as opposed to those which superficially seem nice. Luckily politicians who hope to be reelected can't do anything that turns out to be too stupid in practice... some fraction of the time. And so we sort of muddle our way through things.
1) The history of the 2000 election actually makes a serious point about polling and the failure of a news organization (Fox) to realized polls hadn't actually closed in the panhandle of Florida (Central Time). That area of Florida is heavily Republican and lower voter turn out because of the pre-announced winner (Gore). A few more Democrats voting or a non-preannouncement could have prevented one of the stupidest episodes in US voting history. Vote like you've heard nothing.
So while your post makes a lot of sense on an individual basis, it seems that self-interested groups are almost certainly a factor in the way people vote. It would be pretty easy to miss this looking at things like income or age; I'd be more interested in seeing studies based on union affiliation or some other sentient grouping (as opposed to a non-sentient group like "people over 60").
If that was the case, then you would expect to see most of the rich as republicans, but in actuality a lot are democrats. Taxes are not the most important issue for a lot of people in the upper class.
Lets forget the social issues which can be drivers of that, and focus strictly on the numbers.
A rational person wants to maximize the amount of money they have in their pocket at the end of the day. If government policy had no influence on the economy then obviously the best way to do this is through lower taxes.
But what if government policy does have an influence on the economy? I would rather pay 35% taxes on $100,000 than 30% taxes on $80,000.
This effect gets magnified at the top, especially when bonuses are in play.
Believe it or not, history has shown the economy to be better under democrats than republicans in the post-war period, and this will only become further exacerbated because this data doesn't include what has happened in the last 2 years.
It's important to note this doesn't take into account national, state, and local taxes that everyone pays regardless of income including sales, gas, and property taxes, tariffs, filing fees, tolls, etc. The whole "who pays federal income tax" argument is somewhat of a red herring.
http://gregmankiw.blogspot.com/2009/02/news-flash-economists...
Let's put aside the single-parent part. Last year I made about $25,000.
I enjoyed the protection of the US military, was treated at hospitals using techniques developed with federal funding, and benefited from the federal regulation of interstate commerce.
I also had a nice room in a shared house in Santa Barbara, CA. I had a car, ate healthy food, went out to bars, and lounged on the beach.
Why shouldn't I have had to pay taxes?
Well, we were talking about federal taxes. That's why I listed services of the federal government. Property and sales tax are state. Social security and gas axes are supposed to be a closed systems. None of those pay for the military, interstate commerce regulation, or medical research.
But the important thing is that I wasn't claiming I didn't pay taxes. (I did, although not much.) I was challenging the notion that I shouldn't be paying taxes just because I make less thank $30k.
You don't see a problem with that person voting to increase the amount of free-to-them stuff?
If enough stuff is free-to-me, I'm not going to do anything that other people will pay me to do.
How about you?
Don't forget we live in a representative democracy.
I'd expect half of US households to have an effect on the national agenda.
> Don't forget we live in a representative democracy.
So? The question is whether something is a good idea, not whether it can get popular support.
Consider Justin Bieber.
They call this tax Social Security but it is just a tax like any other.
SSI is collected like a tax, but, unlike almost every other tax, the money collected is mostly returned to the payer. (Folks who didn't pay much get much better return than folks who paid a lot.)
Unfortunately I think they are in fact extremely adept at understanding incentive. Is it possible that you haven't carefully considered which incentives are driving their behaviour :).
This approaches being the perfect crime as the number of crew members go down, doesn't it?
How is this handled?
The position of the body can in most cases show if the victim tripped or was pushed. Tampering with the body after the fall leaves even more clues for the police to find.
But good point about the 'captain's log' though.
(I have the Australia Almanac and it's full of interesting tidbits. One of them was when I read "The English met with the Aborigines during a time of hunger .. 5 men where eaten". I shook my head briefly at the inhumanity and went on to read .. then paused, and re-read the passage again. Turns out, the English ate the Aborigines.)
Whether the Aborigines ever engaged in cannibalism was a somewhat fraught political topic in Australia a few years ago. (The answer is "probably someone got eaten by somebody at some point in the 40,000 year history of the thousands of Aborginal tribes, but you're not supposed to talk about it.")
Anyway, the story isn't about captains "recreationally murdering" prisoners, which is the kind of thing that only a tiny number of psychopaths would do. It's just about them failing to take quite as much care of them in terms of food, water and medical treatment as they really should have.
As for cannibalism, my profile info has been a passing reference to it, in jest; it doesn't concern me at all, at least not until the zombie apocalypse (if food rations run low, I might have to hunt a few zombies and raid the mall shops for flat-screens and warm Heineken!)
I'm filing this under "extraordinary claims demanding extraordinary proof" for now.
The wealthiest and most powerful families of that era, or any time before 20th century, had difficulty identifying kins and heirs. The whole study of Genealogy (and, perhaps the institution of marriage!) was created for the secure identification of blood relatives and safe transfer of property.
Even visual identification is spotty when IDing strangers.
Plus, historically, at the time, New Zealand was not a penal colony like Australia. But home to the English gentry.
I doubt many merchant captains had the forces necessary to kidnap large numbers of people anyway. Besides, It would have been much faster and more profitable to just go straight to Van Diemen's Land and drop off the 'cargo.'
All I am saying is, counting the cargo is not the most ideal solution for the Murdering Captain problem.
Sometimes you might even get willing participants. Say, a ship paid to transport 100 Cubans to the U.S for political asylum might just be better off bringing 100, paying Costa Ricans (ignoring linguistic identification :-)
I have an academic interest in this because I have been a refugee escaping on a boat, helped by traffickers to leave Somalia. And also, because I have an interest in the accurate identification of undocumented individuals (with their active participation, of course; adversarial identification is something better left to Langley)
Survival stories are not worth telling if they're widely shared and experienced. In fact, there are people in New Orleans who have had it worse than us. Because of that, I prefer to be silent, and grateful.
All in all a pretty high negative incentive (which it had to be, to keep starving people from committing crimes).
Why? Well, apart from the possibility you mentioned (which is unlikely -- just you try committing piracy on British soil in the 19th Century in a ship with its name and identifying information written on the back), there was presumably the possibility that a captain might let a prisoner escape in exchange for money. Also there's the problem of maintaining security on the prisons. And finally, I'm sure there was a constant need to cycle guards as well as prisoners back and forth from Britain to the colonies.
It's depressing that a professor is using such sophistry to justify his existence to his students.
My guess is that the problem was that there were no incentives for politicians to think of this as a problem, and seeing as it survived a "scandal," probably some incentives not to care. I'd like to know who was getting the contracts, and who their connections were.
I also wonder if there was some faction screaming about not imposing crushing regulation on the noble businessmen who were providing a crucial and critical function to protect our civilization, and if they overlapped with the connections:)
EDIT: Also, this is a simple matter of paying for what you want. If you want people to get rid of the prisoners, pay them to haul them away. If you want prisoners delivered somewhere, pay them for what they deliver.
This was something I was very good at figuring out for raising my sons. Thus, issues related to this at my job really get on my nerves (because I am convinced it can be done better). So I am wondering what people know about solving this issue for corporate culture -- or even on the start-up scene.