Is obesity an information problem?

As mentioned yesterday, childhood obesity is a problem that can be reduced by giving more opportunities to be outside and away from the television. But one may also try to combat the problem with information campaigns. One way is to publish dietary information in restaurants, something that even benefits the restaurants, as I reported earlier. But most food is not consumed in restaurants, especially for poor households who also are most likely to be obese. But do such information campaigns really work?

Andres Silva, Marian Garcia and Alastair Bailey show that when news about childhood obesity hit the media in the UK, households change their food habits for the better, and without having an impact of expenses. It is thus possible for the poor to do something about the obesity risk without financial consequences.

The fact that information matters is corroborated in a study by Linda Thunström, Jonas Nordström, Jason Shogren and Mariah Ehmke that shows that people use strategic self-ignorance to make choice they know has bad future implication. Specifically they did an experiment where people could choose meals and obtain without cost calorie information. Most subject chose to remain ignorant and then took in more calories than the enlightened ones.

The fight against obesity: more city parks, please

Obesity rates are increasing pretty much everywhere, but nowhere is the obesity problem as massive as in the United States. And nowhere else is television viewing such a cultural focus. With ever increasing viewing times, now about 4 hours a day, one has to wonder what drives Americans to spend so much time in front of the TV with a beer and greasy finger food. Maybe it is the lack of alternatives. Indeed, walk around almost any US city and you will find very few people outside, in a large part because there is nothing to do outside: few parks, no pedestrian areas, no river fronts, etc.

Maoyong Fan and Yanhong Jin show that this does indeed matter for obesity, in particular childhood obesity, which is the most difficult to reverse. One needs to differentiate by various characteristics, though. Parks work particularly well for girls in unsafe neighborhoods, but not as well for white adolescents with high incomes. Now switch that TV off and go outside.

Market competition and product quality

There is common perception that more competition can lead to lower quality, as firms try to lower prices. Of course, this presupposes that buyers do not require quality, or that the trade-off between prices and quality is tilted towards giving up quality. Thus, a lowering of quality cannot be a general phenomenon, but must be limited to some good. One area where we would think that quality is important and would not be traded off is health care. Yet there is evidence that where competition increased, lower quality has been provided. How could that be?

Kurt R. Brekke, Luigi Siciliani and Odd Rune Straume provide a theory that can can explain this under particular circumstances: First, sellers need to be motivated in the sense that they care for quality. Second the marginal utility they get from profits is decreasing as they make higher profits, which implies risk-aversion. These assumption does not seem unreasonable, especially for health care provision (but not for the financial industry, for example, where the bonus payment is so important). The intuition of more competition yielding lower quality is rather twisted: increase competition, and prices fall. Profit margins are smaller, hence also profits. With a higher marginal utility of profit, sellers try harder to increase profits, and quality is a dimension that is available. How to counteract this? Make people care more about quality (how?), tax lower quality (how?). Not obvious.

How to regulate prostitution

While being the oldest profession, prostitution has always been a thorn in the eyes of authorities. The market clearly says it satisfies a demand, but it goes against some moral code. Banning it has never been an efficient solution, in particular because it leads to crime and adverse health outcomes. A better way may be to regulate it in some fashion, but how?

Giovanni Immordino and Francesco Flaviano Russo may have found how, and it involves the prohibition of buying sex, but no limit on selling it. Legalizing selling sex is interesting because it allows taxing it and makes it possible to reduce STD infection rates by applying health policies. What is striking it that the policy for prostitution is the exact opposite of the policy applies in some countries for illegal drugs: decriminalizing consumption and sometimes buying but criminalizing the sale. From what I could see, this seemed to work relatively well. While the tax aspect is the same as for prostitution, the health one is different. By making drug consumption legal, one has better access to consumer to apply health policies, while sellers are of little use in this respect (except when they cut the drug with more harmful material).

Reclassification risk in health insurance

The American health care system has his fair share of problems, a prominent one being health insurance. One particularly frustrating one is when premiums are significantly raised after a health event, so-called health insurance reclassification. Economically, this can be explained by the fact that the insured has revealed being of higher risk. But it seems self-evident that there a large room for improvement in insurance outcome if such reclassification would not occur, that is, if premiums would be almost invariant to health outcomes.

Not so, say Svetlana Pashchenko and Ponpoje Porapakkarm. Their points are that 1) with most people insured under group coverage of their employer, relatively few people are subjects to reclassification; 2) for the latter, means-tested government transfers cushion well the shock of reclassification (or loss of insurance). To come to this conclusion, they use a stochastic overlapping generation general equilibrium model, trying to match the major institutional features of US health care (including Medicaid, uninsureds, private and employer-sponsored insurance) and calibrated using Medical Expenditure Panel Survey.

Pashchenko and Porapakkarm find that introducing guaranteed renewable insurance contracts with constant premiums lowers the proportion on uninsured from 25% to 19%, the difference taking such contracts. Thus it appears that, not surprisingly, eliminating premium fluctuations is welfare-improving. But the welfare gain is very small. For one, These new insurance contracts tends to be more expensive, especially in the first years when standard insurance premiums are low for healthy (and young) people, who tend also to be more liquidity constrained. If there is no guaranteed renewable insurance contract, the government provides a similar insurance: Medicaid, which has essentially the same conditions but is free and asset-tested. The fact that it is a last resort insurance provides the right smoothing benefits for extreme cases, much like insuring premium fluctuations does. The latter is just a little broader, because there is no asset test, and hence the welfare improvement is small if it is priced actuarilly.

Male circumcision and risky sexual behavior

There is a well-known phenomenon that states that when an activity becomes safer, people will respond with riskier behavior. The classic example is the use of seat belts that has lead to more aggressive driving (although there is a claim that this example is wrong). Now switch to another risky behavior: sex. It is well established that male circumcision leads to a significantly lower transmission probability of AIDS. Is risk compensation also happening here?

Nicholas Wilson, Wentao Xiong and Christine Mattson look at recently circumcised males in a region of Kenya and find that their sex behavior is less risky than the uncircumcised control group. This is not a selection effect, as circumcision has been randomly assigned. The authors think that the circumcised ones have become less fatalist about future life prospects and thus changed their behavior for the better (this is also why you want to provide health insurance conditional on not dying from AIDS). I wonder though whether the circumcision has made them more aware of the risk of AIDS as well.

One more argument for taxing unhealthy activities

Whenever an activity exerts a negative externality on others, you want to tax it. For example, sin taxes are in place or are proposed for smoking, eating junk food or drinking soda. The reasoning is that these activities are bad for health, and thus end up costing society, even when there is no socialized health care. The fact that these unhealthy people tend to live shorter only partly offsets the direct effect of the externality.

Catarina Goulão and Agustín Pérez-Barahona explain that there is another good reason to tax unhealthy food: unhealthy eating habits are transmitted from a generation to the next even when there is no genetic reason for this to happen. This can also within a group of socially interacting people, which gives obesity or smoking the characteristics of an epidemic. To break this vicious circle of learning, the price mechanism has to come to the rescue. So let's impose more or new sin taxes. We could use the revenue, apparently.

Social security and the increase in US health care costs

Health care expenditures increase faster than inflation, and I have already offered several explanations for that. But there are more, and they work in rather subtle ways. Today's theme is social security.

Kai Zhao builds a large general equilibrium overlapping generation model to quantify the impact of the introduction of social security in the US on health expenditures. And it is substantial, at 43% of the increase since the fifties. How can this happen? One mechanism is that social security transfers income from the young to the old, and the old have a much higher propensity to spend on health. A second one is that with social security, the utility during retirement years is higher, and thus people want to make sure to have more of those years. Interestingly, the depressing impact of social security on capital accumulation is far too small to counteract the first two effects.

Mandatory health insurance and informality

Insurance suffers chronically from the problem that only bad risks want to get insured, which makes the cost of insurance prohibitive and the insurance market often collapses while its presence would be a clear welfare improvement. A workaround is to force everyone to participate, thereby avoiding that good risks could weasle out. This is the principle behind health insurance mandates in most of the Western world, and it is part of the so-called Obamacare. But such mandates are difficult when there is a large informal economy, as it makes difficult tracking people, especially if access to government services, paying taxes, etc. are the way the mandate is enforced. Could in fact a mandate increase informality?

Reyes Aterido, Mary Hallward-Driemeier and Carmen Pagés look at Mexico and ask a somewhat different question, but it is still informative: Does the provision of health insurance to those without social security (mostly informals) increase informality? They find the formal sector decreased by 0.4 to 0.7% points because fewer people join it. It is not surprising that fewer people see the need to be cover by social security and thus declared their jobs, yet I find it interesting that the effect on formality is so low in a country where it is so easy to disappears from the books. Transpose that to, say, the US, where having a job is currently pretty much a requirement for health insurance coverage. Would then a health insurance mandate lower the incentive to have job? Most likely yes, but seeing how small the impact was in Mexico and considering that the lower elasticity of the formal/informal margin in the States, that effect is very likely to be very small.

One more perversion of employer-based health insurance

Whenever you see risk, you think insurance. And there are different ways to insure yourself. This may be by buying some contingent claims, often bundled into an insurance policy. Or this may be through self-insurance, whereby you build some assets for eventualities beyond savings needs. Formal insurance and self-insurance sure look like substitutes. For the case of health risk, this means that people with formal insurance should have less assets, other personal characteristics being controlled for. This statement is, however, factually wrong: insured people, ceteribus paribus, have more assets. That is difficult to square with standard theory.

Minchung Hsu makes a good attempts at solving this puzzle. The major assumption here is that health insurance is provided through employment (there is also private health insurance, but it is of minor importance, as in the data because it is crowded out by social programs). This means that the loss of employment bears a larger risk for someone who formally insures: one may lose income and insurance. Then, ironically, more self-insurance is needed than for someone who self-insures, but one has also to keep in mind that a self-insurer typically has lower income and is partially covered by social programs. Thus Hsu performs the same regressions as done in the literature and still finds the fact mentioned above. Interestingly, his regression also rejects the existence of precautionary savings, while it is the central element of the model. So much for the power of this test.

Medical expenditure and technology growth

People are running scared about the relative increase of health care costs. As discussed recently, there a many potential explanations out there, my preferred one being that service goods that rely heavily on labor are bound to become relatively more expensive than manufactured goods that become cheaper to produce with technological progress. But one may also worry that this progress does the exact opposite for healthcare, if more technology makes it more expensive. Two recent papers look at the connection of technological progress and health care costs.

Justin Polchlopek wants to understand better medical technology and break away from using total factor productivity. Basically, he goes back to good old input-output modelling because he wants to avoid issues with capital aggregation that may matter. New technology in the medical sector is then equivalent to new capabilities in the model. Unless the use of existing capabilities is reduced, it is then obvious that efficiency will be reduced. This means that how new technologies are diffused and how they replace old ones is critical. Add in poorly designed insurance, and you have a recipe for disaster, but it can be largely reversed.

Amitabh Chandra and Jonathan Skinner take a very different approach, focusing on demand and supply. They use a more aggregate health care production function and study what determines health care productivity. They categorize three types of technologies: (I) highly cost-effective with little risk of overuse; (II) highly effective for some people/diseases; (III) uncertain treatments. Of course, focusing on (I) will increase productivity, while (III) is very costly for potentially little effect. The health care costs balloon if patients ask for the latest technology, which often falls into (III). Insurance systems, whether public or private, need to resist accommodating all such requests.

All in all, both papers show that new technology can become very costly if it is mismanaged. This can be corrected with insurance schemes that let patients feel in their pocketbook some of the consequences of their choices. Incentives through the budget constraint remain powerful disciplining devices.

Negotiate drug price and availability jointly

Health care costs are increasing faster than general inflation mostly everywhere, and for some time now. While this should not be a surprise, as health care is mostly a service good, there is considerable grief over the situation. Among initiatives to curb down costs are efforts on prevention, instituting copays and regulating health care providers. What about pharmaceutical drugs.

Begona Garcia Marinoso, Izabella Jelovac, and Pau Olivella report on a rather common practice in Europe: external referencing. This is setting a price cap on pharmaceuticals domestically based on what the price is abroad. This has obviously consequences on price negotiations in the foreign country, which is not too happy about this as the pharmaceutical companies are bargaining harder. But if the government can tie in drug authorizations into the negotiations, then prices are further capped and even the foreign country is not hurt. In other words, there is no reason that governments should give away bargaining power by putting price regulation and drug authorization in different agencies.

Health cults in ancient Greece

Ancient Greece is a fascinating period as this is the start of the rational and scientific study of the world and many scientific principles were laid down. The Greek philosophers where in particular the first to think seriously about the role of institutions, markets and the functioning of government. In terms of health and medicine, we have all learned about the first attempts to explore and rationalize the human body, using a secular and scientific approach that was unparalleled until much later in history.

Carl Hampus Lyttkens points out that there was also a counter-movement where health care was leaning much more on religion. He also remarks that this is not unlike what we experience now with alternative medicine that has many followers and is even part of state sponsored health care in some countries. Calling these health cults, Hampus Lyttkens claims they arise because people are afraid of the uncertainties of life and cling to anything to reassure themselves. Just think about how many people believe in life after death while there is no scientific evidence for it. And healing cults are often, now and then, the realm of those who cannot afford the services of the scientific healers.

How to best increase organ donations

There is currently an increasing shortage of organs available for transplantation. This is due to a reduction in traffic fatalities, the main provider of healthy organs, and an exploding demand from patients. An economist would say here that there is a classic case of rationing because the price is too low (at zero) and one should let patients pay for organs. But as this is viewed as unethical, we will have to live with rationing and waiting lists, unless one can bring more people to donate organs. This brings up the question why people donate, and in particular why there is altruism. This question is still puzzling, as altruism may emerge from a combination of sense of duty, coaxing, reciprocity, tradition, social pressure, and others.

Juan Cabasés and María Errea try to sort this out by focusing on blood and living organ donation. They model the decision process of the potential donor that in particular factors in some negative effect of donation. Then they administer a questionnaire and test their theory. The survey allows to highlight the attitude towards donating, which in theory corresponds in part to the degree of altruism. But it appears the perceived cost of donating is much more important, as well as information about the need for donations. This shows that in order to encourage more donations, information campaigns may be quite effective, and maybe rationing or a proper market would not be necessary.

Addendum: I forgot to mention a caveat the authors neglect: The survey is administered to staff of an university. Such employees, I believe, are more altruistic than average.

Monopoly in health insurance is better

We typically advocate that competition is good, except when it is not, for example in the case of large production fix costs. Such natural monopolies then need to be regulated. Part of the debate on health care in the United States is also about competition: if health insurance is provided by a single entity, it got to be less efficient. Well, there is data that can verify this, by looking at employers that offer a choice of providers and those that do not.

Ilya Rahkovsky does this and comes to the stunning conclusion that insurance providers that have a exclusivity contract with an employer charge about 40% for the same "insurance quality units." How could this be? Exclusive providers tend to provide better quality insurance because they can subsidize it with the premiums of low quality policies. That would not be possible if they were to compete with other providers.

That said, insurance providers must have been in competition in order to obtain the exclusivity contract, so it is not quite true to state that the monopoly is welfare improving. But from the employees' perspective, it looks like a regulated monopoly in the sense that the employer can keep a leash on the insurance company by threatening to change providers, and that keeps the monopolist from exploiting all rents, it even encourages it to show goodwill to keep the contract. With multiple providers, everyone goes for the quick buck and offers lowly policies.

Smokers and the smoking ban: some hate it because they quit

One of the most unusual and criticized theories in Economics is that of rational addiction, which states that smokers and druggies choose their addiction under full rationality and information. This can be rather surprising to a non-economist, but one can find data that supports (well, does not reject) such theory.

Timothy Hinks and Andreas Katsaros provide some evidence that could further validate the rational addiction theory by looking at public smoking bans in England, Wales and Northern Ireland. Using the British Household Panel Survey, which includes questions about happiness and smoking, they find that those who reduced their smoking show no change in happiness compared to those who did not change their smoking. But once public smoking bans were imposed, those who reduce smoking, in particular heavy smokers, exhibit decreases in happiness. In other words, they were forced to reduce smoking by being chased away from public places, and feel worse for it. That is consistent with the rational addiction theory in that imposing an unanticipated constraint makes people worse off. But one could also imagine irrational addiction theories that would be consistent with that result. Indeed, the critical aspect here is that you are locked into a state (addicted smoker). Whether you got there rationally or irrationally does not matter.

Breastfeeding and cognitive skills

Breastfeeding is now almost universally promoted as the healthiest way to feed a baby. And indeed, while breastfed babies are a little smaller and than bottle-fed ones and gain a little less weight, they are healthier, it is thought mainly because the mother milk transmits antibodies and relevant nutrients. But not every mother breast feeds, maybe because not every mother realizes all the benefits, or because some of the costs are high (time management for working mothers or aesthetic issues). Or there are some other benefits that are not well known.

Maria Iacovou and Almudena Sevilla-Sanz report that breastfeeding has significant positive impacts on cognitive skills (reading, writing and mathematics). While this correlation is well known, it may be spurious because mothers who breastfeed are more likely to be well educated (Irish example), and their children are also more likely to be well educated as well. The obvious way to overcome this statistical issue, a randomized trial, is not feasible on ethical grounds. What Iacovou and Sevilla-Sanz do is use propensity score matching, which essentially matches babies that have the same characteristics but breastfeeding and then compare their cognitive skills. What is particularly impressive in this study is that the retained characteristics are very broad beyond baby demographics and health, including parent characteristics such as education, job, income, and even pre-birth attitude towards breastfeeding or home and neighborhood. And even after controlling for all these variables, the impact of breastfeeding is still significant on babies from Bristol (England), and it may even grow with age.

Optimal aging

While there is some amount of uncertainty in the length of our lifetime, we have the means of influencing it with various choices, such with different diets, occupations, investment in prevention and physical activities. But as these choices all have a cost, whether monetary or in utility, people face trade-offs and there is something of an optimal age. How should we think about it?

Carl-Johan Dalgaard and Holger Strulik make a first attempt at answering this question by positing an "aging law of motion" that defines how a human body become more frail over time and how this can be influenced by various costly choices. They use some recent insights from medicine and biology on the speed of aging and build a model that is able to replicate the impact of medical progress on life expectancy, or the relationship between labor productivity and life expectancy, or cross-country differences in life expectancy. This is all exciting stuff, but I am puzzled that individuals have only utility from consumption. One would expect that the value of life goes beyond just consumption, and empirical studies confirm this. This is not important when the lifetime is fixed, but when someone can influence it, it becomes critical. I am looking forward to a revision of this paper.

Employer-provided health insurance is not that bad

Health insurance is, among OECD countries, uniquely organized in the United States. It is provided by employers, if they can, and is a benefit that is not taxable for employee. The others either buy individual insurance, which is much more expensive than group insurance, or simply bypass insurance. This reliance on insurance by the employer, instead of a group insurance for everyone independent from employment seems clearly suboptimal. For one, the implicit tax subsidy can only lead to over-insurance for the insured. And then, there is clear under-insurance for the others. And lack of mobility of the workforce.

Kevin Huang and Greg Huffman argue that the US system may have advantages that overcome its disadvantages. The basic reasoning is that through this tax subsidy and the fact that insurance is better provided by employers, there is a clear incentive not to fool around and get a job. This decreases unemployment, increases output and possibly welfare despite higher consumption of medical services than optimal.

They argue this welfare improvement through the tax subsidy is possible. But it may also not. It all depends on how much health and leisure are valued, and how risk averse people are. So not everybody prefers the current regime, probably. And the public debate about the subsidy provision while a removal was mulled during the Bush Junior administration clearly shows that. Huang and Huffman, however, argue against using heterogeneous agents, because it is unlikely to have a macroeconomic impact. I am not convinced. Indeed, just look how diverse the insurance packages are that people choose. This highlights fundamental diversities in the perception of risk, and actual risk, in the value of life and health and attachment to work. This has clearly an impact on optimal policy because marginal utilities vary, and there are winners and losers for every policy. This becomes a political economy problem, and heterogeneity is crucial.

Syphilis cannot be eradicated

Syphilis is back. As the most widespread venereal disease in the 1930's it was curtailed after huge efforts, both in developed and developing countries. And ten years ago a push was made to finally eradicate it. But syphilis is quietly making a comeback, hidden in the shadows of AIDS. And because the transmission of this disease is primarily driven by risky sexual behavior, it can be a leading indicator of other sexually transmitted diseases on the rise.

David Aadland, David Finnoff and Kevin Huang use a model of human behavioral response to study this resurgence and come to the conclusion that there is a fundamental cycle that cannot be broken. The point is that the transmission model that epidemiologists use has constant parameters tracing back to biological features of the disease, but these parameters can change through human intervention, and they do. Call this a Lucas Critique of epidemiology. The key here is that when prevalence is low, individuals in a riskier fashion and in particular have more sexual partners. No reasonable policy can overcome this.