Tag Archives: incentive

03.17.2013 | Labor Productivity: Google

I suspect the whole Yahoo inspired debate about whether we work at home or at the office is taking us in the wrong direction.

Instead, I started thinking about what author Daniel Pink suggests in Drive. Discussing incentives, he says that once we are sufficiently paid at work, we need autonomy (directing our own lives), mastery (desire to get better and better at a task), and purpose (“yearning to do what we do in a service larger than ourselves”).

Pink’s ideas took me to Google’s NYC offices. Formerly a shipping complex, Google’s East Coast NYC headquarters occupies a full city block. Software engineers can design their own offices (see below), dogs can stay with their owners (below), and breakfast, lunch and dinner and snacks are free and taste good. During the workday, yoga is available as well as an occasional talk from people like Toni Morrison. Not quite your typical library, shelves open to reveal “secret” rooms and reading spaces. One hallway is lined with a Pacman arcade.

You see where this is going. The spirit and structure at Google generate the autonomy, mastery and purpose that inspire productivity. While Google employees can work at home or at work, most choose work.

But does Google have the only good answer to the home/work debate? Not necessarily. It all depends on the incentives.

A Google Office (photo credit: Marsten NY Times

A Google Office.(Photo Credit: Karsten Moran for the NY Times)

A Google Office (photo credit: Karsten Moran/NY Times)

A Google Office.(Photo Credit: Karsten Moran for the NY Times)

A Google Conference Area (photo credit: Karsten Moran/NY Times)

A Google Conference Area.(Photo Credit: Karsten Moran for the NY Times)

Sources and Resources: My description of Google’s NYC offices is based on a NY Times article, a slide show, and the Google website. To learn more about Daniel Pink’s ideas, his book is Drive: The Surprising Truth About What Motivates Us and he did a popular TED talk, but I thought his interview with Russ Roberts for Econtalk was my best source. Also, the first part of our econlife discussion of the Marissa Mayer Yahoo mandate to work at the office is here.

Posted by: adminEcon
Tags: Drive, Google, incentive, labor productivity, Yahoo
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03.09.2013 | Demand and Supply: A Columbia Dining Hall

The Nutella-gate crisis at Columbia University is classic demand and supply.

First the facts…

A “creamier-than-peanut-butter, chocolate hazelnut spread from Italy, …” Nutella had been served in crepes on weekends at Columbia’s undergraduate dining halls. However, when Columbia started offering it alone, the response was massive. Students ate huge amounts in the dining hall and used soup containers and cups to take Nutella to their dorm rooms.

Concerned, cafeteria authorities complained that they were depleting the school’s food budget. At $5,000 a week according to the Dining Services Executive Director, the total could be $250,000 a year. Disagreeing, Columbia students cited much cheaper Costco prices.

At this point, officials realized they had to contain a rapidly escalating crisis. Calling it “a tongue-in-cheek university statement,” they said, ”Nutella-Gate Exposed…It’s a Smear.” As for the numbers, the university admitted they were far lower than $250,000 and they added that students were leaving dining halls with much less because of the publicity.

Thinking about incentives, the student response to Nutella was predictable. On the demand side, paying as much as $2363 a semester for a meal plan, they have the “all you can eat” incentive. Taking Nutella, some bread, maybe silverware and plates back to the dorm cost them nothing extra.

Because meal plans give students access to an unlimited supply for a single price, for an individual student, the supply curve is perfectly elastic. So, when his or her demand increases, still it crosses supply at the same price. The result? Students have the incentive to consume huge amounts. The law of demand, with less quantity at higher prices does not kick in.

How to get around demand side “over consumption?” I read that one Columbia dining hall eliminated trays. (I am not sure if all did.)

Even when demand increases, price is constant because of perfectly elastic supply.

Even when a student’s demand for Nutella increases, price is constant because of perfectly elastic supply.

Sources and Resources: While my Nutella quote is from a NY Times article and I got other facts from a follow-up NY Times piece and Business Insider, the Columbia Spectator provided a more serious perspective.

Posted by: adminEcon
Tags: Columbia university, demand, incentive, Nutella, supply
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03.05.2013 | The Price System: Health Care

The price system is rather amazing.

Please imagine for a moment that you heard a gallon of gasoline was $1.50. First you would think, “cheap!” Then you might rush to fill your tank. Or, told that a diamond ring was $50, you might not buy it.

Price fluctuations are called a system by economists because they move predictably in markets. Prices can be incentives and quality barometers and used to measure productivity and profitability. Just one number, a price can say so much. But not always.

And that takes us to hips.

What if you were told that a hip replacement could cost $11,000, $125,000, or somewhere in between? Sort of like learning that a wagon could be purchased for 1000 Continentals, you would not really know that those prices mean.

Recently, several college students called 102 hospitals to see how much a hip replacement would cost for their fictitious grandma without insurance. Not getting many price requests, most hospitals were not sure how to respond. When the students finally got the information, the disparity was massive. Not only did price range from $11,000 to $125, 000 but also there seemed to be no normal tie to demand, supply or quality.

In another study, researchers found appendectomies could cost anywhere from $1529 to $182,955. As for the emergency room, a study revealed that a visit for a headache could cost anywhere up to $17,797 but as little as $17. A sprained ankle? $4 to $24,110.

You know where this is going. Lacking the normal signals of the price system, medical care creates alternative incentives. And therein lies our problems.

Sources and Resources: Interesting Washington Post articles here, here and here discussed each of the three studies. Gated, here, here for hips and appendectomies and not gated here for emergency room visits, are the formal articles with all of the details. Connecting the US health care system to moral hazard, this econlib article explains the incentives that artificially low prices create.

Posted by: adminEcon
Tags: health care costs, incentive, price system, supply and demand, unintended consequences
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02.15.2013 | A Federal Subsidy: The Tesla Test

The trip in the $101,000 Tesla Model S along part of the East Coast was supposed to be uneventful. With 2 ultra fast charging stations in Newark, Delaware and Wilton Connecticut, the power was available. For the 1/2 ton lithium battery, a 30 minute “fast charge” generated 150 miles. According to Tesla, the battery’s range was 300 miles and the EPA rating said 265.

NY Times journalist John Broder’s Tesla drive did not quite work out like Tesla expected. Perhaps because of the cold weather or maybe, as Tesla claimed, he neither charged nor drove the car as instructed, the mileage estimator plunged during a final leg of the trip on the first day and he barely made it to the charging station. Even worse, telling him, “Car is shutting down,” the Model S stopped during the second day and they wound up on a flatbed. Both times, Broder says he experienced “range anxiety.”

Fortified with a $465 million government loan, Tesla will be mass producing electric cars and projects a 90 outlet chain of charging stations by the end of this year.

The Tesla story reminded me of an electric car story in the NY Times about Denmark. With gas at $8.50 a gallon, consumers have begun to complement their stable of gasoline powered cars with electric models. Thinking of standardizing charging stations, accepting range challenges, installing household power docks, in Denmark, logistics are somewhat daunting but electric car sales are slowly rising. By contrast in the US, consumers bought 71,000 plug-in hybrids or all electric vehicles–way below estimates. (I’ve read different stats–not sure which are accurate but all are low.)

The Tesla tale starts on the supply side with a government subsidy. In Denmark, its beginning is demand. The endings sound like they will be opposite also. Both, though, are about incentive.

Charging Station in Denmark.

Sources and Resources: John M. Broder’s story of his Testa test ride is a great read. Then, the Washington Post follow-up story and Testla’s response combine to form an interesting part of the debate about government support for electric vehicles. The counterpoint example, for Denmark, is here.

Posted by: adminEcon
Tags: EPA, government subsidies, hybrid cars, incentive, Tesla
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01.03.2013 | Disaster Economics: Neighbors and Utility Companies

Still dealing with the impact of Hurricane Sandy, I keep pondering the cost of preparing for the next storm. Personally, it has been worth purchasing a generator. But, what to do about my neighbor?

Located a half mile from my home, he has many beautiful old huge trees that were destabilized by the storm. Just a week ago, one tumbled down onto a power line during a rainstorm and eliminated our power for 6 hours until repair crews hauled the debris away. However, when asked to engage in further disaster prevention and cut down whatever remaining limbs threaten power lines, he refused.

Similarly, for my power company, it is much cheaper to clean up after a storm than to prepare for it. In NYC, Consolidated Edison (Con Ed) expects to spend $450 million cleaning up storm damage. And, when the Sandy relief bill passes Congress, I expect they will get some of the money. By contrast, storm prevention, including underground wires and elevated substations, would cost Con Ed 100 times as much.

So, if we focus on their private cost, it makes sense for my neighbor and Con Ed to do minimal disaster damage prevention. For them, prevention is much more expensive than clean-up.

But what if we move beyond and look at the “social” cost?

The entire cost benefit equation changes when we add the cost to society. Then, we include fatalities and storm related illness, lost work days, longer commuting times, school cancellations, lower retail sales, lower stock prices of retailers and even the diminished value of pension funds that hold those retail stocks. You see where I am going. The impact of Sandy has a far reaching ripple. Her cost has been huge.

The private cost of prevention is much greater than the private cost of clean up. However, the results might be reversed if we look at the private cost+social cost. Then, does prevention make sense? And if so, what should I do about my neighbor?

Sources and Resources: For more reading about the intricacies of disaster prevention, I suggest the NY Times article, “Hurricane Sandy Alters Utilities’ Calculus on Upgrades” and James Surowiecki’s New Yorker column, “Disaster Economics.”

Posted by: adminEcon
Tags: Consolidated Edison, cost benefit analysis, Delta Plan, elevated substations, flooding, Hurricane Sandy, incentive, JCP&L, private cost, PSE&G, social cost, underground power lines
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