Naked Economics Wheelan, Charles (books to read for 13 year olds TXT) 📖

this employer has to make a hiring decision without access to applicants’ criminal backgrounds (either because he doesn’t have the time or resources to gather such information, or perhaps because he is forbidden by law from asking), then it’s entirely plausible that he will discriminate against black male applicants, who are far more likely to have served time in prison (28 percent) than white male applicants (4 percent).

Of course, all this employer cares about is whether or not the person standing in front of him has a criminal record. If he can acquire that information with certainty, then the broader social patterns don’t matter. In theory, we would expect access to criminal background checks to reduce discrimination against black men without criminal records. In fact, that is what the data show us. A group of economists compared hiring decisions at firms that conduct criminal background checks with hiring decisions at firms that don’t. They concluded, “We find that employers who check criminal backgrounds are more likely to hire African-American workers, especially men. This effect is stronger among those employers who report an aversion to hiring those with criminal records than among those who do not.”2

With race, more information is usually better. The corresponding implication is that less information can be worse. The United States has a huge ex-offender population. (America has a high incarceration rate, and most people who go to prison eventually get out; the median sentence is less than two years.) Policies that seek to help exoffenders by suppressing information on their criminal backgrounds may be bad for a much wider population. The authors of the study cited above warned that their results “suggest that curtailing access to criminal history records may actually harm more people than it helps and aggravate racial differences in labor market outcomes.”

This chapter is not about discrimination. It is about information, which lies at the heart of many discrimination-related problems. Information matters, particularly when we don’t have all that we need. Markets tend to favor the party that knows more. (Have you ever bought a used car?) But if the imbalance, or asymmetry of information, becomes too large, then markets can break down entirely. This was the fundamental insight of 2001 Nobel laureate George Akerlof, an economist at the University of California, Berkeley. His paper entitled “The Market for Lemons” used the used-car market to make its central point. Any individual selling a used car knows more about its quality than someone looking to buy it. This creates an adverse selection problem, just as it did with the Hope Scholarships. Car owners who are happy with their vehicles are less likely to sell them. Thus, used-car buyers anticipate hidden problems and demand a discount. But once there is a discount built into the market, owners of high-quality cars become even less likely to sell them—which guarantees the market will be full of lemons. In theory, the market for high-quality used cars will not work, much to the detriment of anyone who may want to buy or sell such a car. (In practice, such markets often do work for reasons explained by the gentlemen with whom Mr. Akerlof shared his Nobel prize; more on that in a moment.)

“The Market for Lemons” is characteristic of the kinds of ideas recognized by the Nobel committee. It is, in the words of the Royal Swedish Academy of Sciences, “a simple but profound and universal idea, with numerous implications and widespread applications.” Health care, for example, is plagued with information problems. Consumers of health care—the patients—almost always have less information about their care than their doctors do. Indeed, even after we see a doctor, we may not know whether we were treated properly. This asymmetry of information is at the heart of our health care woes.

Under any “fee for service” system, doctors charge a fee for each procedure they perform. Patients do not pay for these extra tests and procedures; their insurance companies (or the federal government, in the case of older Americans who are eligible for Medicare) do. At the same time, medical technology continues to present all kinds of new medical options, many of which are fabulously expensive. This combination is at the heart of rapidly rising medical costs: Doctors have an incentive to perform expensive medical procedures and patients have no reason to disagree. If you walk into your doctor’s office with a headache and the doctor suggests a CAT scan, you would almost certainly agree “just to be sure.” Neither you nor your doctor is acting unethically. When cost is not a factor, it makes perfect sense to rule out brain cancer even when the only symptom is a headache the morning after the holiday office party. Your doctor might also reasonably fear that if she doesn’t order a CAT scan, you might sue for big bucks later if something turns out to be wrong with your head.

Medical innovation is terrific in some cases and wasteful in others. Consider the current range of treatments for prostate cancer, a cancer that afflicts many older men. One treatment option is “watchful waiting,” which involves doing nothing unless and until tests show that the cancer is getting worse. This is a reasonable course of action because prostate cancer is so slow-growing that most men die of something else before the prostate cancer becomes a serious problem. Another treatment option is proton radiation therapy, which involves shooting atomic particles at the cancer using a proton accelerator that is roughly the size of a football field. Doing nothing essentially costs nothing (more or less); shooting protons from an accelerator costs somewhere in the range of $100,000.

The cost difference is not surprising; the shocking thing is that proton therapy has not been proven any more effective than watchful waiting. An analysis by the RAND Corporation concluded, “No therapy has been shown superior to another.”3

Health maintenance organizations were designed to control costs by changing the incentives. Under many HMO plans, general practitioners are paid a fixed fee per patient per year,