Friday, 27 February 2015

Time to 'privatize' the NHS?

Labour's pitch for the upcoming UK general election has been simple - let's talk about the National Health Service. Particularly headline grabbing was the '100 days until the election, 100 days to save the NHS as we know it' campaign. To focus on the NHS may seem like a simple winning strategy for Labour given the rollercoaster of 'NHS in crisis' stories hitting the news in recent months. But, I think labour strategists may have badly misjudged this one. After years of dodging the issue the British public may finally waking up to the idea that we can only preserve the 'NHS as we know it' with some pretty radical change.
       The NHS is a publicly provided health care system that is centrally funded and free at the point of delivery. Labour is broadly committed to maintaining that status quo. They reject private involvement in providing health care. And they reject anything other than a free health service. 'Save our NHS, privatization is putting our NHS at grave risk' sums up the position nicely. The truth is, though, the NHS has to change. There simply is not enough money to fund the standard of service that Britons have got used to. So, we either accept a low standard of care or move to something different.
       The main problem with the NHS model is one of moral hazard: If the government guarantee a free health service then there is less incentive to stay healthy. And if people take more health risks then health costs will be higher than they need to be. Simple though it is this chain of logic needs some justification. After all, no one wants to be ill and so there are some big incentives to stay healthy! The 'free at the point of delivery' mantra has, however, created a society that expects great things from its NHS. That means this is not just a money issue; expectations of the NHS have grown well beyond what it can reasonably deliver. This also feeds into another consequence of moral hazard: people expect service immediately even for relatively minor problems.
       Charging for health care has already begun with a largely privatized dentistry, charges for prescriptions, and a growing private sector for routine operations. This trend will surely have to continue. What's interesting though are attitudes towards paying for health care. The 'free at the point of delivery' mantra is deeply ingrained in the British psyche; anyone who dared question its merits faced criticism. That's why labour might think it is on safe ground defending the NHS as we know it. Things though appear to be changing.
         I think this change partly reflects a growing understanding of individual choice in health care: people choose to get drunk on a Friday night, they choose to smoke, they choose to not eat healthy foods or exercise. Why should the taxpayer pay for health care that was avoidable? Surely the individual should take some of the responsibility? Another thing changing attitudes is the growing recognition that something has to give. The previous labour government put a lot of money into the NHS but that merely delayed the inevitable. People want a high quality health service and the current system is creaking at the edges. Can we not do better?
        Various ideas have been proposed to put additional charges into the NHS. Maybe it will be a nominal fee to visit a GP or A&E. Maybe benefits will be withdrawn from those who refuse to abide advice on healthy eating. Maybe it will be increasing private options in the NHS. One thing, however, seems clear and is often overlooked. Once charges are unleashed there is likely to be a run away train of increased charges. This is what happened with dentistry and is the kind of thing that will scare plenty of people. So, there needs to be a proper debate on what a future health service will look like. That is clearly not going to happen in this election with the conservatives afraid to mention the issue. Time is running out to really save the NHS as we know it.               

Tuesday, 10 February 2015

Premier League TV rights: Winners curse?

The wait is final over to discover who will broadcasting Premier League football from 2016 onwards. There is no surprise this time in the successful bidders - Sky and BT. But there is surprise at the price they have paid - a huge £5.1 billion. That equates to over £10 million per game. This figure is 70% up on last time and above all analyst forecasts. Surely it is time to talk of the winners curse?
        The winners curse is the idea that a winner of an auction may well end up losing money. The intuition is simple enough in that the winner of an auction is likely to be the most optimistic as to how much the prize is worth; that optimism may be misplaced. In the past, TV rights have provided some textbook examples of the winners curse. So, do we have another example?
        One reason to doubt Sky and BT have overbid is the fact they know pretty well what they are bidding for. The winners curse is most likely to occur when the value of the prize is highly uncertain. But Sky have been broadcasting the Premier League for decades and so they surely know what they are doing. Moreover, football rights have come to be central to both Sky and BT's business plan. So, they may well be content to make a loss on football in order to protect their general image as top broadcasters.
        Even so, the latest numbers are shockingly high. It seems that Sky and BT are not so much betting that football fans will continue to pay huge amounts to watch football but that they will pay ever increasing amounts of money to watch football. That seems a dangerous presumption. The football market is already saturated with fans disgruntled at the cost of it all. Can they continue to pay more? I do not think so. Will Russian oligarchs and Arab sheiks continue to plough money into the Premier League? Who knows.
       So, what if Sky and BT have paid too much? Then, I'm afraid, the bubble may well burst. Since its inception the Premier League has hugely distorted the football market in the UK. And the Premier League also appears of the mind-set that ever increasing amounts of money can be expected. Take away the money and the whole thing might collapse. I think, therefore, that it is the Premier League who are taking a big risk by extracting so much money from Sky and BT. Sky and BT will survive the loss of £5.1 billion; I'm not sure the Premier League could!  

Sunday, 1 February 2015

Revealed preference, WARP, SARP and GARP

The basic idea behind revealed preference is incredibly simple: we try to infer something useful about a person's preferences by observing the choices they make. The topic, however, confuses many a student and academic alike, particularly when we get on to WARP, SARP and GARP. So, let us see if we can make some sense of it all.
          In trying to explain revealed preference I want to draw on a study by James Andreoni and John Miller published in Econometrica. They look at people's willingness to share money with another person. Specifically subjects were given questions like: 
Q1. Divide 60 tokens: Hold _____ at $1 each and Pass _____ at $1 each. 
In this case there were 60 tokens to split and each token was worth $1. So, for example, if they held 40 tokens and passed 20 then they would get $40 and the other person $20. Consider another question:
Q2. Divide 40 tokens: Hold _____ at $1 each and Pass ______ at $3 each.
In this case each token given to the other person was worth more than that kept. So, for example, if the subject held 20 tokens and passed 20 they would get $20 and the other person $60. The figure below plots the feasible set for each of the two questions.

           Suppose a subject called James chooses A when asked Q1 and B when asked Q2. In other words he passes all 60 tokens in question 1 and holds all 40 tokens in question 2. Is that 'sensible'? When answering Q1 James could have chosen B; he could have given $0 to the other person and kept $40 for himself. Instead he chose A; he chose to give $60 to the other person and keep $0 for himself. We say that A is directly revealed preferred to B. But, then look at question 2. In this case James could have chosen A but chose B. So B is directly revealed preferred to A. This seems inconsistent; how can A be preferred to B and B preferred to A. It is a violation of the Weak Axiom of Revealed Preference (WARP).
           Why would James or anyone else violate WARP? There are three basic reasons: (1) James does not have consistent preferences. Which is another way of saying he behaves irrationally. (2) He is indifferent between A and B. I'll come back to this later. (3) There are menu or framing effects. To illustrate how menu effects work it is easier to consider a slight variation on Q1 and Q1. Specifically, consider questions:

Q3. Would you choose: A. $0 for yourself and $60 for the other person, or B. $40 for yourself and $0 for the other person.

Suppose James chooses B. So, B is directly revealed preferred to A. Now consider an alternative question:

Q4. Would you choose: A. $0 for yourself and $60 for the other person, B. $40 for yourself and $0 for the other person, or C. $0 for yourself and $50 for the other person.

Clearly option C is a nonsense option because A beats C. But, the presence of C may sway James to choose A. This would be a violation of WARP caused by an attraction effect: option A looks best because it is clearly better than C. There is nothing inherently inconsistent, therefore, in some violations of WARP.
          Let's move on now to the Strong Axiom of Revealed Preference (SARP). Suppose, as before, that James chooses B when asked question 3. So, B is directly revealed preferred to A. Suppose also that when asked he would choose A over C. So, A is directly revealed preferred to C. Given that B 'beats' A and A 'beats' C we would say that B is indirectly revealed preferred to C. Suppose, however, that when asked James choses C over B. Then we have a violation of SARP.
          Note that there is nothing in the story of the previous paragraph that violates WARP. That, however, is because we only consider pairwise comparisons. If we ask James to choose between A, B and C then, whatever his answer, we would get a violation of WARP. More generally, if we elicit James' choices over all the possible combinations of options then WARP and SARP essentially become equivalent: if SARP is violated then so must be WARP and vice versa. The setting of Andreoni and Miller is like this. In order to observe a violation of SARP without a violation of WARP it must be that we only observe choices for some possible combinations of options. That, however, is not unlikely in applied settings. Preference reversals being one example.
         WARP and SARP get most of the attention. They have, however, a basic 'flaw'. Suppose James is indifferent between A and B. Or, to give a slightly more mundane example suppose that when he goes to the canteen for lunch, James is indifferent between ham sandwiches at $2 or cheese sandwiches at $1.50. If we observe James sometimes buying ham sandwiches and sometimes cheese we would say that his preferences violate WARP and SARP. But, there is nothing inconsistent in his preferences or choices. To get out of this problem we need the Generalized Axiom of Revealed Preference (GARP).
          To sometimes choose A and sometimes choose B, or to sometimes choose ham and sometimes choose cheese, is not a violation of GARP. What is? Suppose we observe James sometimes choosing ham and sometimes cheese. Then the price of a cheese sandwich increases from $1.50 to $1.75. If James is observed buying a cheese sandwich after the price rise we say that cheese is strictly directly revealed preferred to ham. This is a violation of GARP. The rise in price should have broken James' indifference between ham and cheese but it did not.
         In order to fit this into the setting of Andreoni and Miller we need a slight reframing of James' choice. Let us consider how much he is willing to give to the other person. With question 1 it costs James $60 to give $60 to the other person and reach point A. With question 2, how much would it cost James to get to point A? It would only cost $40. (Inefficient though it is he would hold 0 tokens and pass 20 tokens, losing 20 tokens in the process.) We said that James would say A when asked question 1. Given that it is 'cheaper' to say A when asked question 2 it would be a violation of GARP for James to now choose B. If he did so it would be the case that B is strictly directly revealed preferred to A.  
         Let me finish by briefly commenting on why WARP, SARP and GARP matter. If GARP is satisfied then preferences are 'well behaved' and we can model choice using a utility function. Given that utility maximization drives most of economics this is clearly crucial! WARP and SARP are less relevant because of the indifference issue. For example, preferences could satisfy GARP and not WARP or SARP.
          That just leaves the question of whether preferences satisfy GARP? There is abundant evidence of violations of GARP. So, in a strict sense people's preferences don't satisfy GARP; something many behavioural economists emphasize. But, to say that preferences don't satisfy GARP is different to saying we cannot make meaningful predictions by assuming they do.