Thursday, July 16, 2015

Beware experts peddling tweaks : the serious economics of tweaking.

Planet Money this week talks to a few social scientists about small tweaks to the economy that would make it better. Here is my letter in response:

(As an aside, you neglected to mention that Kate Baicker also worked at the White House, at the CEA just like Goolsbee. I know because I worked with her there.)

I know this episode was meant to be light, but the topic of tweaks actually touches on a serious economic literature, typically referred to as Path Dependence. It is an important question because the basic theorems of Econ 101 say markets should produce optimal outcomes. For example, if we see inefficiencies that need to be tweaked, like inefficient supermarket queues or signature placement on contracts, a competitive market should create an entrant that has better lines (like Whole Foods actually) or better contracts, and drive the inefficient practices out of business. If this doesn't happen, we typically attribute the inefficiency to market frictions (or as you called it inertia), and use this inertia to justify government action to fix things. The canonical example of this inertia is (like your keypad example) is the QWERTY keyboard.

Two economists however pointed out that we should beware of experts peddling fixes. The standard story is that QWERTY is inefficient, but we are locked in due to inertia, and the world would be better off using a DVORAK keyboard. Liebowitz and Margolis (1990) look at the historical evidence and find that almost all of the studies that say DVORAK keyboards are better were written by Mr Dvorak himself. In fact, for expert typists, QWERTY may be better, because its placements allow better flow. Liebowitz and Margolis then point out that this shouldn't be surprising. QWERTY did not arise out of a vacuum. Instead, it was one of many keyboard layouts in the market, and grew to popularity in part because back then in the competitive typing circuit, the winner, (the Kobayashi of his day) used a QWERTY typewriter.

The lesson being that we should beware of experts (like myself or Dvorak) claiming easy tweaks that government should force us to adopt. Especially in light of growing reserach (by Uri Simonsohn and John Ioannidis and others) that argue that most academic papers are probably wrong. Maybe sometimes we should try to let competition and the market decide.

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