Tuesday, December 15, 2009

Incentives to work and save

I always wonder how much of an effect incentives have on these models in the real world. I recognize the theory is legit - if my marginal income tax rate is at 90%, I am not going to do a lot to attract more business. But how much elasticity is there throughout the range? If my income tax rate goes from 20% to 30%, is it going to affect me at all? Especially since withholding is such an amorphous process. I am not sure most people really know what their marginal rate is at the point when they are making work v play decisions.

The incentive to save effect (paradox of thrift) idea I think is more about salience. Right now, everyone is in panic mode. But give us some time to chill out, and I bet most people go right back to overconsumption and running up the Visa bill. I just don't see our culture learning its lesson. Our nucleus accumbans always seems to win out. The chocolate cookies just smell too good to pass up.
Some great examples here of decision making biases in choosing health care options. It happens to the patients, doctors, health care providers, and more. Setting up the right incentives could solve a lot of our cost containment problems (a la Nudge or Freakonomics). But this also suggests that education will not solve the problem.

It is possible that health care panels could evaluate the empirical data and choose the coverage that makes the most sense for the most people, but this would require two tough calls:

1. How to keep politics out. This means no Congressional wrangling to compel choices for their special interests (i.e. Big Pharma), moral preferences (i.e. abortion), or constituents (i.e. skin cancer in Miami). But it also means no junk science either, which is hard because we are always working within confidence intervals.

2. To allow people to pay for uncovered procedures as much or as little as they want without making it an administrative nightmare. You can't do what has been proposed in the abortion debate (insurance riders) because until you know you need the procedure, no one would pay extra for such specific coverage. And then, it's too late. I kind of like the tiered solution that is being used now for a lot of prescription drug coverage. $10 copay for generics, $20 copay for branded drugs where there is no generic option, full price for branded drugs when there is a generic option. Or something to that effect.