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On The Alignment Of Incentives In Healthcare, In Cartoon Form…

August 1st, 2009 · 7 Comments
Incentives · Just For Fun · Policy

People really like to make fun of editorial cartoons, especially the ones from The New Yorker. The general issue is that they are very highbrow and sometimes incomprehensible. Shows like Seinfeld and The Simpsons have exploited this fact for laughs, as is shown in the following Seinfeld dialogue:

Elaine: Look at this cartoon in the New Yorker, I don’t get this.
Jerry: I don’t either.
Elaine: And you’re on the fringe of the humor business.
(George comes in)
George: Hey!
Elaine: Hey! George look at this.
George: That’s cute.
Elaine: You got it?
George: No , never mind.
Elaine: Come on , We’re two intelligent people here. We can figure this out. Now we got a dog and a cat in an office.
Jerry: It looks like my accountant’s office but there’s no pets working there.
Elaine: The cat is saying ” I’ve enjoyed reading your E-mail”.
George: Maybe it’s got something to do with that 42 in the corner.
Elaine: It’s a page number.
George: Well, I can’t crack this one.
Elaine: Aahh! this has got to be a mistake.
George: Try shaking it…

As such, I feel that it is my duty to provide some insight into this type of cartoon, or at least into the economically relevant ones. Consider the following from

Hehe. This cartoonist clearly understands the importance of proper incentives. Once purpose of incentives is to mitigate the principal-agent problem. To understand the principal-agent problem, let’s think about the case of an employee and his manager. Let’s even assume that the manager is the owner of this (clearly very small) firm. The manager would like the employee to be looking out for the best interests of the firm (i.e. of the manager himself as the owner of the firm). The employee, however, is generally looking out for his own interests- who wouldn’t be? This divergence is the crux of the principal-agent problem. Therefore, the manager needs to set up a system to more closely align the interests of the employee with those of the firm.

In this example, the manager is the principal and the employee is the agent. Typical examples of the principal-agent scenario are employee/manager, board of directors/CEO, etc. (In the board of directors/CEO case, the board of directors is the principal and the CEO is the agent. The board of directors wants to design CEO incentives such that the CEO wants to act in the best interests of the board of directors, and, by proxy, the shareholders. The board of directors is elected by shareholders as their agent to look out for shareholder interests. In this way, the board of directors should also be given incentives to align its interests with that of shareholders.)

One way to align incentives is to watch the employee and threaten to fire him if he doesn’t behave properly. This would probably work, but it is costly- who wants to sit there and babysit an employee? At that point you might as well do the work yourself. On the other hand, if the manager doesn’t sit and watch the employee, the employee has an incentive to shirk (i.e. be lazy, check Facebook, watch porn at work, whatever) rather than work hard. If there isn’t a definite link between effort and output, the employee can just argue that he worked hard and the low output is just bad luck. Therefore, a more useful way to align incentives is to tie the employee’s compensation to his output. This isn’t a perfect solution, as you have likely noticed if you’ve been reading this blog, but it is often times better than nothing.

Now, back to the cartoon. In the case of government, it makes sense to think of the American public as the principal and the U.S. government as the agent. If the citizens want lawmakers to be looking out for their best interests, it makes sense to put forth incentives to align the interests of lawmakers with those of the citizens. This is exactly what the cartoon suggests. What the cartoon overlooks, however, is that a good healthcare system isn’t free, and a public healthcase system would be funded by taxpayer money. Since members of Congress are in fact taxpayers, there is some alignment of incentives on that front. That said, members of Congress are hardly representative of the typical American citizen, so that alignment enough?

Tags: Incentives · Just For Fun · Policy

7 responses so far ↓

  • 1 Jason // Aug 3, 2009 at 3:30 pm,0,

    Doesnt involve incentives, but does tie in through healthcare

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