Saturday, December 31, 2011

Ultimate Cakeoff, Econometrics, and Causality Questions

For reality television and competitive cooking enthusiasts the show Ultimate Cakeoff, produced by TLC, is a real tour de force. The premise: top cake artists and decorators are brought together to compete in creating a cake for some high-profile event. The judges evaluate their efforts based on technical difficulty, adherence to the theme, and aesthetic value, then choose a winning team to receive the $10,000 prize.

Each team has nine hours to produce their ultimate cake. In order to keep the competition interesting and generate some much-needed drama, each episode is broken up by one or two smaller challenges designed to test the team leader's technical skill and speed at a particular cake-related task (such as piping, decorating, carving, etc.) The winner of each mini-challenge can choose one of the other two teams to sit out for thirty minutes.

Nine hours is already a short timeframe to create an award-winning cake - many wedding cakes can take up to a week to construct - so it would seem like losing 30 minutes to an hour would be a serious disadvantage. But, after watching two seasons of Ultimate Cakeoff (a dirty job, but someone had to do it) I noticed something strange: teams forced to sit out didn't seem to lose with any greater frequency. In fact, they often went on to win the competition!

This counter-intuitive trend sparked my curiosity, so I decided to put the question to a statistics program. After collecting data on every episode to find the characteristics of each team, who was forced to sit out, and who won each competition, I was able to find some results. The first regression found that being forced to sit out due to a challenge would increase the chance of winning by about 24%, a statistically significant result. After controlling for the individual attributes of of each participant the statistical significance vanished, and being forced to sit out had no measurable impact on the chance of winning at all (Click here to view the regressions performed, in STATA output format).

What might explain these findings? It would seem that less working time would result in a lower-quality cake, that was less likely to take the prize. Discovering the opposite result is somewhat surprising.

Of course, cake artists forced to sit out were not chosen randomly. The most common reason when choosing who to give a penalty was some variation of "(s)he looks way ahead! Take a break and slow down!" Apparently, cake artists are pretty good at judging each others' progress, and the team that is ahead partway through the competition is often the most talented. Trying to stall them with a penalty may even the field slightly, but not enough to overcome superior cake skills and design.

Admittedly, this is a pretty trivial application for a powerful statistics program. But, there may be some broader lessons for social scientists generally. When human choice is involved few events are truly random, which would be the ideal in an experimental setting. Economists can find some clever ways to mimic a true experiment, but perfect success in that regard still remains elusive. Examining how the data are collected and what selection effects are present is crucial to interpreting statistical results... Otherwise one might be inclined to believe that a shorter work-time makes a better wedding cake!

Saturday, December 24, 2011

Fuzzy Economics and Legal Fees

The New York Times has published several articles in the last two months targeting the American Bar Association. In October, Clifford Winston questioned the need for bar exams and professional licensing. Last week, David Segal wrote "For Law Schools, a Price to Play the A.B.A.’s Way" which blames the ABA's control over law school accreditation for overly high legal fees.In that article, he writes
...The lack of affordable law school options, scholars say, helps explain why so many Americans don’t hire lawyers.

“People like to say there are too many lawyers,” says Prof. Andrew Morriss of the University of Alabama School of Law. “There are too many lawyers who charge $300 an hour. There aren’t too many lawyers who will handle a divorce at a reasonable rate, or handle a bankruptcy at a reasonable rate. But there is no way to be that lawyer and service $150,000 worth of debt.”

This helps explain a paradox: the United States churns out roughly 45,000 lawyers a year, but survey after survey finds enormous unmet need for legal services, particularly in low- and middle-income communities...
This reasoning doesn't make sense to me. It may be true that lawyers are driven to make more money in order to pay off student loans. But, high fees are not the only way to make lots of cash; there is also the low-cost, high-volume strategy (think Walmart). If so much unmet demand for legal services exists, it could be more profitable to charge a lower hourly rate and just work faster or put a little less effort into each case. This wouldn't be practical if the supply of lawyers is artificially restricted, but given the 45,000 new lawyers every year as well as reportedly high numbers of unemployed or idle lawyers, a shortage seems to be unlikely.

Even if the ABA does drive up the cost of law school tuition, that alone can't explain why legal fees are so high. I'd hypothesize that clients pay lawyers a premium wage in order to ensure a high level of effort. As it is hard to monitor an attorney's effort directly, better wages are used as an incentive to keep on the job instead of slacking. In the economics literature, this is referred to as an efficiency wage; the concept has been used to explain why wages remain rigid during periods of high unemployment. That seems to apply quite easily to the legal industry.

I'm sympathetic to the argument for lowering entry barriers to practicing law, but there are other factors at work too which cause lawyer wages to be high. Otherwise, competition in the legal industry would have already driven down prices and serviced the unmet needs in low- and middle-income communities.