Student Blogger - Chicago’s Best Ideas: Todd Henderson on “The Nanny Corporation”

Update: Audio of this talk is now available, and video is embedded after the jump or available on our website.

Nannies care for children, so "nanny" is a convenient label for someone who treats people as if they are children. On May 5, Professor Todd Henderson spoke about these metaphorical nannies in his Chicago's Best Ideas talk, "The Nanny Corporation" (based on a forthcoming article in the University of Chicago Law Review; here is the SSRN version). Nannyism underlies such proposals as bans on trans fat and foie gras, smoking bans, and firing smokers.

Externalities form the primary justification for nannyism, and Henderson focused on externality-based nannyism. An externality occurs when an actor doing an activity does not bear all of the costs of that activity. Take smoking as an example. The smoker imposes some health harms directly on those around her through second-hand (or third-hand) smoke. The long-term health effects of smoking represent costs imposed on future selves, which the smoker may not take into account because of bounded rationality. If the smoker has health insurance from her job, then the other members of that common pool pay extra costs for her increased health-care costs. Solutions to externalities focus on somehow making the individual shoulder these costs.

Henderson stressed that nannyism is inevitable. For health care, consumers' risk aversion motivates the creation of common pools to spread that risk. As soon as someone is paying for someone else (that is, as soon as there is an externality), the payer has a desire to exercise control over the recipient. The UK has a single-payer health-care system, and a recent poll found that 75 percent of Britons favor controlling what others eat to reduce health-care expenditures.

The question is then who is the best nanny. Henderson compared corporations with the government, finding corporations to generally be the better nanny. Corporations can create narrow and deep nanny regulations because they experience more extensive feedback. Firms can apply rules in the form of carrots, like bonuses for a low BMI, or sticks, like firing a smoker; however, carrots are functionally identical to sticks because giving a $50 participation bonus is equivalent to setting wages $50 higher and levying a $50 fee for nonparticipation. When employees experience these costs, they can take a job with a different company if it is worth it. Even in the 1880s--the age of company towns like Pullman, Illinois--the ability of employees to exit disciplined firms; today, ability to exit is even greater. If the cost-savings exceed the lost employees' productivity, the firm will implement the nanny rule; if too many employees leave, the firm will know that it set the cost too high. Politicians are not subject to the same constraints; exit costs from leaving a jurisdiction are much higher than for leaving a job, and elections provide much noisier feedback to politicians than profits to CEOs. Government can potentially have an advantage in severe penalties and lower monitoring costs, but the cost is that government can slant the market in favor of itself because it sets the ground rules. Nanny rules create a whole slew of line-drawing problems, and Henderson stresses that we should let the market solve these problems rather than government.

After all, if a company prohibits you from eating deep-fried Twinkies, you can get a different job; if the government bans deep-fried Twinkies, you're just out of luck.

Comments

[Peter]

Doesn't this theory presuppose every corporation in a field isn't engaging in the same kind of nannyism? If corporations move in lockstep, either through actual agreement or collusion, or by the push of market forces, the "go find another job" solution is either unavailable or much less valuable.

[Todd Henderson]

Peter -- to be sure, if firms are monopsonists, either individually or through (implicit or explicit) cartelization, then the discipline of the market is reduced. The same, of course, is true of governments. If every city bans smoking . . .

Moreover, if every firm bans smoking, then this is probably telling us something about the social value of smoking. If smokers are not net costs on firms/society, then we should see, in a well-functioning market, firms attracting them through their work rules. If they aren't, then why should we care? And, if there are good reasons to care, then government can always legislate to prevent dead weight losses from privately beneficial but socially destructive behavior.

A final point is that we just don't see firms copying in this way. There is huge heterogeneity in the labor market on numerous dimensions, and I think it is unrealistic to hypothesize the world you imagine. If it does come, however, the outcome is either the socially efficient one or can be changed by legislation.

[Drew Navikas]

Mightn't it be the case that heterogeneity in corporate approaches to nannyism reflects something other than a diversity of intentions?

For example, uncertainty about the relevant employment discrimination legal regime could lead firms to nanny differently based on different risk profiles.

Or, alternatively, firms could rely on multiple levers to achieve identical outcomes. For example, three firms could have three approaches to smoking: (1) Never. (2) Not at work. (3) Everywhere. And, three correlated compensation schemes: (1) Cheap healthcare for all. (2) Increased premiums for smokers. (3) Extra-increased premiums for smokers. Looking at only one variable, we wouldn't realize that the firms were compensating along other vectors. Thus, a worker hell-bent on suicide (smoking) could exit toward a firm with a more liberal smoking policy, but run up against a reduction in compensation that neutralized any welfare gain.

States could still regulate even this kind of "sophisticated" corporate behavior. After all, the SEC regulates the stock market. And, in fact, we do see states regulating the ability of firms to control their costs by controlling the behavior of their employees: http://www.ncsl.org/programs/employ/Off-DutyConduct.htm. Some of those states have exceptions for increased insurance premiums, and others don't. Where states cannot adjust insurance premiums, is there any other way for them to return to the free contract equilibrium? Discrimination in hiring or promotion (which entail separate legal concerns)? Carrots for good behavior? Or, proxies for either good or bad behavior, e.g. lung capacity?

If its true that there's more than one way to skin a cat, then these kind of regulations are likely to be inefficient, at least at the margins. But, I suppose that observation is not really a novel contribution.

Reading between the lines, I think the real answer is not that politics can police the market, but rather that the market will police itself. And, if the electorate thinks that there is reason to protect the right to be obese--in effect to offer social insurance for obesity--then the law can make its best effort to raise the costs of corporate discrimination against obese employees. The assumption being that, on net, the losses from imperfect legislation to this effect will be less than the losses of more sweeping impositions on the freedom of contract.

What I find to be problematic is blanket legislation that protects many liberties related to "lawful products" or "lawful activities" at once. This makes me worry not about the collusion of firms, but about the dynamics of interest group politics. If the right to smoke, ride your motorcycle without a helmet, and to be obese are all lumped together, then it is harder as a voter to express a belief that one or the other is an improper grounds for employment discrimination. When a broad law is combined with no exception for variations in insurance premium, then we have acknowledge that the liberty interest being sacrificed is that of only having to pay for your own healthcare--like Ronald Coase said, sort of: everything goes both ways.