Academic

Student Blogger - Chicago?s Best Ideas: Todd Henderson on ?The Nanny Corporation?

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.

Full post as published by The University of Chicago Law School Faculty Blog on May 06, 2009 (boomark / email).