Carl Johnston's Economic System Design Page

Last updated 03-29-2013. Comments welcome at cjohnst1@gmu.edu

I am Affiliated Faculty at the Interdisciplinary Center for Economic Science at George Mason University, in Arlington, Va.
My mailing addresses, phone numbers, and other contact info are here. (Here is my CV. Here is my one paragraph biography.)
My research is in experimental economics, computer simulation and economic system design. Finance of health care and other public goods are of particular interest.

Latest News
Response To ‘An Empirical Analysis Of Aftermarket Transaction By Hospitals’, Journal of Contemporary Health Law & Policy, Vol 29(3) with Curtis Rooney

Carl Johnston, "Small Business in an Experimental Health Insurance Market with Employer Mandates," Economic Inquiry (in revision) with Stephen Rassenti
Resource Adequacy: Should Regulators Worry?: ” Review of Network Economics, 11(4) Article 3, 2012. with Stephen J. Rassenti, Lance Clifner, Hernan Bejarano,

A critique of Medicare Part D and its novel use of inflation adjustments (which are about to become part of the national health reform package), "The Shrinking Part D Benefit," Journal of Econonomic Perspectives, Fall 2009, 23(4), pp239-40.

Research Interests

Economic System Design (ESD) is the study of institutions in the economy, in particular those institutions that sit at the nexus of government policy and the economy.  When the government enacts a program, it often also creates an institution to execute the program. The new organization has the character of an economic institution because it influences commerce, redistributes income, and/or affects the incentives of the people and organizations that interact with it. Yet the government seldom—if ever—scrutinizes the efficiency of these new institutions beyond a narrow accounting of costs. ESD can provide tools for policy-makers for testing, comparing, and redesigning new economic systems. We do this by creating a scaled down experimental market that can operate in a controlled laboratory setting similar to the way it functions in real life. This provides a platform for "Wind Tunnel Testing" of the system to see if the design is feasible, i.e. will it get off the ground? Once scaled down experimental markets are created, they can be assigned different rules, and we can compare the performance of the different rules using any desireable criterion. After testing and comparing systems we can suggest improvements for redesign of the system and then test the new system anew.

"Wind-Tunnel Testing" Economic Systems

I use laboratory experiments and agent-based computer simulation to “test-bed” new economic systems to study industrial organizations, strategic management, government policy, and innovation. My work frequently overlaps with Public Economics, IO, and Micro sub-fields. The investigation methodology is novel. I have pioneered the use of autonomous software agents reacting with humans to test the efficiency of tightly controlled exchanges in a laboratory. These exchanges range from single unit auctions to miniaturized “economies.” Applications include health insurance, restructured wholesale electricity markets, and pharmaceutical drug approval under different incentive schemes.
The research described above came out of the methodology used in my dissertation, “Medicare Part D: an Institutional Analysis” (only excerpts currently available) that examined the federal prescription benefit for seniors. In the study, I used three modes of analysis, (1) study of the institution rules using standard economic assumptions embodied in equations; (2) laboratory experiments using human subjects, and (3) testing of regulatory standards by agent-based computational techniques. I found the cost of the program depended on how HHS implemented inflation adjustments using co-pays, the so-called “doughnut-hole”, and other subtle factors. This finding was published in the Fall 2009 Journal of Economic Perspectives. The most transparent method for keeping the value of the benefit intact would be to pay a fixed dollar amount that could be adjusted to reflect inflation or political concerns while making parsimonious inflation adjustments. (I submitted this solution for the Hamilton Prize in 2007.)

Ongoing Research

My ongoing research falls into two main categories, electricity markets and health care reform. My article “Resource Adequacy: Should Regulators Worry?” for the Review of Network Economics (2012) examines whether or not markets will provide adequate generating capacity to a deregulated market with or without government incentives. The experiments use a methodology I pioneered. It blends human economic laboratory experiments to uncover empirical regularities not predicted by theory with agent-based simulation to create a larger scale of experiment that is adequate to wind tunnel test alternative regulatory institutions. The combination of mechanism design and wind tunnel testing provide a way to examine new regulatory designs in the laboratory before enacting a new regulation, or conducting an expensive field experiment. The study is attached.  I found that allowing participants to trade bulk electricity on a forward basis achieves the same effect as incentives by giving Gencos and banks an independent estimate of future capacity needs and, therefore, a basis for financing. The study may help utilities to make plant expansion decisions in the face of changing technology alternatives.
The electricity work builds on previous studies in health care insurance reform. The National Federation of Independent Business Research Foundation (NFIBFR), in 2007, commissioned me to do research on how health care reform would affect small businesses. At the time, there was no reform plan.

PPACA 2010

So, I identified a cafeteria of choices likely to comprise what became the “Patient Protection and Affordable Care Act of 2010” (PPACA). By 2009 I set up a human/agent environment and found, in part that combined employee- and employer-mandates that compel both businesses and workers to buy insurance—the ultimate design of PPACA—was the least harmful of the “cafeteria” options available. I also found that any system that used employee mandates requiring workers to buy their own insurance would place the bulk of the burden on employees. Finally, my research showed that small firms would find their most productive workers moving to large firms with better benefits.
The findings of this paper were presented at the White House health care summit in Spring 2009 and published by NFIBRF. I intend to further elaborate of this study in an article (in revisions) for Economic Inquiry. This effort looks at the broader question of whether employer/employee mandates are more efficient than single-payer systems to establish new social programs, especially in health care.
Another project involves building and testing an incentive-correct environment for approving novel pharmaceuticals with funding from the National Pharmaceutical Council, National Institutes for Mental Health and/or a private contributor.
I have been asked to create a mechanism for reducing bureaucratic ‘bloat’ in the federal government (although my intention is to render something that would be of use for all long-lived institutions). The envisioned mechanism would measure how bureaucratic interventions change rules of trade for everyone and then to devise an order of negotiation that stakeholders can use to minimize bloat.
Depending on a wide range of variables, I would like to create an immersive model of electricity markets in which human subjects and artificial software agents simulate and study the major causes of electricity grid failure, including reverse flows, mass equipment failure due to natural events or terrorism, and grid congestion with and without congestion fees. In each case, experiments would focus on market-based counter-measures aimed at limiting failures. Such a project would require major funding. White paper on this subject available on request.

Past Research

As a Post-Doctoral Research Fellow at ICES, I was co-creator and author of “Healthcare Reform in an Experimental Market,” research using advanced economic laboratory techniques coupled with agent-based modeling to test various legislative proposals and measure how these approaches would affect small businesses, large businesses, and their employees. This was presented at the White House Health Care Summit in March 2009 and published by the Federation of Independent Business Research Foundation.
Also as a Post-Doctoral Research Fellow at ICES, I authored and published “The Shrinking Medicare Part D Benefit” in the top-ranked Journal of Economic Perspectives in the Fall 2009 issue and have presented at several international conferences, including the Institute of Electrical and Electronics Engineers (IEEE) Conference on Social Computing Applications in 2009.
Recent publication for the Journal of Network Economics examines comparative systemic risks and advantages of de-novo regulatory environments in ‘restructured’ wholesale electricity markets.  I have been a referee for the Journal of Energy Policy since 2008
Among my most recent publications is a study of hospital purchasing systems that links human relationships, economic incentives and government regulation/anti-trust to the decisions that guide most hospital product and equipment acquisitions. Uncovering and explicating implementation costs, however, is hard work -- which partly explains why they so often get short shrift.

Speaking and Education Materials

I have presented to the American Legislative Exchange Council, an important forum for state legislators, on electricity market restructuring. As a graduate student, I was recipient of the James Buchanan Fellowship for students with a strong interest in policy research. I am a senior fellow at the National Center for Policy Analysis based in Dallas.
Before entering graduate school, I was a Research Associate at HBS, I wrote case studies and other educational materials in the Competition and Strategy Department for their required Strategy course based on analytical techniques developed by Michael Porter.

EDUCATION
2007                         Ph.D., Economics, George Mason University
1982                         B.A., English, Stanford University
ACADEMIC APPOINTMENTS
2007-Present             George Mason University, Post-Doctoral Research Fellow at Interdisciplinary Center for Economic Studies (ICES)
2008-Present            National Center for Policy Analysis, Senior Fellow
2011-2012                Chapman University, Research Associate Professor
2002                          Department of Health and Human Services, Office of National Coordinator on Health Information Technology, Graduate Researcher.
1999-2000                Harvard Business School, Department of Competition and Strategy, Research Associate
PUBLICATIONS
In Revision               Stephen J. Rassenti, “Small Business in an Experimental Health Insurance Market with Employer Mandates vs Single Payer,” Economic Inquiry
2013                         Curtis Rooney, “Response-‘An Empirical Analysis of Aftermarket Transaction by Hospitals”, Journal of Contemporary Health Law & Policy, Vol. 24(1) pps 72-88.
2012                         Stephen J. Rassenti, Lance Clifner, Hernan Bejarano, Vernon Smith, “Resource Adequacy: Should Regulators Worry?” Review of Network Economics,Volume 11, Issue 4.
2011                         Lynne Kiesling, “Turning on the Lights 2011: The Next Phase of U.S. Electricity Market Restructuring,” National Center for Policy Analysis.
2009                         “The Shrinking Medicare Part D Benefit,” Journal of Economic Perspectives, Vol. 23, No. 4, pp. 239-40.
2009                         Stephen Rassenti, “Healthcare Reform in an Experimental Market.” Presented at White House Health Care Summit and published by the National Federation of Independent Business Research Foundation.
2009                         “An Experimental Market in Health Care,” Proceedings of the IEEE Conference on Social Computing, Vancouver, BC, Canada.
2005                         “Experimental Investigation in Medical Markets and Institutional Sources of Price Inflation,” Proceedings of Conference on Generative Social Processes, Models, and Mechanisms, Argonne National Laboratory and University of Chicago
Ongoing Research Expected TO Result in Publication
2011                         “Behaviorism on the Road-Serfdom: Misuse of Science in Bad Regulation” Annual Meeting of the Association for Private Enterprise Education, Nassau, Bahamas, April 2011.
2009                         Stephen J. Rassenti, Lance Clifner, Hernan Bejarano, Robert Borluk, Vernon Smith, “An Experimental Investigation of Alternate Wholesale Market Structures,” a Midwest Independent System Operator Research Report, July 2009.
2008                         Stephen J. Rassenti, David Porter, Lance Clifner, “Manning-the Edge: Meeting the Navy’s Manpower Needs in the 21st Century,” Navy Personnel Research, Studies, and Technology (NPRST) Report, November 2008. Contract # N0018907PN653 & N0018907PPV02. 
Research Papers
“Simulation of a Financial Derivatives Clearing System Using Stochastic Methods”
“On Complexity and Efficiency of Health Insurance Markets,” with Maciej Latek

“An Integrated Human-Subject and Computational-Agent Test Bed for Electricity Market Research Targetting Lake Erie Loop Flow Anomaly”

 “An Experimental Health Insurance Market with Regulatory Minimums”
“Examining Mossin's Theory of Optimal Insurance” (2004)

INVITED PRESENTATIONS
2012                         Commenter, “Virginia Attorney General’s Questionnaire Concerning Adder-Fees-Finance New Electricity Generation Capacity in a Regulated Market Including Recommendations for Restructuring Electricity Market,” Richmond, VA
2011                          “Behaviorism on the Road-Serfdom: Misuse of Science in Bad Regulation,” Annual Meeting of the Association for Private Enterprise Education, Nassau, Bahamas.
2011                         Presenter, “Electricity Restructuring in the U.S.,” American Legislative Exchange Council Annual Meeting, Cincinnati, OH
2010                         “Manning to the Edge: Behavioral Issues in Decision Making & Resource Allocation Mechanisms,” Military Operations Research Symposium.
PRESENTATIONS
2013                         Presenter, Western Economics Association International Annual Conference. Panel on Agent-Based Computing. Modeling Risk in a Financial Derivatives Clearing System
2009                         Referee, Institute of Electrical and Electronics Engineers (IEEE) Conference on Social Computing Applications
2009                         Presenter, “Complexity and Efficiency of Health Insurance Markets,” Eastern Economics Association, New York City
2007                         Presenter, “A Computational Approach-Medicare Part D,” International Conference on Economic Science with Heterogeneous Interacting Agents (formerly the Workshop on Economies of Heterogeneous Interacting Agents) (ESHIA/WEHIA), Center for Social Complexity, George Mason University
2006                         Presenter, “Computational Agents as Health Insurers, Consumers, and Doctors,” 12th International Conference on Computing in Economics and Finance, Limassol, Cyprus (Paper available at: http://economicsystemdesign.com/Agent.doc)
2005                         Presenter, “Institutional Sources of Price Inflation: An Agent-based Simulation,” Agent 2005 Conference on Generative Social Processes, Models, and Mechanisms, Argonne National Labs, Chicago, IL.
2005                         Presenter, “Using Repast Simulation Language-Investigate Price Development in Medical Markets,” Third Annual International Conference for Social Science Research, Orlando, FL
Educational Materials (available at hbsp.edu)
2002                         Clayton M. Christensen,“Ethicon Endo-Surgery,Incorporated.” Harvard Business School Case 602-058.
2002                         Peter J. Coughlan, Michael G. Rukstad,“DaimlerChrysler Knowledge Management Strategy,” Harvard Business School Case 702-412.
2002                         Michael G. Rukstad, Tyrell Levine, “Breakup of AT&T: Project Grand Slam,” Harvard Business School Case 702-127.
2001                         Peter J. Coughlan, Michael G. Rukstad,“WebMD(A),” Harvard Business School Case 701-007.
2000                         Michael G. Rukstad, David B. Yoffie, “Microsoft in 2000,” Harvard Business School Case 700-071.
2000                         Michael G. Rukstad “Taiwan Semiconductor Manufacturing Company,” Harvard Business School Case 700-090.
GRANTS AND FELLOWSHIPS
2008-Present            National Center for Policy Analysis, Senior Fellow
2007-2012                George Mason University, Post-Doctoral Research Fellow at Interdisciplinary Center for Economic Studies (ICES)
2004-2006                James Buchanan Center Fellowship, Mercatus Center
2002-2003                GMU College of Arts and Sciences Scholarship
REFEREE FOR PROFESSIONAL JOURNAL
2008-Present            Journal of Energy Policy
PROFESSIONAL APPOINTMENTS/RECOGNITION
2000-2002                Innosight Inc., founded by Harvard Business School Prof. Clayton M. Christensen, Analyst
1995-1999                Dow Jones Newswires, Deputy Washington Bureau Chief
1996                          Dow Jones Nomination for Gerald Loeb Award in Business Reporting
1989-1995                Dow Jones Newswires, White House Reporter
1984-1989                Dow Jones Newswires, Foreign Correspondent, Frankfurt, Germany

Languages
Foreign: German
Programming: PHP/Apache/MySql, JAVA, Eclipse and Dreamweaver Development Platforms, Adobe Creative Suite C6, Mason RePast and RePast Simphony Simulation Toolboxes, STATA, Mathematica, Scientific Workplace, Lindo and Lingo Operations Research software. I am currently learning Prolog artificial intelligence language and GIS/JAVA applications.

 

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