Drone Insurance

DIJ is the current market leader in drone aircraft. This morning my lovely wife pointed out that they are offering drone insurance. This made me curious, as it may create moral hazard for the insurance carrier.

The reason is simple. If you know your drone can be easily and quickly replaced at minimal cost, you will probably take more chances when flying the thing. Here’s a recent example from a soccer match in Argentina:

ABC Breaking News | Latest News Videos

Moral hazard can create adverse selection. In this case, the adverse selection might be only high-risk drone owners buying the insurance. That would drive up costs and could create economic losses for DIJ. To make a guess about whether this is the case, we need to look at the details of the actual policy.

Mavic Pro

(click for larger image)

For this example, I’ll use the DIJ Mavic Pro. Here’s a pdf of the entire FAQ section. The good stuff is after the photos where the terms of service are defined.

DJI Care Refresh


Mitigating Moral Hazard

Economists have spent a lot of time over the past few decades trying to invent contracts that at least reduce the expected cost of adverse selection. We have identified two general contract structures that seem to work. (These definitions are from Jeffrey M. Perloff, Microeconomics 8e 2018 pages 661-663).

State-Contingent Contracts: In a state-contingent contract, one party’s payoff is contingent on only the state of nature.

Profit-Sharing Contracts Even if the principal cannot observe the state of nature or the agent’s actions, the principal may be able to design a contingent contract that reduces the moral hazard problem by making payments contingent on an outcome, such as profit or output. One common contingent contract is a profit-sharing contract, in which the payoff to each party is a fraction of the observable total profit.

DIJ uses both methods to mitigate moral hazard. The state-contingent parts limit coverage in the event that any one of several actions are taken. For example, if you modify your drone with parts not approved by DIJ, your warranty is void. Also you are limited to two replacements in a year. And coverage lasts one year, after which it can’t be renewed. Unless, of course, you replace your drone twice. In that case the policy is terminated after the second replacement.

The profit-sharing part (or, more appropriately for this case, cost-sharing) is the fees the owner must pay for various events. For example (still using the Mavic Pro in the U.S.) the up-front price of the policy is $99. The replacement price is $79 for the first and $129 for the second. And, of course, there is no third replacement. Nevertheless, the retail price of this baby is $999. The most you’ll pay out-of-pocket is $307. To figure out whether this warranty creates moral hazard we need to delve into the details of the state-contingencies.

Does the Insurance Create Moral Hazard?

The excerpts below are from the Terms of Service (see the pdf file above for the complete source).

First, limit the parts that are covered:

4、Which parts can be replaced under DJI Care Refresh?

Mavic Pro, Mavic Pro Platinum and Spark: aircraft, gimbal, camera, battery and propellers.

Second, limit the duration of coverage:

6、Can I renew my DJI Care Refresh when it expires? How many times can I purchase DJI Care Refresh for my aircraft?

No, you cannot. Currently, each product is eligible for only one DJI Care Refresh. The service plan cannot be renewed after it expires.

Third, DIJ keeps their options open. They may ship you a refurbished replacement drone (emphasis added).

7、How do I replace my aircraft under DJI Care Refresh?

DJI Care Refresh is bound to the product’s S/N. If you want to replace your product, contact DJI Support via phone, email, or live chat. Then send your product to a designated DJI repair center under the instruction of DJI Support staff. Our repair staff will conduct damage assessment and send you an invoice. After receiving the invoice, you can either choose to repair your product or replace the aircraft under DJI Care Refresh. You will receive a unit that is new or equivalent to new in performance and reliability after paying the service charge specified in your DJI Care Refresh Service Agreement. The replacement’s S/N will be automatically bound to your DJI Care Refresh plan.

Fourth, be sure not to cover intentional abuse or other malfeasance

II. Exclusions

DJI Care Refresh does not cover the following:

  1. Lost or partially lost aircraft, gimbal or accessories.

  2. Stolen, forgotten, or abandoned product.

  3. Damage caused by flight under unsuitable conditions.

  4. Remote controller, battery of Inspire 2, Phantom 4 Pro and Phantom 4 Advanced, and modification accessories.

  5. Deliberate losses.

  6. Abrasions and shell damage that do not affect the performance of the product.

  7. Direct or indirect losses caused by force majeure.

  8. Replacement requests for damage incurred outside the period of validity.

  9. Extra fees resulting from technical enhancements or performance improvements.

  10. Damage resulting from modifications that are not in accordance with manual recommendations, or the use of incompatible batteries and charger.

  11. Damage resulting from the use of third party accessories, batteries or software.

Fifth, repeat the mantra that there are only two replacements.

Ⅲ.Replacement Service

DJI Care Refresh includes two replacements. If you claim for replacement of your product twice, DJI shall be considered to have fully executed the DJI Care Refresh service. The DJI Care Refresh service will then be terminated.

After replacement, the original product becomes DJI’s property and the replacement product is your property, with coverage effective for the remaining period of the Plan.

Finally, be specific about pricing. The second replacement costs more than the first. And those prices depend on the exact model as well as where you live. The complete list is near the end of the Terms of Service. I’ll include a few examples here.

Ⅶ.Replacement Fee

There are no hidden charges for the replacement service. After you choose DJI Care Refresh, you will receive prioritized service. The cost of two way postage for customers within DJI Care Refresh service areas will be covered by DJI. In other areas, these costs and any associated customer’s duties are at the customer’s expense. In all areas the custom fees are at the customer’s expense. Each time the replacement service is requested, subject to your purchase region.

In NA region (US & Canada):

For DJI Care Refresh (Spark), the first time replacement fee is $49, the second time replacement fee is $69.

For DJI Care Refresh (Mavic Pro), the first time replacement fee is $79, the second time replacement fee is $129.

In the EU region (27 countries):
For DJI Care Refresh (Spark), the first time replacement fee is €49, the second time replacement fee is €69.
For DJI Care Refresh (Mavic Pro), the first time replacement fee is €99, the second time replacement fee is €139.

You get the idea.


DIJ has done a pretty good job of limiting moral hazard. Read II. Exclusions carefully. There’s quite a bit of wiggle room in there. As is so often the case, you’re depending on the reputation of DIJ.

One last note: DIJ has been in business quite a few years. The market outcome is that they are still offering this insurance. That implies they have mitigated moral hazard.

Consumer Reports Fail

Worst appeal to authority in history.  Big-time Consumer Reports fail.  I’ve highlighted the troublesome text.

Consumer Reports Fail

Richard Rubin meets a sacred cow featured

Sacred Cows of the US Tax Code

Over on the Wall Street Journal website Richard Rubin and Heather Seidel have put together a video explaining some sacred cows of the US tax code.  They use actual cows and milk bottles of varying sizes.  If yolu’re having trouble sorting out tax rates, the tax base, and the relationship between the two, this will probably work for you.  Warning: it may be behind a paywall. It’s worth the effort just to see Mr. Rubin wear a cowboy hat.

Richard Rubin meets a sacred cow

Richard Rubin meets a sacred cow (click for largere image)

Ronco Is Going Public. Stay Away From This One.

We intend to use the net proceeds for the following purposes in the following order: (a) first towards credit card fees of up to approximately $600,000 (2% of the gross proceeds from the Offering);

Ronco is going public.  Before I get into the details, I have to issue this warning: this article is for entertainment purposes only. After scanning the prospectus, I honestly cannot recommend this stock. Most of the proceeds will go to paying off debt. One interesting item in the “Use of Proceeds” (p. 29 of the Preliminary Offering Circular) is this →

If you insist on looking further, visit the INVEST page on the company’s website. Download the Preliminary Offering Circular and spent a quality hour reading it in detail. Then do a search on “William M. Moore.” When you get to the multiple signature pages at the end, go back to the top. This time search for “Moore.” You’ll see an interesting difference in the search result on the (unnumbered) third page of the document.  For some reason the company doesn’t want to make it easy for you to find this information.

The Ronco IPO

Ronco is going public with an IPO of 5 million shares. Actually, this is a “Tier 2 Offering” under Regulation A+. The offering price is $6 per share with a minimum “investment” of 20 shares ($120 for the math challenged). This offering is aimed squarely at Ronco’s target demographic for retail sales. If you need another reason to avoid this offering, there’s the fact that the current CEO, William M. Moore, declared Chapter 7 bankruptcy. That bankruptcy was discharged in November, 2007. And, even if the IPO is 100 percent subscribed, Mr. Moore will still control 96.67 percent of the voting power.

Ronco Innovations Ronco Is Going Public. Stay Away From This One.

Ronco Innovations (click for larger image)

Ronco is, of course, the company famous for late-night TV commercials and off-the-wall products. Remember Ron Popeil at midnight on your TV? “But wait – there’s more!” Ronco also invented the infomercial. Anyone who was around in the 1960s and 70s must have encountered Mr. Popeil at least once.

But Wait – There’s More!

Consistent with Ronco’s long history, investors may receive additional gifts depending on how much they lay out. The table below shows the full list of prizes and how much you’ll have to pay for them. Personally, I recommend the $10,000 level which gets you a one-time 20 percent discount at Ronco.com, a free Ronco Rotisserie and a free Ronco Ready Grill with accessories. Oh, wait, I actually recommend an investment of $0.00. Never mind.

Ronco IPO gifts Ronco Is Going Public. Stay Away From This One.

Ronco IPO gifts (click for larger image)

Ron Popeil

Ron PopeilFrom the company’s website:

Ronco was founded by Ron Popeil in 1964, and commercials for the company’s products quickly made Ronco a household name. The names “Ronco” and “Popeil” and the suffix “-O-Matic” (used in many early product names) became icons of American pop culture and were often referred to by comedians introducing fictional gadgets. Popeil became known as the “father of the infomercial” and coined the phrase “Set it and forget it!”

Ron is a native of Chicago and has become a legend in the Windy City. Fifty years and 2 billion dollars later, Ron has walked down Chicago’s Maxwell Street reminiscing over where it all began. After a troubled youth, being shuffled from foster home to foster home, Ron remembers a turning point in his life. “Maxwell Street was a Chicago tourist attraction as well as a place to sell all sorts of goods. The first time I went there, the proverbial light bulb went on in my head. I saw all these people selling products, making sales, pocketing money, and my mind went racing. I can do what they’re doing, I thought, but I think I can do it better” said Popeil.

And “did it” he has. The self-made millionaire is the consummate American entrepreneurial success story. Ron “Ronco” Popeil is no doubt one of America’s most unique inventors. Over the past fifty years, his products have pulled in more than $2 billion in sales. Today Popeil is still going strong, even after selling Ronco in 2004. The iconic Ronco brand and its innovative products continue under the ownership of Austin-based Ronco Holdings, Inc. Ron resides in California where he continues to invent and enjoys spending time with his family!

Even Mr. Popeil is probably embarassed by what’s happened to his former company.  Oh, wait — he’s a billionaire.  Never mind.

Thanks Anyway, Petco, I’ll Pass On This Offer

My lovely wife was browsing the ads that arrived with our daily newspaper.  While studying an insert from Petco she found two offers for BLUE Wilderness dog and cat food. Here are the ads.  (Click for a larger image):

Cat Food Dog Food


In case you don’t see it, here are closeups. (Again, click for a larger image):

Cat Food Zoom Dog Food Zoom


As if our cat doesn’t scare us enough already.  Thanks anyway, Petco, I’ll pass on this offer

Oakland Public Library Fights Fake News by Giving Customers Access to Major Fake News Site

The Oakland Public Library announced today that they were taking a major step to fight the spread of fake news. They will give all their patrons free online access to the New York Times. To fight fake news they are giving their patrons access to a major source of fake news. Irony is now truly dead.

This from NBC News Bay Area:

With fake news grabbing international headlines, the librarians in Oakland, Calif. want to put a kabash [sic] on the lies.

So they recently negotiated a deal with the New York Times to offer library patrons at 18 of its libraries free, unlimited access to the paper of record, according to Main Library Supervisor Mana Tominaga. The program launched in late November, a couple weeks after Donald Trump was elected president and Buzzfeed, the New York Times, the Washington Post and others began reporting that fake news websites might have swayed voters.

Now, under this new scenario, patrons have full access to the Times, and can search to their hearts’ delight and read whatever they want for free. In addition the libraries have limited numbers of 72-hour passes that can be used outside of the library.

Oakland libraries negotiated a deal that will cost $5,000 a year out of an annual operating budget of $26 million – about $1.8 million of which is spent on books, videos and other materials, public records show.

And, with the competence we’ve come to expect of local public institutions, it turns out you don’t even have to own an Oakland Library card. Go to http://www.oaklandlibrary.org/ and search for “New York Times.” You’ll see this:Oakland Library Search Results

Click the link noted and, presto, you get the full New York Times. No need to log in or even have any city or county library card!

But you better be quick. I predict the Times will shut down access in a hurry once they read this.

Donald Trump and the Mexican Peso

One of the more entertaining aspects of this year’s presidential campaign has been the relationship between Donald Trump’s poll ratings and the exchange rate between the Mexican peso and the U.S. dollar. The model is straightforward. Mr. Trump doesn’t like Mexico or Mexicans. As his chances of being elected rise and fall, the Mexican peso depreciates and appreciates vis-à-vis the U.S. dollar. The null hypothesis is that there is no relationship between Mr. Trump’s polling statistics and the exchange rate. Until now, the evidence has been mostly anecdotal. This work is an effort to test this hypothesis as well as determining the overall impact (if any) of polling results on the exchange rate.  This is a brief study of Donald Trump and the Mexican peso.

The polling data was the daily Real Clear Politics (RCP) average of various presidential polls. (This data was extracted using the Real Clear Politics Data Extraction Tool from my firm, Tony Lima Associates.) The data begins on July 1, 2015 and runs through October 5, 2015. I was only able to use data through September 30 because that was the end point of the exchange rate data. I had 458 observations from RCP. I used the Federal Reserve Bank of St. Louis’s FRED data tool for Microsoft Excel™ to obtain data for the peso-dollar exchange rate. Said data is not available for U.S. holidays and weekends. Therefore I had 316 values for the exchange rate. (Despite the disclaimer in the footnote on the FRED plugin page, I have used the plugin with Excel for OS X for quite a few years.  It still works.)

As always, my data and methods are transparent.  Click here to download an Excel workbook with the data and model.  (I used SPSS to do the actual statistical work.  The SPSS files are available on request.

A simple Pearson correlation between the two variables yielded a value of 0.377 and was significant on the order of 10-12. This is important because it indicates an increase in Mr. Trump’s poll ratings is positively related to the peso-dollar exchange rate. (The exchange rate is measured as pesos per U.S. dollar. An increase in this exchange rate means it takes more pesos to buy one dollar. Therefore a higher exchange rate means the peso has depreciated vis-à-vis the dollar.)

correlations Politics and the Mexican Peso

(click for larger image)

A quick-and-dirty linear regression of the exchange rate on Mr. Trump’s poll ratings had a coefficient of 0.144. That means for every percentage point increase in Mr. Trump’s polling, the exchange rate depreciates by 0.144 pesos per dollar. The t-statistic of that coefficient was 7.207, well above the five percent significance threshold. Not surprisingly, the adjusted R-squared was 0.139, meaning there is quite a lot of variance in the exchange rate that is not explained by this model. And that is not surprising given the myriad economic factors that affect the exchange rate. For what it’s worth, the elasticity of the exchange rate with respect to Mr. Trump’s polling numbers is +0.06. (This elasticity is calculated at the mean of each variable. Only observations with data on both variables were included.)

Regression Coefficients Politics and the Mexican Peso

Regression Coefficients (click for larger image)

Regression R-squared Politics and the Mexican Peso

Regression R-squared (click for larger image)

However, the null hypothesis that there is no relationship between Mr. Trump’s polling and the Mexican peso exchange rate is rejected. As a footnote, ten different nonlinear models were estimated. While a few fit the data a bit better, none was good enough to report. Anyone interested in the data is welcome to contact me.

A Fun Brexit Meme

The EU Without the UK Andrea Widburg on Brexit

Tip: If you want to stay at the Omni, make your reservation through Expedia.com.  For some reason their site gives consistently better rates than the hotel itself.

I met Andrea at James Taranto’s talk in San Francisco June 24. The event was held at the Omni Hotel in San Francisco and sponsored by the Pacific Research Institute. James was kind enough to invite several of us to continue the conversation in the hotel bar afterwards.  The group included my lovely wife, Andrea Widburg, and several staff members of the Pacific Research Institute.  Special thanks to Laura Dannerbeck and Rowena Itchon for their kind hospitality. And I was pointed to this fun Brexit meme.

Andrea and I had an amicable conversation about wine, guns, and the virtues of free markets. She is a passionate second amendment supporter.

She suggested I take a look at this blog: The BookWormRoom.com. Among the many entertaining articles, there was an open thread. The first few memes were about the Brexit vote. A good example is the featured image at the top of this article.

Who Is James Taranto?

For anyone unfamiliar with James Taranto, he is a member of the Wall Street Journal editorial board, edits Peggy Noonan’s weekly column, and writes the daily Best of the Web Today column.  I am a regular contributor.  During our chat he revealed that I send him more e-mail than anyone else.  Therefore, I claim this title:

James Taranto With Your Humble Correspondent Andrea Widburg on Brexit

James Taranto With Your Humble Correspondent


How do I protect my sighting of Elvis?

The King

The King

Governments are often chastised for lacking humor.  While searching the U.S. Copyright Office website today I ran across this.  A pretty darn good exception.

How do I protect my sighting of Elvis?
Copyright law does not protect sightings. However, copyright law will protect your photo (or other depiction) of your sighting of Elvis. File your claim to copyright online by means of the electronic Copyright Office (eCO). Pay the fee online and attach a copy of your photo. For more information on registering a copyright, see SL-35. No one can lawfully use your photo of your sighting, although someone else may file his own photo of his sighting. Copyright law protects the original photograph, not the subject of the photograph.

The Alpaca Bubble Has Burst

The alpaca bubble has burst

Alpaca (click for larger image)

A news item on NPR’s Morning Edition caught my attention. Apparently the alpaca bubble has burst. Alpacas are, of course, one of the two animals most often mistaken for llamas. (The other is the ostrich.)

According to NPR, at one point alpacas were selling for “tens of thousands of dollars” per animal. A recent ad on craigslist offered 30 of them for $3,000. Now that’s a bubble! Puts the housing bubble to shame.

This, of course, brings to mind the first documented bubble: the Dutch tulip bubble in 1630.  Wikipedia notes dryly that, “The lack of consistently recorded price data from the 1630s makes the extent of the tulip mania difficult to estimate.”  Wikipedia is also the source for this graph showing tulip prices during the bubble.

A standardized price index for tulip bulb contracts, created by Earl Thompson. [1] Thompson had no price data between February 9 and May 1, thus the shape of the decline is unknown. The tulip market is known, however, to have collapsed abruptly in February.

Tulip Prices

Tulip Prices (click for larger image)

Comparing the two bubbles, alpaca prices declined to 0.01 of the peak price.  Tulips declined to 0.05 of the peak price (approximately).  If any of these numbers can be believed, the alpaca bubbles was the real thing.

[1] Thompson, Earl (2007), “The tulipmania: Fact or artifact?” (PDF), Public Choice 130 (1–2): 99–114, doi:10.1007/s11127-006-9074-4