Alex Tabarrok

The Uber Tipping Equilibrium

by on November 17, 2017 at 7:50 am in Economics | Permalink

What is the effect of tipping on the take-home pay of Uber drivers? Economic theory offers a clear answer. Tipping has no effect on take home pay. The supply of Uber driver-hours is very elastic. Drivers can easily work more hours when the payment per ride increases and since every person with a decent car is a potential Uber driver it’s also easy for the number of drivers to expand when payments increase. As a good approximation, we can think of the supply of driver-hours as being perfectly elastic at a fixed market wage. What this means is that take home pay must stay constant even when tipping increases.

But how is the equilibrium maintained? One possibility is that as riders tip more, Uber can reduce fares so that the net hourly wage remains constant. Since take home pay doesn’t change we will have just as many drivers as before tipping. Under the tipping equilibrium the only change will be that instead of the riders paying Uber and then Uber paying the drivers, the riders will also pay something to the drivers directly and Uber will pay the drivers a little bit less. The drivers end up with the same take home pay.

But suppose that Uber doesn’t want to reduce fares or is somehow constrained from doing so. Does the model break down? Sorry, but the laws and supply and demand cannot be so easily ignored. If Uber holds fares constant, the higher net wage (tips plus fares) will attract more drivers but as the number of drivers increases their probability of finding a rider will fall. The drivers will earn more when driving but spend less time driving and more time idling. In other words, tipping will increase the “driving wage,” but reduce paid driving-time until the net hourly wage is pushed back down to the market wage.

At this point many readers will object that I am a horrible person and this is all theory using unrealistic “Econ 101” assumptions of perfectly competitive markets, rationality, full information etc etc. To which my response is that the first claim is plausible but irrelevant while the second is false. A new paper, Labor Market Equilibration: Evidence from Uber, from John Horton at NYU-Stern and Jonathan Hall and Daniel Knoepfle, two economists at Uber, looks at what happens when Uber increases base fares:

We find that when Uber raises the base fare
in a city, the driver hourly earnings rate rises immediately, but then begins
to decline shortly thereafter. After about 8 weeks, there is no detectable
difference in the average hourly earnings rate compared to before the fare
increase. With a higher fare, drivers earn more when driving passengers, and
so how do drivers make the same amount per hour? The main reason is that
driver utilization falls; drivers spend a smaller fraction of their working hours
on trips with paying passengers when fares are higher.

My conclusion is that increases in Uber fares are a very bad idea. Why? Increases in Uber fares–i.e. increases beyond those required to have enough drivers so that pick-up times are reasonably short–have two negative effects. First, and most obviously, higher fares increase the price to riders. Second, higher fares don’t result in higher driver earnings but do result in drivers wasting time.

The situation is very similar to the inefficient market for realtors. When realtors earn a fixed percentage of a home’s sales price, higher home prices encourage more entry into the realtor market. But we don’t need more realtors just because home prices have increased! When home prices are high, a realtor can earn enough selling a handful of homes a year to make it worthwhile to stay in the industry even though most of the realtor’s time is spent unproductively finding customers rather than actually helping customers to buy and sell homes. It would be better if commission rates fell when home prices rose but even after many years of online entry that typically doesn’t happen which is the mystery of realtor rent-seeking.

Uber is a great service for riders and it’s also great for people who need a source of flexible earnings. The fact that Uber drivers earn less than some people think is appropriate is a function of the wider job market and not of Uber policy. Indeed, Uber can’t increase take-home pay by raising fares and if we require them to do so we will simply hurt consumers and waste resources without improving the welfare of drivers.

Hacking the Nazis

by on November 16, 2017 at 8:50 am in History, Web/Tech | Permalink

Some resisters fought the Nazis in the streets while others fought them from within by hacking some of the world’s first information technology systems. Ava Ex Machina has a fascinating post discussing some of these unheralded hackers. Here is one:

René Carmille — was a punch card computer expert and comptroller general of the French Army, who later would head up the Demographics Department of the French National Statistics Service. As quickly as IBM worked with the Nazis to enable them to use their punch card computer systems to update census data to find and round up Jewish citizens, Rene and his team of double-agents worked just as fast to manipulate their data to undermine their efforts.

The IEEE newspaper, The Institute, describes Carmille as being an early ethical hacker: “Over the course of two years, Carmille and his group purposely delayed the process by mishandling the punch cards. He also hacked his own machines, reprogramming them so that they’d never punch information from Column 11 [which indicated religion] onto any census card.” His work to identify and build in this exploit saved thousands of Jews from being rounded up and deported to death camps.

Rene was arrested in Lyon in 1944. He was interrogated for two days by Klaus Barbie, a cruel and brutal SS and Gestapo officer called “the Butcher of Lyon,” but he still did not break under torture. Rene was caught by the Nazis and sent to the Dachau concentration camp, where he died in 1945.

Hat tip: Tim Harford.

Here’s the second chapter of our mini-series on business cycle theories: The Monetarists. For the real econ aficionados, today’s video features an un-credited cameo. A free Game of Theories t-shirt to the first person to identify the cameo in the comments.

Seasteading, the once quixotic idea of Patri Friedman and early funder Peter Thiel, is now taking shape in French Polynesia writes David Gelles in the New York Times:

Long the stuff of science fiction, so-called “seasteading” has in recent years matured from pure fantasy into something approaching reality, and there are now companies, academics, architects and even a government working together on a prototype by 2020.

…Earlier this year, the government of French Polynesia agreed to let the Seasteading Institute begin testing in its waters. Construction could begin soon, and the first floating buildings — the nucleus of a city — might be inhabitable in just a few years.

“If you could have a floating city, it would essentially be a start-up country,” said Joe Quirk, president of the Seasteading Institute. “We can create a huge diversity of governments for a huge diversity of people.”

The future is hard to predict but I am eager to see greater experimentation in city governing rules.

Addendum: I have been a minor adviser.

Tyler and I are always pleased to get emails like this:

Dear Prof Alex and Prof Tyler,

I write to express my profound gratitude to you and your team for putting those videos online for the benefit of mankind. I am currently running an Executive MBA at University of Ibadan School of Business in Nigeria. Your videos have been extremely useful to me and lots of my colleagues. Exam comes up tomorrow. I am revising with your videos again. Everything is made simple, easy to understand, remember and apply. I look forward to sharing my exam success story with you in addition to applying the principles to a personal business in the nearest future.

I can’t thank you enough.

Ibrahim HAMMED

And here are two from teachers of economics at high schools in the United States:

Dear Profs,

I’m an Economics teacher at a public charter school in Mesa, Arizona. I use your videos in my class on a regular basis. My students and I love you. Thank you for all that you do!

Ben Fenton


As a high school Economics teacher, I am constantly trying to make lessons interesting and relevant. Your video series is a terrific resource and I am thankful you have invested your time and resources into making these interesting, understandable, and relevant videos. Please pass along my thanks to anyone associated with your very useful site.

Many thanks,

Bruce Jones, Economics Teacher, Hiram High School

Won’t Get Foiled Again

by on November 11, 2017 at 7:23 am in Current Affairs, Economics | Permalink

The Trump administration has just put crippling tariffs (97-162%) on the import of aluminium foil from China. Making America great again? It’s doubtful. Far more American firms use aluminium foil than make it. Indeed, only two US-based firms make it and one of them is owned by Swedes. Virginia Postrel has the details:

Only two companies have U.S. mills making the thin-gauge foil affected by the duties. The ones owned by Sweden-based Gränges are already selling all they can produce; the company has announced plans to expand capacity at its Tennessee mill by 2019. Converters say that JW Aluminum Co., the Mt. Holly, South Carolina-based company that lobbied strongly for the duties, isn’t offering them much, if any, additional supply.

Most of the ex-Chinese sales won’t even go to US firms but to firms in countries not affected by the tariffs, including Russia, Bulgaria, South Korea and Taiwan. Yes, Russia.

Conspiracy or coincidence? I want to say coincidence. On the other hand:

Donald Trump’s former national security adviser, Michael Flynn, is under investigation for involvement in an alleged plot to kidnap a Turkish dissident cleric living in the US and fly him to an island prison in Turkey in return for $15m, it was reported on Friday.

So who can say anymore? Excuse me while I go put on my hat.

Over the next few weeks our Principles of Macroeconomics class at MRUniversity will offer four “mini-classes” on theories of the business cycle. Today, we begin with the Keynesian theory.

Indiana Jones, Economist?!

by on November 7, 2017 at 7:25 am in Economics, History | Permalink

In a stunningly original paper Gojko Barjamovic, Thomas Chaney, Kerem A. Coşar, and Ali Hortaçsu use the gravity model of trade to infer the location of lost cities from Bronze age Assyria! The simplest gravity model makes predictions about trade flows based on the sizes of cities and the distances between them. More complicated models add costs based on geographic barriers. The authors have data from ancient texts on trade flows between all the cities, they know the locations of some of the cities, and they know the geography of the region. Using this data they can invert the gravity model and, triangulating from the known cities, find the lost cities that would best “fit” the model. In other words, by assuming the model is true the authors can predict where the lost cities should be located. To test the idea the authors pretend that some known cities are lost and amazingly the model is able to accurately rediscover those cities.

Here from the paper is more detail. Each step is an accomplishment and the final product is something completely unexpected. Bravo!

Our first contribution is to extract systematic information on commercial linkages between cities
from ancient texts. To do so, we leverage the fact that the ancient records we study can be transcribed
into the Latin alphabet, allowing all texts to be digitized and parsed. We automatically
isolate, across all records, the tablets which jointly mention at least two cities. We then systematically
read those texts, which requires an intimate knowledge of the cuneiform script and Old
Assyrian dialect of the ancient Akkadian language that the records are written in. Taking individual
source context into account, this analysis relies exclusively upon a subset of records that
explicitly refer to journeys between cities and distinguishes whether the specific journey was undertaken
for the purpose of moving cargo, return journeys, or journeys undertaken for other reasons
(legal, private, etc.).

Our second contribution is to estimate a structural gravity model of ancient trade. We build
a simple Ricardian model of trade. Further imposing that bilateral trade frictions can be summarized
by a power function of geographic distance, our model makes predictions on the number of
transactions between city pairs, which is observed in our data. The model can be estimated solely
on bilateral trade flows and on the geographic location of at least some cities.

Our third contribution is to use our structural gravity model to estimate the geographic location
of lost cities. While some cities in which the Assyrian merchants traded have been located
and excavated by historians and archaeologists, other cities mentioned in the records can not be
definitively associated with a place on the map and are now lost to us. Analyzing the records
for descriptions of trade and routes connecting the cities and the landscapes surrounding them,
historians have developed qualitative conjectures about potential locations of several of these lost
cities. We propose an alternative, quantitative method based on maximizing the fit of the gravity
equation. As long as we have data on trade between known and lost cities, with sufficiently many
known compared to lost cities, a structural gravity model is able to estimate the likely geographic
coordinates of lost cities. Our framework not only provides point estimates for the location of lost
cities, but also confidence regions around those point estimates. For a majority of the lost cities, our
quantitative estimates come remarkably close to the qualitative conjectures produced by historians,
corroborating both such historical models and our purely quantitative method. Moreover, in some
cases where historians disagree on the likely location of a lost city, our quantitative method supports
the conjecture of some historians and rejects that of others.

Supply and Demand

by on November 6, 2017 at 7:25 am in Economics | Permalink

Enrico Moretti tells it like it is:

Over the past two years, San Francisco County added 38,000 jobs, reaching its highest employment level ever. Yet only 4,500 new housing units were permitted. For all those new families knocking on San Francisco doors, new units are available for less than 12 percent of them. The numbers for Silicon Valley are even worse. This is why the rents skyrocket.

The problem is largely self-inflicted: the region has some of the country’s slowest, most political and cumbersome housing approval processes and most stringent land-use restrictions.

…One way to think about it is that the enormous increase in wealth generated by the tech boom is largely captured by homeowners in the urban core who bought before the boom.

…The second negative consequence of the region’s restrictive housing policies in the urban core is environmental degradation on the periphery. Good environmental stewardship suggests that we should build more in the urban core near transit and jobs and less on the fringes. Yet because of cities’ strict housing regulations, we build more on farmland on the region’s outskirts and less in the city center where demand is higher.

It’s economics 101 not rocket science but few people have an interest in denying the truths of rocket science.

Muhammad Ali Jinnah was nothing if not complicated. Jinnah, an alcohol-drinking, pork-eating, English-loving barrister, was the founder of  the Islamic Republic of Pakistan. Yesterday, his only child Dina Wadia died and that too is complicated.

Dina Wadia was the daughter of Jinnah and his Parsi wife Rattanbai Petit whom he proposed to at 16 and married at 18 when he was 42. Rattanbai was the daughter of one of Jinnah’s friends, who never forgave him. Jinnah and Petit’s daughter, Dina, was born in 1919 shortly after their marriage. Rattanbai died only ten years later.

Dina herself married young, to the Parsi Neville Wadia whose successful family-business went back to the days of the East India Company. But Jinnah was furious that she had married outside the faith telling her “There are millions of Muslim boys in India,” and she could marry any one of them she chose. Dina promptly replied, “Father, there were millions of Muslim girls in India. Why did you not marry one of them?” Jinnah did not attend the wedding.

When India’s partition came, Jinnah’s family was partitioned as well. Jinnah went to Pakistan and his daughter stayed in India, never to see him again. Her son, Nusli Wadia, became one of India’s richest men. Thus the descendants of the founder of the Islamic Republic of Pakistan are successful Indian Parsis. The last twist perhaps in Jinnah’s complicated tale.

In her later years, Dina Wadia moved to New York where she died yesterday.

In the debate over corporate taxation it’s often assumed that corporate taxes are equivalent to taxes on capital. But corporations are only a minority of firms. Most of the firms in the pass-through sector are small partnerships but by no means are all pass-through firms small. Indeed, corporate profits are less than half of all business profits as shown by the following graph from the Tax Foundation.

What this means is that a cut in the income tax is also a cut in the capital tax. Indeed, a cut in the top marginal income tax rate is a bigger cut in capital taxation than a cut in the top corporate tax rate. (Unfortunately, it now looks like the top marginal rate on income won’t be cut.)

Since pass through businesses can be large, some people have suggested that these businesses should be taxed like corporations. That would be a mistake. An ideal tax system should be neutral as to organizational form. So, if anything, corporate taxation should be moved more in the direction of pass-through taxation.

Hat tip: Lunch with Steve Pearlstein, Bryan Caplan and Tyler.

Prostitution Reduces Rape

by on October 31, 2017 at 7:34 am in Economics, Law | Permalink

A new paper in the American Economic Journal: Economic Policy by Bisschop, Kastoryano, and van der Klaauw looks at the opening and closing of prostitution zones (tippelzones) in 25 Dutch cities.

Our empirical results show that opening a tippelzone reduces sexual abuse and
rape. These results are mainly driven by a 30–40 percent reduction in the first two
years after opening the tippelzone.
For tippelzones with a licensing system, we
additionally find long-term decreases in sexual assaults and a 25 percent decrease
in drug-related crime, which persists in the medium to long run.

Cunningham and Shah studied decriminalization of indoor prostitution in Rhode Island and found very similar results.

We exploit the fact that a Rhode Island District Court
judge unexpectedly decriminalized indoor prostitution in 2003 to provide the first causal estimates
of the impact of decriminalization on the composition of the sex market, rape offenses, and sexually
transmitted infection outcomes. Not surprisingly, we find that decriminalization increased the size
of the indoor market. However, we also find that decriminalization caused both forcible rape offenses
and gonorrhea incidence to decline for the overall population. Our synthetic control model finds 824
fewer reported rape offenses (31 percent decrease) and 1,035 fewer cases of female gonorrhea (39
percent decrease) from 2004 to 2009.

In addition a working paper by Riccardo Ciacci and María Micaela Sviatschi studies prostitution in New York and also finds that prostitution significantly reduces sex crimes such as rape:

We use a unique data set to study the effect of indoor prostitution establishments on sex
crimes. We built a daily panel from January 1, 2004 to June 30, 2012 with the exact location of
police stops for sex crimes and the day of opening and location of indoor prostitution establishments.
We find that indoor prostitution decreases sex crime with no effect on other types
of crime. We argue that the reduction is mostly driven by potential sex offenders that become
customers of indoor prostitution establishments. We also rule out other mechanisms such as
an increase in the number of police officers and a reduction of potential victims in areas where
these businesses opened. In addition, results are robust to different data sources and measures
of sex crimes apart from police stops.

It’s become common to think that rape is about power and not about sex. No doubt. But some of it is about sex. Quoting Ciacci and Sviatschi again:

We find evidence consistent with the fact that potential perpetrators substitute
towards indoor prostitution establishments instead of engaging in sex crimes….This mechanism is in line with a survey of men who had purchased sex from women in London.
About 54% of these men stated that if prostitution did not exist then they would be more
likely to rape women who were not prostitutes. This belief was clearly held by one man who even
stated: “Sometimes you might rape someone: you can go to a prostitute instead” (Farley et al.,

In short, a wide variety of evidence from different authors, times and places, and experiments shows clearly and credibly that prostitution reduces rape. This finding is of great importance in considering how prostitution should be rationally regulated.

The Great Moderation and Leverage

by on October 30, 2017 at 7:23 am in Economics | Permalink

In response to my earlier post, The Great Moderation Never Ended,  the perceptive Kevin Drum noted that the moderation seems to have been asymmetric–the booms have moderated more than the busts. That’s correct but it’s more than lower economic growth–expansions also last longer. It’s as if the booms have been smoothed over a longer period of time but not the busts.

Søren Hove Ravn points me to a paper of his with co-authors, Leverage and Deepening: Business Cycle Skewness that documents this fact and also proposes a theory.

The authors argue that financial innovation made credit more easily accessible and easier credit led to more leverage. Leverage, however, has an asymmetric feature. When asset prices are up everything is golden, wealth is high and credit is easy because lenders are happy to lend to the rich. When asset prices decline, however, the economy takes a double hit, wealth is low and credit is tight. The net result is that booms are smoothed but busts become, if anything, even more violent.

The theory is promising because it explains both the negative skewness and the great moderation. It’s also important because higher leverage, longer expansions and greater negative skew are new features of business cycles that appear across many developed economies as shown by Jorda, Schularick and Taylor in Macrofinancial History and the New Business Cycle Facts. In this paper Jorda et al. create new data series using over 150 years of data from 17 economies and conclude:

…leverage is associated with dampened business cycle volatility, but more spectacular crashes.

and more generally:

We find that rates of growth, volatility, skewness, and
tail events all seem to depend on the ratio of private credit to income. Moreover, key
correlations and international cross-correlations appear to also depend quite importantly
on this leverage measure. Business cycle properties have changed with the financialization
of economies, especially in the postwar upswing of the financial hockey stick. The manner
in which macroeconomic aggregates correlate with each other has evolved as leverage
has risen. Credit plays a critical role in understanding aggregate economic dynamics.

Rodents of Unusual Size

by on October 29, 2017 at 7:31 am in Film | Permalink

The first love of the very talented team at Tilapia Films that produces many of our videos at MRUniversity isn’t economics (I know, hard to believe) but making documentaries. Their latest, Rodents of Unusual Size, has a world premier Nov. 15 in New York at DocNYC. It’s bound to be great, check it out! Tickets here.

Image may contain: text

Lights On, Lights Off

by on October 29, 2017 at 7:21 am in Economics, Science | Permalink

You can learn a lot from satellite pictures of the earth at night; the famous picture of North and South Korea, which Tyler and I feature in Modern Principles, is just one such example.

ESRI has an interesting picture-story illustrating the lights that have turned on and those that have turned off between 2012 and 2016. It’s remarkable how much North India literally turns on in this short space of time. Lights have also turned off around the globe. Not only in places like Syria but also in much of the United States and Northern Europe. In the latter two cases, as the surprising result of more efficient lighting and campaigns to reduce light pollution. Check it out.