Alex Tabarrok

Another Cost of Global Warming

by on September 22, 2017 at 9:52 am in Economics, Law, Science | Permalink

This paper documents a small but systematic bias in the patent evaluation system at the United States Patent and Trademark Office (USPTO): external weather variations affect the allowance or rejection of patent applications. I examine 8.8 million reject/allow decisions from 3.5 million patent applications to the USPTO between 2001 and 2014, and find that on unusually warm days patent allowance rates are higher and final rejection rates are lower than on cold days. I also find that on cloudy days, final rejection rates are lower than on clear days. I show that these effects constitute a decision-making bias which exists even after controlling for sorting effects, controlling for applicant-level, application-level, primary class-level, art unit-level, and examiner- level characteristics. The bias even exists after controlling for the quality of the patent applications. While theoretically interesting, I also note that the effect sizes are relatively modest and may not require policy changes from the USPTO. Yet, the results are strong enough to provide a potentially useful instrumental variable for future innovation research.

From a paper by Balázs Kovács, here. Hat tip Kevin Lewis.

Google City!

by on September 21, 2017 at 7:24 am in Economics | Permalink

Amazon is looking for a city for its new headquarters. Boring! Google is looking to build a city. The FT reports:

Google’s parent company was working on a sweeping plan to build a city from the ground up, the executive in charge of its urban innovation business said on Tuesday, in an attempt to prove that a technologically-enabled urban environment can improve quality of life and reduce cities’ impact on the environment.

…“We actually want to build a new city, it is a district of the city, but one that is of sufficient size and scale that it can be a laboratory for innovation on an integrated basis,” said Dan Doctoroff, head of Sidewalk Labs, at a talk to the San Francisco Bay Area Planning and Urban Research Association.

Sidewalk was “quite far along” in its search for a city with which to partner to build a testing ground for new approaches to transport, infrastructure and possibly even governance and social policy, he said.

As I said in my NYTimes op-ed on private cities (with Shruti Rajagopolan):

The world is building more cities, faster than ever before. China used more cement in the last three years than the United States used in the entire 20th century. By 2050, India will need new urban infrastructure to house an additional 404 million people — a task comparable to building every city in the United States in just 35 years.

…As the world urbanizes, we need to experiment with new urban forms and new forms of urban planning, and privately designed and operated cities — proprietary cities — like Jamshedpur, India, or Reston, Va., may provide answers.

By the way, Virginia’s private city, Reston, was just named by Money magazine as one of the best places to live in the United States.

Here’s the second MRUniversity video from India. It’s a little different than what we have done before and a bit of an experiment; an interview with Shannon D’Souza one of the proprietors of my favorite coffee shop in Mumbai, Koinoina Coffee. We talk about what it’s like doing business in India.

Enjoy! And if you are in Mumbai do stop by Koinoina Coffee Roasters in Chuim village and tell them Alex sent you.

The Color of Law

by on September 19, 2017 at 7:25 am in Books, Economics, History, Law | Permalink

Richard Rothstein’s The Color of Law is a good history of government discrimination against African-Americans in the housing market. Most notably, the FHA and the VA refused to guarantee mortgage loans or loans to builders unless the neighborhood was segregated. Indeed, the FHA wouldn’t even insure a project if there were too many African Americans living nearby.

In 1940, for example, a Detroit builder was denied FHA insurance for a project that was near an African American neighborhood. He then constructed a half-mile concrete wall, six feed high and a foot thick, separating the two neighborhoods, and the FHA then approved the loan.

Rothstein is no libertarian but to his credit he does acknowledge that one of the few anti-segregation forces in the early twentieth century was the Lochner influenced reasoning of the Supreme Court. In Louisville, Kentucky, wealthy blacks began to buy houses in previously white neighborhoods. In response, the city passed an ordinance making it illegal for blacks to move into majority-white neighborhoods and vice-versa. The NAACP organized a test case. Warley, an African American, agreed to buy a house from Buchanan, if not prevented by law from doing so. Buchanan then argued that the law reduced the value of his house because he could not sell to Warley or other African-Americans. Thus, the ordinance was a taking which violated the 14th Amendment right not to be deprived of property without due process of law.

The State of Kentucky responded with a brief arguing that segregation was divinely ordained and that “negroes carry a blight with them wherever they go.” The racism was sickening but Kentucky also had the great mass of intellectuals behind it because they were asserting the progressive belief that the state’s police powers could and should overrule individual rights, especially property rights. Under Lochner, however, “unreasonable, unnecessary and arbitrary interference with the right and liberty of the individual to contract” violated the 14th Amendment. Rothstein writes:

“In 1917, the Supreme Court overturned the racial zoning ordinance of Louisville, Kentucky, where many neighborhoods included both races before twentieth-century segregation….The Court majority was enamored of the idea that the central purpose of the Fourteenth Amendment was not to protect the rights of freed slaves but a business rule: “freedom of contract.” Relying on this interpretation, the Court had struck down minimum wage and workplace safety laws on the grounds that they interfered with the right of workers and business owners to negotiate individual employment conditions without government interference. Similarly, the Court ruled that racial zoning ordinances interfered with the right of a property owner to sell to whomever he pleased.”

Sure, it’s a grudging acknowledgment, but most people don’t even do that so give Rothstein credit where credit is due.

Governments evolved other measures to promote segregation such as zoning laws and the white-subsidy systems of the FHA and VA. Nevertheless, Buchanan v. Warley was likely an very important decision. Bill Fischel goes so far as to argue that Buchanan v. Warley prevented apartheid in America.

Addendum: On segregation and Lochner, see David Bernstein’s excellent book Rehabilitating Lochner from which I have also drawn.

Buffett Wins Bet

by on September 18, 2017 at 7:25 am in Economics | Permalink

NYPost: The Oracle of Omaha once again has proven that Wall Street’s pricey investments are often a lousy deal. Warren Buffett made a $1 million bet at end of 2007 with hedge fund manager Ted Seides of Protégé Partners. Buffett wagered that a low-cost S&P 500 index fund would perform better than a group of Protégé’s hedge funds.

Buffett’s index investment bet is so far ahead that Seides concedes the match, although it doesn’t officially end until Dec. 31.

The problem for Seides is his five funds through the middle of this year have been only able to gain 2.2% a year since 2008, compared with more than 7% a year for the S&P 500 — a huge difference. That means Seides’ $1 million hedge fund investments have only earned $220,000 [through 2016] in the same period that Buffett’s low-fee investment gained $854,000.

I am shocked that Seides put his money on five funds-of-funds, thus piling fees on fees. It was a loser bet. Mark Perry at Carpe Diem has more of the stats.

In one way, this is another win for index fund investing but there is still an anomaly. The S&P trounced the hedge funds but it still lost to an investment in Berkshire Hathaway! (see addendum) Admittedly the race was pretty close at times but after ten years Berkshire was up 91.5% and the S&P 500 up 69.1%.

Addendum: An astute reader with access to a Bloomberg terminal points out that an investment in the S&P 500 pays dividends while famously Berkshire Hathaway does not. Moreover, when you compare total returns the S&P 500 is up 110.7% over this period and Berkshire is up 91.8% so indexing over this period even beats Buffett!

A City on the Hill

by on September 17, 2017 at 7:43 am in Economics, Law, Religion | Permalink

The Redeemed Christian Church of Nigeria has built its own private city.

A 25-megawatt power plant with gas piped in from the Nigerian capital serves the 5,000 private homes on site, 500 of them built by the church’s construction company. New housing estates are springing up every few months where thick palm forests grew just a few years ago. Education is provided, from creche to university level. The Redemption Camp health centre has an emergency unit and a maternity ward.

On Holiness Avenue, a branch of Tantaliser’s fast food chain does a brisk trade. There is an on-site post office, a supermarket, a dozen banks, furniture makers and mechanics’ workshops. An aerodrome and a polytechnic are in the works.

…“If you wait for the government, it won’t get done,” says Olubiyi. So the camp relies on the government for very little – it builds its own roads, collects its own rubbish, and organises its own sewerage systems. And being well out of Lagos, like the other megachurches’ camps, means that it has little to do with municipal authorities. Government officials can check that the church is complying with regulations, but they are expected to report to the camp’s relevant office. Sometimes, according to the head of the power plant, the government sends the technicians running its own stations to learn from them.

There is a police station on site, which occasionally deals with a death or the disappearance of a child, but the camp’s security is mostly provided by its small army of private guards in blue uniforms. They direct traffic, deal with crowd control, and stop children who haven’t paid for the wristband from going into Emmanuel Park – home to the aforementioned ferris wheel.

As in Gurgaon, India, where the government fails opportunities are opened for entrepreneurs who think big.

In 2004 Canada prohibited paying Canadian sperm donors, leading to a tremendous shortage as I had predicted in 2003 (see also my post, The Great Canadian Sperm Shortage). Canadian Peter Jaworski has an update (oddly enough published in USA Today):

Canada used to have a sufficient supply of domestic sperm donors. But in 2004, we passed the Assisted Human Reproduction Act, which made it illegal to compensate donors for their sperm. Shortly thereafter, the number of willing donors plummeted, and sperm donor clinics were shuttered. Now, there is basically just one sperm donor clinic in Canada, and 30-70 Canadian men who donate sperm. Since demand far outstrips supply, we turn to you. We import sperm from for-profit companies in the U.S., where compensating sperm donors is both legal and normal.

Note, by the way, that contrary to what you might expect from Titmuss et al. US sperm is considered to be of high quality because it comes with information about the donor.

And sperm isn’t the only precious bodily fluid that Canada imports.

Canada has never had enough domestic blood plasma for plasma-protein products, such as immune globulin. Our demand for those products, however, is increasing. Last year, we collected only enough blood plasma from unremunerated donors to manufacture 17% of the immune globulin demanded. The rest we imported from you, in exchange for $623 million, or $512 million U.S.

Reliance on your blood plasma looked like it might change a little bit when, in 2012, a company called Canadian Plasma Resources announced plans to open clinics in Ontario dedicated to collecting blood plasma. The trouble is that its business model included compensating donors. Almost immediately, groups such as the Canadian Union of Public Employees and the Canadian Health Coalition began to lobby the Ontario government to pass a law to stop CPR from opening clinics. Ontario obliged in 2014, passing the Safeguarding Health Care Integrity Act, which among other things made compensation illegal.

…As for safety, the fact that we import products made with remunerated donors should tell you that it is emphatically not an issue. Health Canada has said that there is no health concern. The CEO of Canadian Blood Services, Graham Sher, took to YouTube to explain that “it is categorically untrue to say, in 2015 or 2016, that plasma-protein products from paid donors are less safe or unsafe. They are not. They are as safe as the products that are manufactured from our non-remunerated or unpaid donors.”

As Jaworski writes:

What Canada should do is legalize compensation for renewable bodily fluids in our own country. It would be the morally right thing to do. It would help make and save more lives, without harming anybody.

In a new NBER working paper David Card and Abigail Payne have a stunning new explanation of the gender gap in STEM at universities. The conventional wisdom is that the gender gap is about women and the forces–discrimination, sexism, parenting, aptitudes, choices; take your pick–that make women less likely to study in STEM fields. Card and Payne are saying that the great bulk of the gap is actually about men and their problems. At least that is my interpretation of their results, the authors, to my mind, don’t clearly state just how much their results run against the conventional wisdom. (Have I misunderstood their paper? We shall see.)

The authors are using a large data set on Canadian high school students that includes data on grade 12 (level 4) high school classes and grades and initial university program. Using this data, the authors find that females are STEM ready:

…At the end of high school, females have nearly the same overall rate of STEM readiness as males, and
slightly higher average grades in the prerequisite math and science courses.  The mix of STEM related courses taken by men and women is different, however, with a higher concentration of women in biology and chemistry and a lower concentration in physics and calculus.

Since females are STEM-ready when leaving high school you are probably thinking that the gender gap must be a result either of different entry choices conditional on STEM-readiness or different attrition rates. No. Card and Payne say that entry rates and attrition rates are similar for males and females. So what explains why males are more likely to take a STEM degree than females?

The main driver of the gender gap is the fact that many more females (44%) than males (32%) enter university.  Simply assuming that non‐STEM ready females had the same university entry rate as non‐STEM ready males would
narrow the gender gap in the fraction of university entrants who are STEM ready from 14
percentage points to less than 2 percentage points.

Moreover:

On average, females have about the same average grades in UP (“University Preparation”, AT) math and sciences courses as males, but higher grades in English/French and other qualifying courses that count toward the top 6 scores that determine their university rankings. This comparative advantage explains a substantial share of the gender difference in the probability of pursing a STEM major, conditional on being STEM ready at the end of high school.

Put (too) simply the only men who are good enough to get into university are men who are good at STEM. Women are good enough to get into non-STEM and STEM fields. Thus, among university students, women dominate in the non-STEM fields and men survive in the STEM fields. (The former is mathematically certain while the latter is true only given current absolute numbers of male students. If fewer men went to college, women would dominate both fields). I don’t know whether this story will hold up but one attractive feature, as a theory, is that it is consistent with the worrying exit from the labor market of men at the bottom.

If we accept these results, the gender gap industry is focused on the wrong thing. The real gender gap is that men are having trouble competing everywhere except in STEM.

Hat tip: Scott Cunningham.

TechCrunch: Tesla has pushed an over-the-air update to some of its vehicles in Florida that lets those cars go just a liiiittle bit farther, thus helping their owners get that much farther away from the devastation of Hurricane Irma.

Tesla owners in Florida may be grateful for this mileage boost as they escape the ravages of Irma but I suspect that some of them will be upset when they have more time to reflect. How could Tesla increase the mileage at the flick of a switch? The answer is that owners of the Tesla 60kWh version of its Model S and Model X actually have the same battery as the 75kWh vehicles but the battery has been purposely limited or “damaged” to provide only 60KWh of mileage. But why would Tesla damage its own vehicles?

The answer to the second question is price discrimination! Tesla knows that some of its customers are willing to pay more for a Tesla than others. But Tesla can’t just ask its customers their willingness to pay and price accordingly. High willing-to-pay customers would simply lie to get a lower price. Thus, Tesla must find some characteristic of buyers that is correlated with high willingness-to-pay and charge more to customers with that characteristic. Airlines, for example, price more for the same seat if you book at the last minute on the theory that last minute buyers are probably business-people with high willingness-to-pay as opposed to vacationers who have more options and a lower willingness-to-pay. Tesla uses a slightly different strategy; it offers two versions of the same good, the low and high mileage versions, and it prices the high-mileage version considerably higher on the theory that buyers willing to pay for more mileage are also more likely to be high willingness-to-pay buyers in general. Thus, the high-mileage group pay a higher price-to-cost margin than the low-mileage group. A familiar example is software companies that offer a discounted or “student” version of the product with fewer features. Since the software firm’s costs are mostly sunk R&D costs, the firm can make money selling a low-price version so long as doing so doesn’t cannibalize its high willingness-to-pay customers–and the firm can avoid cannibalization by carefully choosing to disable the features most valuable to high willingness-to-pay customers.

The classic paper in this literature is Damaged Goods by Deneckere and  McAfee who write:

Manufacturers may intentionally damage a portion of their goods in order to
price discriminate. Many instances of this phenomenon are observed. It may
result in a Pareto improvement.

Note the last sentence–damaging goods can be beneficial to everyone! Consider: Without selling to the high willingness-to-pay customers at the high price the good might not be produced at all because the profit from customers who are only willing to buy at a discount aren’t enough to support the R&D. Thus, the high willingness-to-pay customers aren’t worse off from the existence of a discounted version and the low willingness to pay customers and the firm are clearly better off.

Unfortunately, I fear that Tesla may have made a marketing faux-pas. When it turns off the extra mileage boost are Tesla customers going to say “thanks for temporarily making my car better!” Or are they going to complain, “why are you making MY car worse than it has to be?”

Hat tip: Monique van Hoek.

Designing electronic marketplaces will be the focus of a new degree to be offered jointly by MIT’s economics and computer science departments.

“This area is super-hot commercially,” says David Autor, the Ford Professor of Economics and associate head of the Department of Economics. “Hiring economists has become really prominent at tech companies because they’re filling market-design positions.”

Because these companies need analysts who can decide which objectives to maximize, what information and choices to offer, what rules to set, and so on, “companies are really looking for this skill set,” he says.

UBER, Airbnb and Amazon are familiar marketplaces that need computer scientist cum economist designers and online worlds like EveOnline join multiple marketplaces into entire economies.

I’d also note that an increasing number of marketplaces will need to be designed not for people but for non-human traders–this will create entirely new challenges.

Silphium

by on September 8, 2017 at 12:19 pm in Economics, History, Medicine, Science | Permalink

Long ago, in the ancient city of Cyrene, there was a herb called silphium. It didn’t look like much – with stout roots, stumpy leaves and bunches of small yellow flowers – but it oozed with an odiferous sap that was so delicious and useful, the plant was eventually worth its weight in gold.

Image result for silphiumThat’s the opening to an excellent story about silphium, a herb widely-used and loved by the Romans but that hasn’t been seen for nearly two thousand years. Part of the problem was biological, the plant grew only in a tiny region of modern day Libya:

Its entire range consisted of a narrow strip of land about 125 miles (201km) by 35 miles (40km).

Try as they might, neither the Greeks or the Romans could work out how to farm it in captivity. Instead silphium was collected from the wild, and though there were strict rules about how much could be harvested, there was a thriving black market.

Even today there are plants, like huckleberry which resist all efforts to farm them. (Ala Jared Diamond’s Guns, Germs and Steel). Part of the problem was also economic–a tragedy of the commons–as prices shot up and property rights weren’t strong enough to prevent over-farming.

And might silphium still be found somewhere in remote regions of Libya? Read the whole thing.

When In India, Get a Haircut!

by on September 6, 2017 at 7:24 am in Economics, Travels | Permalink

Here is the first of our MRUniversity videos made in India! It was a lot of fun to make. The video introduces the Balassa-Samuelson effect (also called the Penn effect) and why we need purchasing power parity corrections. Eventually, we will update our entire Development Economics course to the same production quality. Enjoy!

Big Data Surveillance

by on September 3, 2017 at 10:55 am in Law | Permalink

Newly minted sociologist Sarah Brayne spent two and a half years studying the LAPD as it shifted from traditional methods to what she calls big data surveillance.

This article examines the intersection of two structural developments: the growth of surveillance and the rise of “big data.” Drawing on observations and interviews conducted within the Los Angeles Police Department, I offer an empirical account of how the adoption of big data analytics does—and does not—transform police surveillance practices. I argue that the adoption of big data analytics facilitates amplifications of prior surveillance practices and fundamental transformations in surveillance activities. First, discretionary assessments of risk are supplemented and quantified using risk scores. Second, data are used for predictive, rather than reactive or explanatory, purposes. Third, the proliferation of automatic alert systems makes it possible to systematically surveil an unprecedentedly large number of people. Fourth, the threshold for inclusion in law enforcement databases is lower, now including individuals who have not had direct police contact. Fifth, previously separate data systems are merged, facilitating the spread of surveillance into a wide range of institutions. Based on these findings, I develop a theoretical model of big data surveillance that can be applied to institutional domains beyond the criminal justice system. Finally, I highlight the social consequences of big data surveillance for law and social inequality.

Here’s one bit, not far from what one would see on CSI:

For example, after a series of copper wire thefts in the city, the police found the car involved by drawing a radius in Palantir
around the three places the wire was stolen from, setting up time bounds around the time they knew the thefts occurred at each site, and
querying the system for any license plates captured by ALPRs in all three locations during those time periods.

And another:

I encountered several other examples of
law enforcement using external data originally
collected for non–criminal justice purposes,
including data from repossession and collections
agencies; social media, foreclosure, and
electronic toll pass data; and address and
usage information from utility bills. Respondents
also indicated they were working on
integrating hospital, pay parking lot, and
university camera feeds; rebate data such as
address information from contact lens rebates;
and call data from pizza chains, including
names, addresses, and phone numbers from
Papa Johns and Pizza Hut. In some instances,
it is simply easier for law enforcement to purchase
privately collected data than to rely on
in-house data because there are fewer constitutional
protections, reporting requirements,
and appellate checks on private sector surveillance
and data collection (Pasquale 2014).
Moreover, respondents explained, privately
collected data is sometimes more up-to-date.

Hat tip: Kevin Lewis.

A lot of nonsense has been written about the causes of flooding in Houston. Anti-immigration people blame immigration. Anti-development people blame development. Anti-Trump people blame Republicans.

The truth, however, is that Houston has flooded regularly since it was founded. Moreover, unlike Katrina, the flood systems have mostly worked as they are supposed to–diverting water to the highways, for example. The problem has been that there is just a lot of water.

In a superb post, Phil Magness has the details. From here on in this is Magness. I won’t indent.

————

We’ve seen a flurry of commentators in the past few days attributing Houston’s flooding to a litany of pet political causes. Aside from the normal carping about “climate change”… several pundits and journalists have opportunistically seized upon Houston’s famously lax zoning and land use regulations to blame Harvey’s destruction on “sprawl” and call for “SmartGrowth” policies that restrict and heavily regulate future construction in the city.

According to this argument, Harvey’s floods are a byproduct of unrestricted suburban development in the north and west of the city at the expense of prairies that would supposedly absorb rainwater at sufficient rates to prevent natural disasters and that supposedly served this purpose “naturally” in the past.

There are multiple problems with this line of argument that suggest it is rooted in naked political opportunism rather than actual concern for Houston’s flooding problems.

First, as we’ve established in the preceding history lesson, flooding has been a regular feature of Houston’s landscape since the beginning of recorded history in the region. And catastrophic flooding – including multiple storms in the 19th century and the well-documented flood of December 1935 – predates any of the “sprawl” that has provoked these armchair urban designers’ ire.

Second, the flooding we saw in Harvey is largely a result of creeks and bayous backlogging and spilling over their banks as more water rushes in from upstream. While parking lot and roadway runoff from “sprawl” certainly makes its way into these streams, it is hardly the source of the problem. The slow-moving and windy Brazos river reached record levels as a result of Harvey and spilled over its banks, despite being nowhere near the city’s “sprawl.” The mostly-rural prairie along Interstate 10 to the extreme west of the city recorded some of the worst flooding in terms of water volume due to the Brazos overflow, although fortunately property damage here will be much lower due to being rural.

Third, the very notion that Houston is a giant concrete-laden water retention pond is itself a pernicious myth peddled by unscrupulous urban planning activists and media outlets. In total acres, Houston has more parkland and green space than any other large city in America and ranks third overall to San Diego in park acreage per capita.*

But even more telling is a 2011 study by the Houston-Galveston Area Council that actually measured the ratio of impervious-to-pervious land cover within the city limits (basically the amount of water-blocking concrete vs. water-absorbing green land). The study used an index scale to measure water-absorption land uses. A low score (defined as less than 2.0 on the scale) indicates a high presence of green relative to concrete. A high score (defined as greater than 5.0) indicates high concrete and low levels of greenery and other water-absorbing cover. The result are in the map below, showing the city limits. Gray corresponds to high levels of pervious surfaces (or greenery). Black corresponds to high impervious surface use (basically either concrete or lakes that collect runoff). As the map shows, over 90% of the land in the city limits is gray, indicating more greenery and higher water absorption. Although they did not measure unincorporated Harris County, it also tends to be substantially less dense than the city itself.

Does this mean that impervious land uses are not a problem and do not contribute to floods in any way? No. But to cite them as a principle cause of the destruction witnessed in Harvey is purely a political move aimed at generating support for a long list of intrusive regulatory policies.

Houston’s flood problems are a distinctive feature of its topography and geography, and they long predate any “sprawl.” While steps have been taken over the years to mitigate them and reduce the severity of flooding, a rare but catastrophic event will unavoidably overwhelm even the most sophisticated flood control systems. Harvey was one such event – certainly the highest floodwater event to hit Houston in over 80 years, and possibly the worst deluge in its recorded history. But it is entirely consistent with almost 2 centuries of recorded historical patterns. In the grander scheme of causes for Harvey’s flooding, “sprawl” does not even meaningfully register.

Read the whole thing for more historical background.

*  Earlier version said second which was a typo as source reports third; other sources can differ depending on year and what exactly is counted.