control premium

How large is the control premium?

Cass Sunstein on Twitter directs us to this paper (AEA gate), by David Owens, Zachary Grossman, and Ryan Fackler, entitled “The Control Premium: A Preference for Payoff Autonomy.”  The abstract is here:

We document individuals’ willingness to pay to control their own payoff . Experiment participants choose whether to bet on themselves or on a partner answering a quiz question correctly. Given participants’ beliefs, which we elicit separately, expected-money maximizers would bet on themselves in 56.4 percent of the decisions. However, participants actually bet on themselves in 64.9 percent of their opportunities, reflecting an aggregate control premium. The average participant is willing to sacrifice 8 percent to 15 percent of expected asset-earnings to retain control. Thus, agents may incur costs to avoid delegating and studies inferring beliefs from choices may overestimate their results on overconfidence.

There are ungated versions here.

Is the college wealth premium *zero*?

Now this one is a stunner:

The college income premium—the extra income earned by a family headed by a college gra duate over an otherwise similar family without a bachelor’s degree—remains positive but has declined for recent graduates. The college wealth premium (extra wealth) has declined more noticeably among all cohorts born after 1940. Among non-Hispanic white family heads born in the 1980s, the college wealth premium is at a historic low; among all other races and ethnicities, it is statistically indistinguishable from zero [emphasis added]. Using variables available for the first time in the 2016 Survey of Consumer Finances, we find that controlling for the education of one’s parents reduces our estimates of college and postgraduate income and wealth premiums by 8 to 18 percent. Controlling also for measures of a respondent’s financial acumen—which may be partly innate—, our estimates of the value added bycollege and a postgraduate degree fall by 30 to 60 percent. Taken together, our results suggest that college and post-graduate education may be failing some recent graduates as a financial investment. We explore a variety of explanations and conclude that falling college wealth premiums may be due to the luck of when you were born, financial liberalization and the rising cost of higher education.

That paper is by William R. Emmons, Ana H. Kent and Lowell R. Ricketts, and comes from the St. Louis Fed, not from some bunch of (college-educated) cranks.

Via the excellent Samir Varma.

On the so-called “beauty premium”

Very unattractive respondents always earned significantly more than unattractive respondents, sometimes more than average-looking or attractive respondents. Multiple regression analyses showed that there was very weak evidence for the beauty premium, and it disappeared completely once individual differences, such as health, intelligence, and Big Five personality factors, were statistically controlled.

…Past findings of beauty premium and ugliness penalty may possibly be due to the fact that: 1) “very unattractive” and “unattractive” categories are usually collapsed into “below average” category; and 2) health, intelligence (as opposed to education) and Big Five personality factors are not controlled. It appears that more beautiful workers earn more, not because they are beautiful, but because they are healthier, more intelligent, and have better (more Conscientious and Extraverted, and less Neurotic) personality.

That is from Satoshi Kanazawa and Mary C. Still, probably not the last word on this topic but still an advance in knowledge.  Via Kevin Lewis.

How much of the attractiveness premium is really about grooming?

For women, most of it, at least according to Wong and Penner:

This study uses data from the National Longitudinal Study of Adolescent to Adult Health (Add Health) to (1) replicate research that documents a positive association between physical attractiveness and income; (2) examine whether the returns to attractiveness differ for women and men; and 3) explore the role that grooming plays in the attractiveness-income relationship. We find that attractive individuals earn roughly 20 percent more than people of average attractiveness, but this gap is reduced when controlling for grooming, suggesting that the beauty premium can be actively cultivated. Further, while both conventional wisdom and previous research suggest the importance of attractiveness might vary by gender, we find no gender differences in the attractiveness gradient. However, we do find that grooming accounts for the entire attractiveness premium for women, and only half of the premium for men.

Those results are consistent with my intuition, and here is some Ana Swanson discussion of the results.  That is via Samir Varma, and here is Allison Schrager on whether female scientists should try to look frumpy.

The Ebola risk premium

Underpaid or overpaid?:

They’re looking for the few, the proud — and the really desperate.

For a measly $19 an hour, a government contractor is offering applicants the opportunity to get up close and personal with potential Ebola patients at JFK Airport — including taking their temperatures.

Angel Staffing Inc. is hiring brave souls with basic EMT or paramedic training to assist Customs and Border Protection officers and the Centers for Disease Control and Prevention in identifying possible victims at Terminal 4, where amped-up Ebola screening started on Saturday.

EMTs will earn just $19 an hour, while paramedics will pocket $29. Everyone must be registered with the National Registry of Emergency Medical Technicians.

The medical staffing agency is also selecting screeners to work at Washington Dulles, Newark Liberty, Chicago O’Hare and Hartsfield-Jackson Atlanta international airports.

There is more here, via Matthew E. Kahn.  How much does the regular (non-Ebola) staff earn?

*Three Identical Strangers*

Few movies serve up more social science.  Imagine three identical triplets, separated at a young age, and then reared separately in a poor family, in a middle class family, and in a well-off family.  I can’t say much more without spoiling it all, but I’ll offer these points: listen closely, don’t take the apparent conclusion at face value, ponder the Pareto principle throughout, read up on “the control premium,” solve for how niche strategies change with the comparative statics (don’t forget Girard), and are they still guinea pigs?  Excellent NYC cameos from the 1980s, and see Project Nim once you are done.

Definitely recommended, and I say don’t read any other reviews before going (they are mostly strongly positive).

Friday assorted links

Coin flip experiments as a measure of status quo bias

That is what the new Steve Levitt paper looks at and it does seem people stick with their current circumstances too much:

Little is known about whether people make good choices when facing important decisions. This paper reports on a large-scale randomized field experiment in which research subjects having difficulty making a decision flipped a coin to help determine their choice. For important decisions (e.g. quitting a job or ending a relationship), those who make a change (regardless of the outcome of the coin toss) report being substantially happier two months and six months later. This correlation, however, need not reflect a causal impact. To assess causality, I use the outcome of a coin toss. Individuals who are told by the coin toss to make a change are much more likely to make a change and are happier six months later than those who were told by the coin to maintain the status quo. The results of this paper suggest that people may be excessively cautious when facing life-changing choices.

Of course not all coin flips turn out the right way.  And furthermore we all know that the control premium is one of the most underrated ideas in economics…

Tuesday assorted links

1. “Using the Current Population Survey (CPS), we find strong evidence that higher minimum wages lead to a greater prevalence of subminimum wage payment.

2. Senators are not good at stock picking, even when related to their committee assignments.

3. Economic analysis of optimal lockdown.  I definitely think this exercise is worth doing, but the researchers, as economists, ignore most of the critical public choice and sustainability issues, much as other researchers do.

4. What makes Ringo a great drummer (video).  And is music getting better or worse? (data from streaming)

5. “The village on Java island has deployed a cast of “ghosts” to patrol the streets, hoping that age-old superstition will keep people indoors and safely away from the coronavirus.

6. How testing works, or doesn’t work, in New Jersey.

7. An epidemiologist addresses my questions (something Twitter was unable to do), bravo to him.

8. Apichatpong Weerasethakul plum tree update.  And ““This is the first transnational geopolitical Twitter war Thais have engaged in,” said Prajak Kongkirati of Bangkok’s Thammasat University.” (NYT)

9. Markets in everything: “Hamas Willing to Trade Information on Israelis Held in Gaza for Ventilators.”

10. Reopening guidelines from John Cochrane.

11. Sarah Constantin on variolation.

12. David Henderson argues for liberation from lockdown.  Not my view, but I think his strongest argument is that greater freedom will induce us to rush with innovation in test and trace, masks, etc.

13. How soon does it end?  Preliminary results, but very important.  There is so much interesting in that link, including the possibility that California needs to worry more than does New York.  Recommended.  I’ll be saying more about these issues soon and of course waiting for the final results.

14. Why serology is more difficult than it looks.  And look at these pictures.

15. “We estimate that 4-14% (1.5%-10%) of actual infections had been reported in US up to March 16, accounting for an assumed reporting lag of 8 (5) days.

16. Superspreaders (NYT): ““The MERS-CoV outbreak in South Korea was driven primarily by three infected individuals, and approximately 75 percent of cases can be traced back to three superspreaders who have each infected a disproportionately high number of contacts,” wrote George F. Gao, an immunologist and virologist at the Chinese Centers for Disease Control and Prevention in Beijing, in a recent paper.

17. The Wolfram Physics Project, lots there.

Another take on q-factors and investment CAPM

Standard consumption CAPM applies a constant discount rate across all stocks, but surely that is odd if different companies face different costs of capital, as indeed they do.  Take the companies with a higher cost of capital — in equilibrium they also should have higher rates of return as an offset.  And those are (usually) the small stocks, and indeed we know there is a small stock premium (sometimes better expressed as a lower market to book premium) in the finance literature.

But that premium comes from the supply side arbitrage conditions, not from some odd properties of portfolio risk.

You will note that “the investment CAPM says that controlling for a few characteristics is sufficient to explain the cross section of expected returns.”  Theory advocates claim that investment CAPM indeed passes that test: “…most anomalies turn out to be different manifestations of the investment and profitability effects.”

That is all from this Lu Zhang paper.  Here is my earlier post on q-factors and investment CAPM, still not sure I understand it!

The economic effects of private equity buyouts

We examine thousands of U.S. private equity (PE) buyouts from 1980 to 2013, a period that saw huge swings in credit market tightness and GDP growth. Our results show striking, systematic differences in the real-side effects of PE buyouts, depending on buyout type and external conditions. Employment at target firms shrinks 13% over two years in buyouts of publicly listed firms but expands 13% in buyouts of privately held firms, both relative to contemporaneous outcomes at control firms. Labor productivity rises 8% at targets over two years post buyout (again, relative to controls), with large gains for both public-to-private and private-to-private buyouts. Target productivity gains are larger yet for deals executed amidst tight credit conditions. A post-buyout widening of credit spreads or slowdown in GDP growth lowers employment growth at targets and sharply curtails productivity gains in public-to-private and divisional buyouts. Average earnings per worker fall by 1.7% at target firms after buyouts, largely erasing a pre-buyout wage premium relative to controls. Wage effects are also heterogeneous. In these and other respects, the economic effects of private equity vary greatly by buyout type and with external conditions.

That is from a new paper by Steven J. Davis, John Haltiwanger, Kyle Handley, Josh Lerner, Ben Lipsius, and Javier Miranda.  Via John Chamberlain.

Death and Occupational Licensing

My latest paper (with the excellent Brandon Pizzola) is on occupational licensing in the funeral services industry. Almost all of the previous work on occupational licensing has used cross-sectional data, comparing outcomes in states that license an occupation with outcomes in states that do not. Since many factors vary between states it’s difficult to be sure whether those studies are identifying causal effects. Pizzola and I take advantage of a unusual change, Colorado delicensed its funeral service industry in 1983. The time-series variation combined with the cross-sectional variation lets us examine and test the data in many ways.

In 1983, Colorado delicensed funeral services….the results from difference-in-differences, difference-in-difference-in-differences, and synthetic control specifications suggest occupational licensing causes a wage premium of 11-12 percent.

Importantly, we also do a cross-sectional test similar to those that have been done before in other industries and that test is also consistent with a wage premium of 11-12 percent. In other words, our paper makes all the previous papers on occupational licensing that use cross-sectional data more credible.

We find similar results from a standard cross-sectional wage regression using data on individuals in 1990. Thus, this suggests that cross-sectional regressions of wages on occupational licensing in other industries are a good baseline estimate of a causal effect.

Finally, consistent with an earlier paper by David Harrington and Kathy Krynski that used cross-sectional data, we find some evidence that licensing, which requires training in embalming, increases prices even more than the wage premium alone would suggest because under licensing consumers appear to be pushed away from cremation and towards more expensive burial.

Consistent with Colorado’s decision to delicense in 1983, we find no evidence that delicensing reduced quality in the funeral services industry.

Should a state government decide marginal increments of health care?

That is one of the debates swirling around the resuscitated Republican health care plan (NYT summary), which now seems to have some chance of passing.  Sarah Kliff writes:

The Republican solution to sick people who need health insurance in a post-Obamacare world is increasingly coming to center on three words: high-risk pools.

The White House has reportedly secured the support of Rep. Fred Upton (R-MI), a longtime legislator, by promising an additional $8 billion to fund these programs. That would mean the Republican plan has nearly $115 billion that states could use, if they wanted to, for high-risk pools.

…There were 35 state high-risk pools before the Affordable Care Act passed. To control costs, they would often do things like charge higher premiums than the individual market. Most had waiting periods before they would pay claims on members’ preexisting conditions, meaning a cancer patient would need to pay premiums for six months or a year before the high-risk pool would cover her chemotherapy treatments.

Kliff then notes those pools have proved quite expensive.  And:

The Republican bill doesn’t require states to build high-risk pools — it just gives them the option. And it has little to say about how states should build them if they decide to do so. It is possible they would also have lifetime limits and preexisting condition waiting periods. Those details are hugely important, but are unlikely to get sorted out until after the bill passes and the Trump administration begins to write regulations.

I don’t favor ACHA, which I see as bringing no benefit and also as involving a cynical desire to repeal Obamacare simply to fulfill a campaign promise (and it needs a CBO score).  Still, I see many people fulminating about this change toward high risk pools, yet without defending their position much beyond a hand wave.  Should all requests for emergency medical care receive additional government funding?  Obamacare itself does not embody anything remotely like that principle, for instance consider all the medical conditions not covered under the mandate, or covered only imperfectly.  Not to mention the rare diseases that receive only limited R&D dollars.  And we’re about to run out of yellow fever vaccine — nasty!  The list goes on and on.  How are those pandemic preparations coming?

If the federal government is asked to pick up the tab for high-risk pools or some rough equivalent, it probably visualizes the cost in terms of either additional borrowing or as a common pool problem.  It is close to a free lunch in political terms, arguably even a political benefit, now that Obamacare is more popular.

If balanced-budget state governments are asked to pick up the tab, they will wonder whether that money should better be spent on schools, roads, and prisons.  Many of them will be reluctant.  Maybe that is right or wrong, but is “let’s have a democratically elected state government decide how much to subsidize medical care for those with preexisting conditions” such a morally outrageous view?  I guess it is these days.  The simple but underemphasized truth is that under the new bill state governments can spend as much as they want on high-risk pools.

(Is it not sobering to think that if the high-risk patients are put into a separate pool, and have to ask for state-level but taxpayer-sourced money in a direct and transparent manner, the political support for that funding is not so strong?  That is perhaps the real lesson here.  In this debate, both sides are the enemies of transparency.)

Which is the better perspective?  Federal or local?  The answer is obvious if you believe all requests for emergency medical care should receive additional government funding.  But, as I’ve mentioned, no one believes that.  I do see people who cite that principle when it is convenient in one part of a debate, and who forget about the same principle for other policy choices.

And please, don’t compare these marginal health care expenditures to “tax cuts for the rich” — instead advocate for where you most want to see the money spent!  Don’t let the silly Republicans bail out your analytical apparatus once again; any program is easy to justify in your own mind if you put it up against what you consider to be a very weak alternative use of the funds.  It is fine to say “bigger subsidies for high-risk pools are better than tax cuts for the rich, but they are still only my 17th most preferred use for the funds.”

Along related lines, while I favor taking in many more refugees, I also understand that any feasible migration policy involves leaving many refugees and potential migrants to their possible deaths, and with a relatively high probability in some cases.  So if your moral argument is “we should let in person x, or person x will die,” you need to provide a limiting principle once again.

Most generally, beware of moral arguments that a) lower the status of some other group of people, and b) do not state and justify their limiting principles.  They are ways of substituting in pleasurable moralizing in lieu of dealing with the really tough questions.

Addendum: Here are some new and relevant results cited by David Leonhardt, I haven’t had time yet to read through them.

The effects of public unions on compensation

I can’t say I followed this debate very closely, still this paper may settle some of the outstanding questions about public sector unions and wages and bargaining power.

The Effects of Public Unions on Compensation: Evidence from Wisconsin (Job Market Paper)

This paper seeks identify the effect that public sector unions have on compensation. Specifically, I look at the compensation premium associated with teachers’ unions in Wisconsin. In 2011, Wisconsin passed a landmark law (Act 10) which significantly lowered the bargaining power of all public sector unions in the state. Using an event study framework, I exploit plausibly exogenous timing differences based on contract renewal dates, which caused districts to be first exposed to the new regulations in different years. I find that the reduction in union power associated with Act 10 reduced total teacher compensation by 8%, or $6,500. Roughly two-thirds of this decline is driven through reduced fringe benefits. The analysis shows that the most experienced and highest paid teachers benefit most from unionization. I supplement the event study approach with synthetic control and regression discontinuity methods to find that regulatory limits on contract terms, rather than other mechanisms such as state financial aid cuts or union decertification, are driving the results.

That is from Andrew Littten, job market candidate at the University of Michigan (p.s.: Michigan, your job market candidate web site is the very hardest to use and browse, please improve it!)

How much monopsony power is there?

This is from Adam Ozimek:

…if big firms are bargaining down wages then why do labor economists consistently find a large firm wage premium? To take one example from many, one recent study on retailers found that after controlling for individual and store characteristics, firms with at least 1,000 employees pay 9% to 11% more than those employing 10 or fewer.

Third, if firms’ bargaining power over their employees is growing, then why are they increasingly contracting out for work? Lawrence Katz and Alan Krueger argue that from 2005 to 2015, the share of workers hired out through contract companies grew from 0.6% to 3.1%. A company with labor market power wouldn’t want to contract out work to another company. They’d want to hire workers directly to take advantage of that power.

Fourth, the CEA report points to the minimum wage literature as evidence of monopsony power. Leaving aside the debate over whether the minimum wage reduces employment (I say yes, the report says no) the literature clearly shows that the minimum wage increases prices. As Daniel Aaronson and Eric French have pointed out, the monopsony model implies that the minimum wage should increase employment and output, thereby decreasing prices. That prices rise is inconsistent with the monopsony model.

I say there is plenty of monopsony in the short run in individual situations, mostly because workers carve out perks for themselves in individual firms.  In other words, if firms have some short-run bargaining power, it is because they have lost the longer-run bargaining power game.