Month: August 2014

The economics of complex tax incentives

I’ve long wondered about this question, now there is a paper about it, from Johannes Abeler and Simon Jäger, forthcoming, “Complex Tax Incentives,” American Economic Journal: Economic Policy.  The abstract is here:

How does tax complexity affect people’s reaction to tax changes? To answer this question, we conduct an experiment in which subjects work for a piece rate and face taxes. One treatment features a simple, the other a complex tax system. The payoff-maximizing output level and the incentives around this optimum are, however, identical across treatments. We introduce the same sequence of additional taxes in both treatments. Subjects in the complex treatment underreact to new taxes; some ignore new taxes entirely. The underreaction is stronger for subjects with lower cognitive ability. Contrary to predictions from models of rational inattention, subjects are equally likely to ignore large or small incentive changes.

I would think the real world danger is that intermediaries will teach people how to game complex tax systems over time.  Still, the actual tax incentive faced by individuals may not be so transparent even to informed and strategic advisors, nor are the advisors always able to communicate actionable advice to the individuals facing the taxes.

Here is Simon’s paper on the returns to German higher education.

FDA Device Regulation

In the interests of length I had to sacrifice a few points in my WSJ review of Innovation Breakdown by Joseph Gulfo (excerpted on MR yesterday). In the review, I argued that the FDA could speed the approval of medical devices and reduce uncertainty by not reviewing directly but becoming a certifier of certifiers as is done in Europe.

In fact, a US model is already in place. OSHA, the Occupational Safety and Health, requires that a range of electrical products and materials meet certain safety standards but it outsources certification to Underwriters Laboratories and other Nationally Recognized Testing Laboratories. We could and should do the same for medical devices and for drugs. Indeed, if a device or drug is permitted in a developed, advanced economy such as in Europe, Australia and Japan then I see no reason why it ought not to be provisionally approved in the United States (and vice-versa).

My paper with DiMasi and Milne showed that some FDA drug divisions appear to be much more productive than other divisions suggesting possibilities for substantial improvements if best practices were uniformly adopted. There also appear to be substantial differences between the regulation of drugs and devices especially in recent years. Ian Hathaway and Robert Litan have a new paper on Entrepreneurship and Job Creation in the U.S. Life Sciences Sector that shows that new firm creation in the medical device sector has fallen drastically since 1990 and far more than in the drug sector. Although there are likely many causes, the drop in the number of new firms is consistent with Gulfo’s experience of regulatory uncertainty and may suggest increases in regulatory cost for devices relative to drugs. Here is Hathaway and Litan:

The medical devices and equipment sector, on the other hand, saw new firm formations decline steadily and persistently between 1990 and 2011—falling by 695 firms or 53 percent during that period. Its share of new life sciences firms fell to 31 percent in 2011 from 50 percent in 1990. Unlike its life sciences sector counterparts, the decline in new firm formations in this segment appears to stretch beyond the cyclical effects of the Great Recession.

new device firms

Do the advantages of undergraduate prestige persist?

Joni Hersch of Vanderbilt has a new paper on this topic.  Given the multiple dimensions of unobserved quality, I wonder if there is any method which can convince me on such questions.  Still, I am glad to see someone putting the effort in.  Here is what the author came up with:

Income disparities arise not only from differences in the level of education but also from differences in status associated with an individual’s degree-granting college or university. While higher ability among those who graduate from elite undergraduate institutions may account for much of the earnings premium associated with elite education, ability should be largely equalized among those who graduate from similarly selective graduate programs. Few graduates of nonselective institutions earn post-baccalaureate degrees from elite institutions, and even when they do, undergraduate institutional prestige continues to influence earnings overall and among those with law, medical, graduate business and doctoral degrees.

For the pointer I thank the excellent Kevin Lewis.  Kevin also refers us to this unorthodox paper on the Finns, namely why are they so smart yet win so few Nobel Prizes.

Fair trade markets in everything?

“Fair Trade” Cocaine Is A Thing Now

For instance:

Even more intriguing is the use of marketing strategies that mimic corporate social responsibility initiatives. These may take the form of financial sponsorship of organizations likely to be viewed favorably by online drug consumers. For example, one Australian drug vendor recently advertised their enterprise as a: “Proud financial supporter of WikiLeaks and Bluelight.”

At the more extreme end of socially progressive marketing strategies used by online dealers are those that involve the promotion of drugs on the basis of supposedly “ethical”, “fair trade”, “organic” or “conflict-free” sources of supply:

“We are a team of libertarian cocaine dealers. We never buy coke from cartels! We never buy coke from police! We help farmers from Peru, Bolivia and some chemistry students in Brazil, Paraguay and Argentina. We do fair trade!”

Naturally, it is impossible to verify these claims.

For the pointer I thank Annie Lowrey.

*Colorless Tsukuru Tazaki and his Years of Pilgrimage* (What I’ve been reading)

That is the new Haruki Murakami book, which Amazon sent me a day early.  It is (dark) fun, but not deep and not top drawer Murakami.  Most of his fans will like it enough to be glad they bought it.

Fear: A Novel of World War I, by Gabriel Chevalier, is being touted as the “latter day All Quiet on the Western Front.”  At first I thought that was just exaggerated promo, but it is quite good.

Justin McGuirk, Radical Cities: Across Latin America In Search of a New Architecture is broader than the title implies and recommended to anyone who follows that part of the world.

Innovation Breakdown

From my review today in the WSJ of Innovation Breakdown by Joseph Gulfo:

Yo is a smartphone app. MelaFind is a medical device. Yo sends one meaningless message: “Yo!” MelaFind tells you: “biopsy this and don’t biopsy that.” MelaFind saves lives. Yo does not. Guess which firm found it easier to put their product in consumers hands? Oy.

In “Innovation Breakdown: How the FDA and Wall Street Cripple Medical Advances,” Joseph Gulfo tells the tumultuous history of MELA Sciences, the company that invented MelaFind. When Dr. Gulfo joined the firm as president and CEO in 2004, the company’s brilliant team of scientists had spent many years and tens of millions of dollars to develop MelaFind, a “camera with a brain”—optical technology that would scan potential melanomas in multiple spectra and then, using sophisticated algorithms and large datasets, diagnose which were most likely to be cancerous.

MELA Sciences conducts an extensive clinical trial according to a protocol agreed on by the FDA and all looks good. After the clinical trial is completed, however, the FDA backs away from the protocol and comes out against MelaFind.

…The title of Dr. Gulfo’s book is “Innovation Breakdown” but “Innovator’s Breakdown” might have been more apt. The letter sent the author into survival mode. He battled the FDA, calmed investors, and defended against the lawsuit all while trying to keep the company afloat. Under stress, Dr. Gulfo’s health began to decline: He lost 29 pounds, his hair began to fall out, and the pain in his gut became so intense he needed an endoscopy. When his wife begged him to quit, he refused. They turned into roommates. “We were nothing more than cordial. I basically shut my wife out of my life,” he writes.

…The climax to this medical thriller comes when, in “the greatest 15 minutes of [his] life,” Dr. Gulfo delivers an impassioned speech, à la “Twelve Angry Men,” to the FDA’s advisory committee. The committee voted for approval, 8 to 7, and, perhaps with the congressional hearing in mind, the FDA approved MelaFind in September 2011.

It was a major triumph for the company, but Dr. Gulfo was beat. He retired from the company in June 2013—just in time to save his marriage.

Yet remarkably, given his experience, Mr. Gulfo writes that he still believes in a strong FDA. He argues in the book that better “leadership” and a few tweaks to existing rules can fix the problem. He’s wrong.

Compare MelaFind’s experience in the U.S. with its reception in Europe: MelaFind was submitted for marketing approval in Europe in May 2011. It was approved just five months later. One key reason for Europe’s efficient approval process is that European governments don’t review medical devices directly. Instead they certify independent “notified bodies” that specialize and compete to review new products. The European system works more quickly than the U.S. system, and there is no evidence that it results in reduced patient safety. Rather than tweak the current system, why doesn’t the U.S. just adopt the European model and call it a day? Our health and our economy would be better off for it.

Google’s Sergey Brin recently said that he didn’t want to be a health entrepreneur because “It’s just a painful business to be in . . . the regulatory burden in the U.S. is so high that I think it would dissuade a lot of entrepreneurs.” Mr. Brin won’t find anything in Dr. Gulfo’s book to persuade him otherwise. Until we get our regulatory system in order, expect a lot more Yo’s and not enough life-saving innovations.

Why is there so much unemployment in Gaza?

Assaf Zimring writes to me:

Since we tend to associate high unemployment with any economic calamity, people don’t seem to think a lot about why we see very high unemployment in Gaza. But I am puzzled by it. How come an economy with such tremendous shortages fails to employ 40% of its workers in an attempt to meet these shortages?

Has the (by now, fairly loose) blockade pushed the MPL to zero for 40% of workers? Is it uncertainty that stops investment? Did large aid payments (in some years – 50% of GDP) cause some kind of a Dutch disease of an epic scale (though I am not sure that would lead to unemployment)? I wonder if you have any thoughts about that.

At the first link you will find some interesting papers by Assaf on the Gaza blockade and other Gaza shocks.  One option of course is simply that hardly anyone is really employed, although there is massive underemployment in grey and black market economies, including for the digging of tunnels and subsistence agriculture.

What I’ve been listening to

Here is what has been sticking with me most so far this year, this list is drawn from full recordings rather than individual songs:

1. Sd Laika, That’s Harakiri, a new sound world, best on vinyl.

2. Calypso: Musical Poetry in the Caribbean 1955-1969, best on vinyl.

3. Shostakovich string quartets, Pacifica Quartet.  The best versions of these ever?  Very Soviet-sounding, muscular in approach, totally bleak.

4. Complete Haydn string quartets, Mosaiques Quartet.  My favorite of all the complete recordings of these.

5. Mala, Mala in Cuba.  Think Buena Vista Social Club for dubstep fans.

6. Deafheaven, Sunbather.  “Black metal for people who don’t like black metal.”  Alternatively, “Serving as an artistic lucid dream of warmth despite the stinging pain of life’s cruel idealism.”

7. Dick Hyman’s Century of Jazz Piano, five CDs, quite familiar music, some of it corny even, nonetheless these remain remarkable pieces and they are impeccably played.  A joy of rediscovery.

Lots more Benjamin Britten, including String Quartet #3, and many versions of Mahler’s Sixth.

*Finding Equilibrium*

The authors are Till Düppe and E. Roy Weintruab and the subtitle is Arrow, Debreu, McKenzie and the Problem of Scientific Credit.  I very much liked this book, which provides an inside look at the discovery of some key theorems in economics, with an emphasis on the problem of joint discovery.  McKenzie, by the way, is the one who received the least credit, an example of the Matthew Effect.

Has the religion-education gradient turned positive?

For those born in much of the 20th century, it was true that college graduates of all ages were significantly less likely than others to report any religious affiliation.

But research just published in the journal Social Forces (abstract available here) finds that, starting for those born in the 1970s, there was a reversal in this historic trend. For that cohort, a college degree increases the chances that someone will report a religious affiliation.

“College education is no longer a faith-killer,” said Philip Schwadel, author of the paper and associate professor of sociology at the University of Nebraska at Lincoln.

That is for belief, observance was not tested.  The full story is here.

The education premium for prostitutes

The Economist ran a long feature story, full of data on the world’s oldest profession.  Here is one bit of interest (WWBCS?):

A degree appears to raise earnings in the sex industry just as it does in the wider labour market. A study by Scott Cunningham of Baylor University and Todd Kendall of Compass Lexecon, a consultancy, shows that among prostitutes who worked during a given week, graduates earned on average 31% more than non-graduates. More lucrative working patterns rather than higher hourly rates explained the difference. Although sex workers with degrees are less likely to work than others in any given week (suggesting that they are more likely to regard prostitution as a sideline), when they do work they see more clients and for longer. Their clients tend to be older men who seek longer sessions and intimacy, rather than a brief encounter.

Are there general lessons here for the rate of return to education?  Here is another bit, when it comes to disintermediation one sex worker complains:

Moving online means prostitutes need no longer rely on the usual intermediaries—brothels and agencies; pimps and madams—to drum up business or provide a venue. Some will decide to go it alone. That means more independence, says Ana, a Spanish-American erotic masseuse who works in America and Britain. It also means more time, effort and expertise put into marketing. “You need a good website, lots of great pictures, you need to learn search-engine optimisation…it’s exhausting at times,” she says.

The full story is here.

Why do women pay more for some consumer goods and services?

Danielle Kurtzleben considers a few hypotheses:

…women develop “relationships” with brands and are more brand-loyal than men. If that’s true, it could explain why women might pay more for a razor that’s priced too high.

And in some cases, there are legitimate differences between men’s and women’s clothing. According to Kebba Gaye, a managing partner at The Press Dry Cleaning and Laundry in Washington DC, high-priced ladies dry cleaning has to do with actual differences in the clothing. Men’s dress shirts tend to be standard in shape and material — often cotton, with two long sleeves, one button-up front, maybe a pocket or two — and one machine can press all of them.

Women’s shirts, on the other hand, are far more varied — sleeveless, rayon, cap-sleeved, buttoned, silk, pullover — and can’t all be handled the same.

“The reason a woman’s shirt is $5 versus $1.85 for men is because of the different types of shirt,” Gaye says. But he says he does make exceptions: “If men wear a polyester like Hawaiian shirt, then they’ll have to pay more, too.”

Her main explanation however is based on the demand side (is there so much market power?):

Of course, there’s an obvious answer here: society expects women to look a certain way. Put into economics terms, there’s a higher return on investment for beauty for women. Beauty products are becoming more popular among men, it’s true, but expensive skin cream is still optional. For women, all those trappings are more necessary.

The full piece is here.