Bounty hunters for the IRS

Here is an interesting tidbit from the FTC report on spam bounty that I discussed earlier this week. The IRS has had a bounty system for tax cheats since 1967. In the first thirty years of the program more than seventeen thousand infomants earned $35.1 million, in the process helping the IRS to recover $1.2 billion. That’s a pretty good return, even if some of the ex-wives would have snitched anyway.

You can’t take it with you

False. The owner can sell the forest. As a result, the owner of a forest has an incentive to continue to seed it even if seeds planted today won’t produce trees until after the owner is dead. The same idea applies to any long-lived productive asset.

I think this insight is very beautiful. It’s precisely the fact that the forest is owned that gives the owner an incentive to take into account how other people value the forest.

The basic logic doesn’t require perfect competition or fully efficient markets but if these assumptions do hold then the private owner will choose investment decisions exactly as would a “social planner.”

Bonus questions: What does the logic say about the argument that managers of publicly owned corporations will focus too much on quarterly earnings and not enough on investments that only pay off in the long-run?

What does the logic say about the incentives of a politician who controls an asset like a forest but doesn’t own it?

As usual, and in advance of the Crooked Timber complaints, the points are for thinking about the problem in a logical way, laying out the assumptions and weighing which may or may not hold in various circumstances, and not for arriving at “the answer.” Sorry for being pedantic, but I am a professor.

Queue Jumping in Canada

The Canadian health care system is falling apart. Bill Binfet needs both knees replaced. He waited 4 months to get an appointment with a specialist who then put him 290th on a waiting list. It’s been a year and still no surgery despite the fact that his arthritis is now so bad he has bone grinding on bone.

In desperation, Binfet has placed an ad in the local paper offering to buy someone else’s place on the waiting list. The provincial health care minister tut-tuts and says “it would be unethical for a doctor to trade places on a surgical wait list for an exchange of money.”

But as Colby Cosh points out that’s not what Binfet proposes:

…the established bioethics of medicare – whether you approve of them in general, or not – forbid us from allowing patients to queue-jump using inducements to physicians. There is a theoretical hazard, the story goes, that too much of that sort of thing would cause the best doctors to abandon public-funded practice altogether. Fair enough. But Binfet’s offer creates no such danger. He proposes a zero-sum, wholly voluntary exchange between patients for access to the rationed, public, monopoly service. Where’s the ethical problem?

I agree, adding only that what Binfet proposes is positive sum not zero-sum! Binfet will be better off, the recipient of the cash will be better off and no one will be worse off. Contrary to the assertions of economist’s, however, even Pareto optimal policies are sometimes opposed. Try it out on your students.

Thanks to Eric Crampton for the pointer.

Economics of relationships

Ok, bear with me for a few minutes while I tell you a little bit about my relationship with my lovely wife. I promise I’ll be brief and I’ll soon tie into some economics!

My wife calls me on the telephone more often than I call her. Sometimes she complains, “Why don’t you ever call me? Don’t you want to talk to me?” Of course I do, so why don’t I call her? Glen Whitman at Agoraphilia explains:

Say Ted would like to talk on the phone every two days, whereas Sheila would like to talk every day. You might think Sheila would call Ted about two-thirds of the time – but in fact, she will call him every time. If they talk on Monday, Ted plans to call on Wednesday; but then Sheila calls him Tuesday. His clock reset, Ted plans to call on Thursday. And then Sheila calls on Wednesday. Eventually, Sheila decides Ted doesn’t care about her, because he never calls.

Glen uses the same model to explain some other relationship disputes (you can guess which).

As long as I am promoting Agoraphilia you can also read Glen on optimal haircuts, and here is co-blogger Tom Bell on the relationship between ice-cream and cryonics and lest you think this not a serious blog here is Glen’s excellent post on health care savings accounts.

Spam Bounty

Last year, Larry Lessig and Representative Rep. Zoe Lofgren (D-San Jose) proposed a system of mandatory spam tags, i.e. something like mandatory use of [ADV] in the subject line and, as a method of enforcement, bounties for people who tracked down illegal spammers. Lessig liked the idea so much he offered to quit his job if the bill became law and didn’t substantially reduce spam. Now that’s a guy who believes in incentives!

Lessig won’t have to quit his job anytime soon, however. After studying the idea the FTC has recommended against bounties aimed at cybersleuths but they do allow that large bounties aimed at insiders could be useful.

Some of the FTCs objections are unclear. At one point they say that “potential informants who lack subpoena power, and who are not ‘insiders’ possessing personal knowledge of the spammer, are highly unlikely to possess or produce the kind of information deemed most useful to the Commission.” But elsewhere they say that cybersleuths “already provide useful information to the public for free, and may not be further motivated by the prospect of a monetary reward.” So which is it? Is the problem that the information provided by cybersleuths is not good enough or is it that the information is good but we already get it for free? Admittedly these sentences are not necessarily contradictory if one riffs on the distinction between the Commission and the public. It’s unclear to me, however, why the FTC resorts to speculation about the sort of information that cybersleuths can produce when some examples of what they have produced in the past would give us a better idea about what stronger incentives could accomplish.

The FTCs main objection is that they could not handle the resulting flow of mostly low-value information. The FTC already receives 300,000 forwarded spam-emails a day and doesn’t want a slew of further emails from bedroom bounty-hunters.

America’s Most Wanted, however, doesn’t offer rewards for the arrest of any criminal they offer rewards for ….America’s most wanted criminals. A spam bounty system could similarly limit the number of low-value tips by focusing rewards on the spammers responsible for the particular pieces of spam that went out to the most people – the FTCs database already has this information. Rewards could also be limited to sleuths offering specific information.

Large rewards for insiders are a good idea, Microsoft caught the author of the Sasser worm with help from bounties. I’d like to see some more research and experiment, however, before counting the cybersleuths out.

Addendum: More on real bounty hunters here.

Our Austrian Economist Guest Blogger

We are delighted that Michael Stastny, author of the excellent Mahalanobis blog, will be guest blogging with us this week. Michael is a true Austrian economist – he studies economics at the University of Vienna! Alas, he tells me that Menger, Böhm-Bawerk, and Mises are never mentioned in his classes and Hayek wouldn’t get a mention either, except for the fact that he “worked together with Pinochet so closely.” How sad. Truly, one has to come to Vienna, VA to study Austrian economics!

Tornado II

It was raining hard and I was stocking up at the video store with my kids. Coming out of the store I was shocked to see a soot-black, swirling cloud, full of malice not far away. I bundled the kids into the car and headed home! My house was fine but tornadoes touched down throughout the area ripping roofs off homes and in one amazing Washington Post picture (not online) impaling a wooden fence-post through a wall.

Tornado

News roundup

Test of Missile Defense System Delayed Again is the headline in the Washington Post but don’t worry, “The Air Force general in charge of the program said the setback will not affect plans to begin operating the system in the next month or two.”

$3 Trillion Price Tag Left Out As Bush Details His Agenda but don’t worry, Bush-Cheney spokesman Steve Schmidt says “the president remains committed to cutting the budget deficit in half over the next five years.”

How can politicians get away with crazy policies like this? Explanation here.

Credible Discretion

Brad DeLong writes:

I think, the most interesting thing about the late-Greenspan Fed. He has so much credibility as an inflation hawk that he simply doesn’t have to worry about what monetary policy moves over a one or two-year span do to alter people’s perceptions of the Fed’s tolerance for inflation. As a result, he can be much more aggressive in trying to keep unemployment near its natural rate (whatever that is) than a central banker who would wish to and is known to wish that he could focus on stabilizing employment rather than controlling inflation. Such a central banker has to be constantly reassuring everyone that he is committed to controlling inflation, and so has very little room to respond to shocks–like shocks to oil prices–that might affect both.

Quite right. In short, it’s not rules versus discretion it’s rules and discretion.

Aaron Director, 1901-2004

Aaron Director was the key figure in the formative years of Chicago antitrust analysis. Although he didn’t write much himself his thoughts were transmitted through a legion of famous students including Robert Bork (before Bork became cranky) and Richard Posner. George Stigler once said “most of Aaron’s articles have been published under the names of his colleagues.” Director also founded the very influential Journal of Law and Economics which he co-edited with Ronald Coase.

Director is Rose Friedman’s older brother. When Rose was to marry Milton he gently teased that he was not in favor because Milton was too supportive of the New Deal! Appreciations from Don Boudreaux, the Washington Post, and the University of Chicago.

Compared to what?

..a New York Times survey comprising scores of detailed interviews exploring the families’ [of September 11 World Trade Center victims] emotional, physical and spiritual status. That survey found lives colored by continuing pain. Almost half still have a hard time getting a good night’s sleep. A few said they no longer flew on airplanes. About a third have changed jobs or quit. About one in five have moved since 2001, and a fifth of those who still live where they did on Sept. 11 would move if they could. Very few who lost a spouse have remarried.

What do these numbers mean? Without some comparision group, almost nothing. Robert Musil has the numbers and a good lesson in statistical thinking.

Addendum: Thanks to Newmark’s Door for the link. Of course, I take it as understood that proper statistical thinking in no way diminishes our profound sympathy for the victims of 9/11.

Minimum Wage Effects in the Longer Run

The minimum wage reduces employment, especially among low-skilled workers for whom the minimum wage is most binding. That remains the consensus view but note that holding the consensus view does not preclude thinking that the decrease in employment is small relative to the increase in the wages of those who remain employed. If the employment effect is small, however, it is also important to understand why it is small – the policy implications of monopsony, which I think implausible, are quite different from the implications of the the idea that other aspects of the labor-contract adjust in response to enforced changes in wages (i.e. the converse of the hot water argument). See also Tyler on this.

When I discuss minimum wages in class I tell my students that one of the best ways to get a high-paying job is to get a low-paying job and work your way up. The minimum wage can put the least employable out of work and have permanent negative effects when training and work skills not acquired in youth are difficult to accumulate later on. I think the theory makes sense but until recently it had not been extensively investigated.

David Neumark and Olena Nizalova
look at the how exposure to the minimum wage in the past impacts workers today. They find that teenagers who grow up in states with a minimum wage that is significantly and consistently higher than the federal minimum have lower earnings and work less a decade or more later when those workers are in their late twenties. The negative effects are larger for blacks, for whom the minimum wage tends to be more binding.

To generate variation, Neumark and Nizalova use data on minimum wages by state relative to the Federal minimum. The data is more aggregated than I would like and the variation by state only picks up in the late 1980s so there is less data than meets the eye. In theory, there is nothing special about the minimum wage as the driving factor that pushes people out of the work force, unemployment brought about by bad economic conditions should have similar effects. Thus, I wish that they had discussed the literature on hysteresis and unemployment. Welfare could also pull people out of the work force. I’m not fully convinced that they adequately control for economic conditions although they do use some clever techniques to try to address some of these issues. Nevertheless, my priors are supported so this must be a good paper! More seriously, Neumark and Nizalova are to be credited with opening the question of the long run effects of the minimum wage.

The bottom line? If you don’t work at McDonald’s when you are a teenager, don’t expect to manage a McDonald’s when you are middle-aged.

Addendum: Thanks to John Thacker and others who pointed out that one of my sentences, now fixed, was difficult to parse if you hadn’t read the paper – which sort of defeats the purpose of the blog, doesn’t it?