Category: Economics

Why do people own things?

A loyal MR reader asks:

This is related to a recent post and something I’ve been thinking about a lot as I pack up my house to move: Why do we buy books and videos?  Doesn’t it make much more sense to outsource their storage to libraries and video stores or services like Netflix?

I have an intrinsic desire to collect and flood my house with nuggets of joy (not Natasha’s phrase), but that doesn’t explain everyone.  Often people own books and DVDs for reasons of identity and self-expression; that is why iTunes outcompeted Rhapsody, even though the latter in some ways offered a better deal.  Ownership, especially of the non-digital kind, also allows you to lend out, to send to friends, and to show off.  The ownership puzzle is related to the "why do we buy mostly new music" puzzle.

It makes the most sense to own songs and CDs, if only because the desire to hear them is more spontaneous, and renting them is harder.  The costs of renting are falling, but the costs of personal storage are falling too, as houses become larger.  The mail isn’t getting much quicker, but the demand for immediacy is growing.  Ownership remains robust.

#3 in a series of 50.

Do carbon offsets work?

Maybe-Megan-McArdle writes:

When you donate money to build a new windfarm, you don’t take any of
the old, polluting power offline; you increase the supply of power,
reducing the price until others are encouraged to buy more
carbon-emitting power.

In other words, these carbon offsets shift back the demand curve for dirty power but they also shift out the supply curve for power as a whole.  (The persnickety might argue the demand curve doesn’t even shift back, but if you have to buy all those offsets you will think twice about your next plane trip.)  Competition from wind power forces down the price of the monopolistic dirty power company (electricity?), which means that other people buy more of it.  The quantity of dirty power consumed might well go up rather than down.

A better approach for carbon offsets might involve buying up a power plant and taking it off the market, thereby raising price and discouraging consumption.

Or it might be better if that "wind farm" is a failure and a fraud.

Furthermore if you simply buy less of a non-storable good such as electricity,
price to other demanders will go back down and social quantity consumed will
not change.  The boycott matters only if general
capacity shrinks over time, and that of course requires a large boycott.

If the dirty power source is from a broadly competitive sector (is there one? gasoline? cars?), the carbon offset is more likely to work.  If a non-dirty competitor comes on-line, the dirty power source has no option of lowering price and expanding quantity sold; the price of the dirty power source can’t fall below marginal cost.  Instead the supply of the dirty power source falls and the offset works.   

The bottom line: Unless you can put them under, don’t try to compete on price with your local power company.

Progressive taxation as price discimination

That’s a request from the comments, sometimes the customer is king after all.

The point of price discrimination is to sell more goods and services while taking in more profit; the low demanders can pay a lower price, yet the company still sells for a higher price to the high demanders.  If output goes up, social welfare usually does too. 

So ideally we might levy higher taxes on those people who especially enjoy working, or people who especially enjoy living in the country.  Current tax rates are conditioned mostly on income plus a blizzard of confusing factors listed in the tax code, such as depreciation allowances and legislated tax breaks.  Why not — either directly or indirectly — condition tax payments on proxies for enjoying one’s job and country?  After all, those are the people least likely to leave or least likely to stop working.

Tax flags, guns, churches, and other correlates with patriotism.

Tax fun jobs.  Like being a professor.

Next idea?

More generally, I’m not always keen on taxing inelastic factors, if only because it leads to excess revenue collection, a’la Brennan and Buchanan.

Choosing an Inferior Alternative

It’s well known that people suffer from confirmatory bias, so after they buy a new car they eagerly read the advertisements for that car  – the ads, of course, confirm that their purchase was a good one.

Many people also have a predecisional bias, they interpret new information in a way that is biased towards the leading candidate – a confirmation bias in expectation.  In Choosing an Inferior Alternative (also here) Russo, Carlson and Meloy show that careful manipulation to take advantage of predecisional bias can actually cause people to choose inferior alternatives.

The authors ask people to rate restaurants, nominally named A,B,C etc., on a series of attributes (atmosphere, hours, parking, dishes and so forth) thus creating a ranking.   Two weeks later they ask the same people to rate the same (but renamed) restaurants in a series of pairs.  But this time they put the attribute that most favored the inferior restaurant first – thus the inferior restaurant would win the first comparision and further attributes would suffer from predecisional bias.  They also put the attribute that had the second strongest favorable rating for the inferior restaurant last to take advantage of any recency effect.  The least favored attributes were buried in the middle. 

Compared to a control group, twenty percent more of the treatment group chose an alternative that according to their own preferences was inferior.  In fact, in the treatment group a majority chose the inferior alternative.

Minimum wage and EITC

David Neumark, this time with William Wascher, continues his reign of enlightenment:

We study the effects of minimum wages and the EITC in the post-welfare reform era.  For the minimum wage, the evidence points to disemployment effects that are concentrated among young minority men.  For young women, there is little evidence that minimum wages reduce employment, with the exception of high school dropouts.  In contrast, evidence strongly suggests that the EITC boosts employment of young women (although not teenagers).  We also explore how minimum wages and the EITC interact, and the evidence reveals policy effects that vary substantially across different groups.  For example, higher minimum wages appear to reduce earnings of minority men, and more so when the EITC is high.  In contrast, our results indicate that the EITC boosts employment and earnings for minority women, and coupling the EITC with a higher minimum wage appears to enhance this positive effect.  Thus, whether or not the policy combination of a high EITC and a high minimum wage is viewed as favorable or unfavorable depends in part on whose incomes policymakers are trying to increase.

Here is the paper, here are non-gated versions.  In short, the standard liberal recipe of boosting the minimum wage and the earned income tax credit is probably good for women, bad for men.  The interesting question is what kind of model could rationalize this result…

Four new economics journals

Mario Rizzo directs my attention to Andrew Oswald’s 2007 paper (Economica) "An Examination of the Reliability of Prestigious Scholarly Journals: Evidence and Implications for Decision-Makers", here is the abstract: 

Scientific-funding bodies are increasingly under pressure to use journal rankings to measure research quality.  Hiring and promotion committees routinely hear an equivalent argument: ‘this is important work because it is to be published in prestigious journal X’.  But how persuasive is such an argument?  This paper examines data on citations to articles published 25 years ago.  It finds that it is better to write the best article published in an issue of a medium quality journal such as the OBES than all four of the worst four articles published in an issue of an elite journal like the AER.  Decision-makers need to understand this.

Zing!

I love it when Greg Mankiw gets nasty.

Robert
Reich
says that, as a requirement for free trade deals, we should tell
developing countries to "set a minimum wage that’s half their median wage." The
proposal raises two questions in my mind:

1. Does Reich pay his nanny,
cleaning person, and gardener more than half the median wage of members of his
family?

2. If not, should I refuse to buy his books?

Organ Donation in Israel

Israel may begin something like a no-give, no-take rule for organ donation.  Under a new proposal someone who had previously signed their organ donor card would be given points helping them to move up the waiting list should they one day need a transplant organ.  See here for more on the no-give, no take rule.   

Thanks to the ever-entrepreneurial Dave Undis for the pointer.

I can’t decide whether this paper is politically incorrect

We study the relation between gender and job performance among brokerage firm equity analysts.  Women’s representation in analyst positions drops from 16% in 1995 to 13% in 2005.  We find women cover roughly 9 stocks on average compared to 10 for men.  Women’s earnings estimates tend to be less accurate.  After controlling for forecast characteristics, the difference in accuracy is roughly equivalent to four years of experience.  Despite reduced coverage and lower forecast accuracy, we find women are significantly more likely to be designated as All-Stars, which suggests they outperform at other aspects of the job such as client service.

Here is the link.  Here are non-gated versions.  The authors claim that more women don’t enter the sector because of their preferences, rather than discrimination; after all, They Win Prizes!.  Is the implication that women analysts are less productive, but men receive consumption value from voting them as "All-Stars"?  I don’t know how the voting works, but possibly the companies lobby for them, so as to show they have visible female stars.  I see the possibility of patronizing condescension in the data.  That’s not quite the same as outright discrimination, but I suspect the real story remains uncovered.  The odd mix of positive and negative discrimination that women, and some minorities, face, has not yet made its way into good models.

Assortative mating

Last month the New York Times’ David Leonhardt published a fascinating article, listing 13 young (untenured) in his piece The Future of Economics Isn’t So Dismal… 

Of the 13 up-and-coming academic economists, six are married to each other.  For example, Chicago’s Emily Oster is married to fellow Chicago economist Jesse Shapiro.  Not only that, Dr Oster is the daughter of two economists, Yale’s Ray Fair and Sharon Oster.  Talk about keeping it in the family.  The other two couples were MIT’s Amy Finkelstein and Harvard’s Benjamin Olken, and Berkeley’s Ulrike Malmendier, and Stefano DellaVigna.

Wharton’s Justin Wolfers,
by the way, has a partner with a PhD in economics from Harvard, who
worked for two Federal Reserve banks and who is now an Assistant
Professor of Business and Public Policy at Wharton: Betsey Stevenson.  So that means over half (7 out of 13) of the rising US economic stars have an economist as partner.

Here is the link.

Executive pay fact of the day

…while overly generous executive pay may be maddening, it is a drop in the bucket compared to the size of these companies and the impact it has on shareholder prices and employee compensation.  The top 50 companies alone have a market capitalization approaching $5 trillion.  Limiting CEO pay, as some neopopulists propose would have little to no impact on overall wages or compensation.  If every penny of the $14.4 billion earned by the "fortunate 2500" were distributed to all workers, it would amount to only $100 apiece.

That is from The New Rules Economy, a "Third Way" Project, and full of remarkable common sense.  Or try this bit:

Corporate profits as a share of both corporate net income and as a share of national income were higher in the 1940s and 1960s.  But that, admittedly, is splitting hairs.  What they don’t highlight is that in 2001, corporate profits were at one of their lowest points in recent history.

The neat trick is that the authors invert the usual right- vs. left-wing take on living standards: "Yes, living standards are way up, that means we have lots of money to spend on creative social programs."  It will make some people want to say "Whoa….living standards aren’t up that much…"