Category: Economics

Reducing Discrimination with More Information

From Cui, Li and Zhang:

We conduct four randomized field experiments among 1,801 hosts on Airbnb by creating fictitious guest accounts and sending accommodation requests to them. We find that requests from guests with African American-sounding names are 19.2 percentage points less likely to be accepted than those with white-sounding names. However, a positive review posted on a guest’s page significantly reduces discrimination: When guest accounts receive a positive review, the acceptance rates of guest accounts with white-sounding and African American-sounding names are statistically indistinguishable.

In other words, taste based discrimination is weak but statistical discrimination is common. Statistical discrimination happens when legitimate demands for trust are frustrated by too little information. Statistical discrimination is a second-best solution to a problem of trust that both owners/sellers/employers and renters/buyers/workers want to solve. Unfortunately, many people try to solve statistical discrimination problems as if they were problems of invidious prejudice.

If you think the problem is invidious prejudice, it’s natural to try to punish and prevent with penalties and bans. Information bans and penalties, however, often have negative and unintended consequences. Airbnb, for example, chose to hide guest photos until after the booking. But this doesn’t address the real demands of owners for trust. As a result, owners may start to discriminate based on other cues such as names. Instead market designers and regulators should approach issues of discrimination by looking for ways to increase mutually profitable exchanges. From this perspective, providing more information is often the better approach. As Cui, Li, and Zhang write in a HBR op-ed:

Our recommendation is for the platform companies to build a credible, easy-to-use online reputation and communication system. Bringing information to light, rather than trying to hide it from users, is more likely to be a successful approach to tackling discrimination in the sharing economy.

Addendum: See also Tyler and I in The End of Asymmetric Information. We need to work with information abundance rather than try to push against the tide.

*VC: An American History*, by Tom Nicholas

An excellent and original economic history of venture capital, with lots of new material, brought together in a convenient and readable form.  Here is one excerpt:

…nineteenth century whaling can be compared to modern venture capital in at least three respects.  First, whaling was the archetypical skewed-distribution business, sustained by highly lucrative but low-probability payoff events.  Voyages often lasted several years and and covered geographic areas in the search for elusive whale pod.  The long-tailed distribution of profits held the same allure for funders of whaling voyages as it does for a venture capital industry reliant on extreme returns from a very small subset of investments.  Although other industries across history, such as gold exploration and oil wildcatting, have been characterized by long-tail outcomes, no industry gets quite as close as whaling does to matching the organization and distribution of returns associated with the VC sector.

The book also covers VC in the Industrial Revolution, to what extent Mellon and Morgan can be thought of as venture capitalists, the institutionalization of venture capital in the 1950s, how the limited partnership structure came to VC, the roles of Intel and Genentech, Sequoia Capital, and the growth of a true Silicon Valley ecosystem.

How about this?:

During the 1970s, San Jose State University was graduating more scientists and engineers than Stanford or Berkeley, while local community colleges within the California system provided crucial access to technical training programs.

Recommended to anyone with an interest in the topic, you can pre-order here.

What will Singapore do with its NIRC?

‘NIRC’ – it’s a uniquely Singaporean economic abbreviation that stands for net investment returns contribution…

The total size of Singapore’s total reserves is a state secret, but estimates by most analysts put it at well above S$500 billion (US$370 billion)…

The Temasek Holdings chief executive wrote about how returns from the firm she leads, as well as GIC Private Limited, and the foreign reserves held by the central bank were the “single largest contributor” to the Singapore budget.

“Without tapping on the dividends or returns from GIC, [the Monetary Authority of Singapore], and Temasek, the government would have had to raise taxes long ago for social spending,” Ho wrote.

Without the NIRC, the Pioneer Generation Package – a S$9 billion programme unveiled in 2014 to help cover the health care costs of citizens born before 1949 – would probably have been funded by “higher taxes or cuts to other essential programmes”, according to Ho.

Here is the full story, via a loyal MR reader.  If you wish to understand Singapore’s relatively low rates of taxation, you also need to understand NIRC.  Here is my earlier post Singapore as financial corporation.

Why should blackmail be illegal?

David Henderson raises this question in a recent blog post, and here is Robin Hanson from 2011.  I would suggest a few reasons why blackmail should be against the law in traditional ways:

1. The law serves a primary purpose of publicity, and advertising for a polity, and also the law serves symbolic functions.  People still don’t give Singapore a break for making chewing gum illegal and the like, even though this restriction is not in fact a big source of tyranny there.  I don’t see it as good for the United States and its reputation to make blackmail legal, even if the “legalize blackmail” arguments are perfectly sound in a Steve Landsburg kind of way.  It’s just not worth the bad publicity.

2. As Coase pointed out long ago, blackmail typically involves an exchange setting with bilateral monopoly.  And the material in question is often emotionally fraught, such as knowledge of a crime, of an affair, photos of private body parts, and so on.  The process of the trading is painful and stressful for many people.  Limiting that process could produce welfare gains, or at the very least legalizing that process, and thus producing more of it, won’t involve huge benefits.  When the process of trade and bargaining is itself painful, some of the welfare theorems need to be rethought a bit.  Of course the unilateral release of gossip can be terrible too, but perhaps it involves less potential for drawn-out situations and painful bargaining because the transacting it not allowed in the first place.

3. As Scott Sumner points out: “In practice, I suspect that most blackmail involves issues of sex, gender and drugs. (Soon we’ll have to add race to this list.) I don’t expect to convince others of my views here, but let me just say that I believe that our society is unable to think rationally in these areas. Thus I don’t see any great value in legalizing blackmail.”

4. Sometimes the efficient blackmailers are your immediate family, not strangers.  Outlawing blackmail from outsiders gives them a semi-monopoly for an efficient, do-it-yourself at home, low transactions cost Coasean deal (“Darling, someone needs to take out the garbage…”).  Let’s do blackmail right!  And privately, out of the public eye, to avoid the problems discussed under #1.  And as a matter of justice, shouldn’t it be the aggrieved spouse getting the gains here, not the National Enquirer?

Lint Barrage on climate change and capital taxation

I show that decentralizing the optimal allocation requires not only high carbon prices but also fundamental changes to tax policy: If the government discounts the future less than households, implementing the optimal allocation requires an effective capital income subsidy (a negative intertemporal wedge), and, in a setting with distortionary taxation, an effective labor-consumption tax wedge that is decreasing over time. Second, if the government cannot subsidize capital income, the constrained-optimal carbon tax may be up to 50% below the present value of marginal damages (the social cost of carbon) due to the general equilibrium effects of climate policy on household savings. Third, given the choice to optimize either carbon, capital, or labor income taxes, the socially discounting planner’s welfare ranking is ambiguous over a standard range of parameters. Overall, in general equilibrium, a policy-maker’s choice to adopt differential social discounting may thus overturn conventional recommendations for both environmental and fiscal policy.

That is from her discount rate paper.  The broader lesson here is that all your intuitions about climate change, discount rates, and taxes might not hang together.  Do not follow mood affiliation, rather think the issues through carefully.

For the pointer I thank the excellent KL.  Here are other papers by Lint Barrage.

Words of wisdom

Amazon will pay property tax on its new Long Island City offices. It will pay corporate tax — not just on its profits, but on its capital base. Its employees, especially highly paid ones, will pay the city’s personal income tax. Those taxes, of course, will be somewhat offset by the incentives that the city has promised the company — up to $2 billion, depending on how many people the company hires and how many facilities it builds. Those incentives were a wasteful way to attract corporate investment. But in the long run, the tax revenue New York City gets from HQ2 will probably far exceed the cost.

That is from Noah Smith at Bloomberg.  The “will” needs to be changed, otherwise right on target…

Economists for Inclusive Prosperity

The co-directors of this new institution are Suresh Naidu, Dani Rodrik, and Gabriel Zucman.  Here is the Twitter announcement.  Here is an 87-pp. eBook introduction, ungated and free, with a short and readable introduction.  Here is a brief excerpt:

This is a time when we need new ideas for policy. We think economists, among other social scientists, have a responsibility to be part of the solution, and that mainstream economics – the kind of economics that is practiced in the leading academic centers of the country – is indispensable for generating useful policy ideas. Much of this work is already being done. In our daily grind as professional economists, we see a lot of policy ideas being discussed in seminar rooms, policy forums, and social media. There is considerable ferment in economics that is often not visible to outsiders. At the same time, the sociology of the profession – career incentives, norms, socialization patterns – often mitigates against adequate engagement with the world of policy, especially on the part of younger academic economists.

Are workers exploited in the Chinese manufacturing sector?

Many news outlets and scholars have expressed concerns that workers have been unfairly exploited by employers in the Chinese manufacturing sector. Economic theory suggests that this exploitation, if it exists, is the result of employers in the manufacturing sector having considerable monopsony power. While there is a vast economic literature on monopsony power in the United States and other nations, little monopsony research has been conducted on the Chinese manufacturing market. This paper follows the monopsony research tradition and examines the Chinese manufacturing sector along several likely indicators of monopsony power. These include the turnover rate in the manufacturing sector, the relation between marginal factor cost and average factor cost, the relation between average real labor productivity and real wage in the manufacturing sector, and the comparison of labor costs between China and other countries. This study found that worker exploitation/monopsony in the manufacturing sector is not as severe as previously reported.

Here is the paper, by Linan Peng and Joshua Ingber, both of GMU, via the excellent Kevin Lewis.

Amazon winners and losers

WINNERS:

Virginia Governor Ralph Northam: He did a good job on the first Amazon deal for Virginia, and now can try to lure more of the company here.  There is a new reason to keep him in office and also to start paying attention to a different issue.

Nashville and the Southeast more generally: That part of the country has fewer local NIMBY activists and is less likely to elect figures such as AOC.  Texas too.  Is it possible that I live in the sanest part of the country?  Wouldn’t that be funny?

The Bay Area: NYC is no longer such a fierce competitor at the macro level, with the potential to become the new center of gravity for the tech world.  The Bay Area can breathe a bit more easily now, at least as long as clustering remains the name of the game.  Yet this one is double-edged, because it also means the Bay Area has less incentive to solve its rather pressing problems and dysfunctions.

Valentine’s Day: It will be used to announce more dramatic break-up events, and thus become all the more emotionally fraught, in both positive and negative directions.

Hoboken and Jersey City: They are nicer than Manhattan anyway and with better day-to-day food options, right?  Right?  Queens won’t be obviously outcompeting them as a home for a new, high-quality business site.

Regional development subsidies: It was awfully easy for Amazon to walk away from this “deal.”  Expect to see higher subsidies and tighter deals in the future.

LOSERS:

Queens: Most of the residents wanted the project to come.

Amazon: The company will find it harder to access the top talent of New York City, and the top talent that is willing to live in New York City.  Let’s hope this is a blessing in disguise, and a new path toward discovering hitherto untapped sources of talent.

New York City: Yes, Google is expanding in Chelsea but more and more NYC is becoming a city of finance and tourism and restaurants.  Can a location have the Dutch disease and cost disease at the same time?  Stay tuned to find out.

YIMBYs: One of the world’s most valuable, efficient, and also popular companies could not make stick a deal to expand and create tens of thousands of high-paying jobs and pay more taxes.  What hope do the rest of us have?

AIs Quickly Learn to Collude

AI’s are better than humans at Chess and Go, why shouldn’t they also be better at the game of collusion? Calvano, Calzolari, Denicolò and Pastorello show that they are (here quoting a VOXEU summary by the authors):

[In Calvano et al. 2018a] we construct AI pricing agents and let them interact repeatedly in controlled environments that reproduce economists’ canonical model of collusion, i.e. a repeated pricing game with simultaneous moves and full price flexibility. Our findings suggest that in this framework even relatively simple pricing algorithms systematically learn to play sophisticated collusive strategies. The strategies mete out punishments that are proportional to the extent of the deviations and are finite in duration, with a gradual return to the pre-deviation prices.

Figure 1 illustrates the punishment strategies that the algorithms autonomously learn to play. Starting from the (collusive) prices on which the algorithms have converged (the grey dotted line), we override one algorithm’s choice (the red line), forcing it to deviate downward to the competitive or Nash price (the orange dotted line) for one period. The other algorithm (the blue line) keeps playing as prescribed by the strategy it has learned. After this exogenous deviation in period , both algorithms regain control of the pricing.

Figure 1 Price responses to deviating price cut

Note: The blue and red lines show the price dynamic over time of two autonomous pricing algorithms (agents) when the red algorithm deviates from the collusive price in the first period.

The figure shows the price path in the subsequent periods. Clearly, the deviation is punished immediately (the blue line price drops immediately after the deviation of the red line), making the deviation unprofitable. However, the punishment is not as harsh as it could be (i.e. reversion to the competitive price), and it is only temporary; afterwards, the algorithms gradually return to their pre-deviation prices.

…The collusion that we find is typically partial – the algorithms do not converge to the monopoly price but a somewhat lower one. However, we show that the propensity to collude is stubborn – substantial collusion continues to prevail even when the active firms are three or four in number, when they are asymmetric, and when they operate in a stochastic environment. The experimental literature with human subjects, by contrast, has consistently found that they are practically unable to coordinate without explicit communication save in the simplest case, with two symmetric agents and no uncertainty.

What is most worrying is that the algorithms leave no trace of concerted action – they learn to collude purely by trial and error, with no prior knowledge of the environment in which they operate, without communicating with one another, and without being specifically designed or instructed to collude.

Tacit collusion isn’t actually illegal since it’s virtually impossible to prove, at least among humans. Tacit collusion by AIs is going to be much more common but perhaps also easier to prove if the antitrust authorities can demand access to the algorithms. No need to torture the data when you can torture the AIs. It’s going to be a strange world.

Hat tip: Ankur Delight.

Seven lessons about blackmail

That is the title of my latest Bloomberg column, here is the opening bit:

Every now and then, a few apparently random news events come together and influence how you see the world. My most recent lesson is that blackmail and blackmail risk are a lot more common than I had thought.

And:

…the main villains in these privacy losses are not the big internet companies. While it is murky exactly how the Bezos photos leaked, it seems to have involved old-fashioned spying and the interception of text messages (and possibly a renegade brother). Silicon Valley didn’t sell his data. As for Northam, the yearbook is from the pre-digital era, dug up in a school library. This information was not on the internet, though of course it did play a role in spreading it.

Third, billionaires can be pretty useful. As Bezos asked in his open letter on Medium: “If in my position I can’t stand up to this kind of extortion, how many people can?” In this case, both the billionaire and the medium of communication are the good guys.

Fourth, fears of a new era of blackmail based on Photoshopped images and so-called deep fakes (phony but convincing video) may be overblown, or at least premature. In the cases of both Bezos and Northam, the authenticity of the source material (text messages and photos) is not really being questioned, and both stories are receiving intense scrutiny. Rather, the debate is over the provenance and significance of the information.

There is much more at the link.

Women in Economics: Elinor Ostrom

Our first episode in the Women in Economics series is an introduction to Elinor Ostrom, the first woman to have won the Nobel Prize in Economics. Elinor Ostrom and Vincent Ostrom have long been a part of the intellectual foundations of “Masonomics”. Both the Ostroms were past presidents of the Public Choice Society, for example, as were Jim Buchanan, Gordon Tullock and Vernon Smith. The Mason Economics department was thrilled when Ostrom won the Nobel as there has been and continues to be fruitful interaction between public choice, experimental economics and institutional analysis.

At the Women in Economics website you can also find Ostrom’s Nobel Prize address, more on the tragedy of the commons, and other resources.

Especially valuable for in-depth research are Vlad Tarko’s biography of Elinor Ostrom and Paul Dragos Aligica and Peter Boettke’s introduction to The Bloomington School.

Life without the Export-Import Bank

In terms of total revenue, Boeing, the aerospace giant, had its best year ever in 2018, with worldwide sales of $101.1 billion.

Exports were particularly robust. Commercial jet deliveries to foreign airlines rose from 763 in 2017 to 806 last year. Overall, the company has a 5,900-order backlog for airplanes worth a staggering $412 billion, according to The Post last week…

For the past 3½ years, Ex-Im, as the trade-finance agency is known, has been essentially paralyzed, yet Boeing has gone from strength to strength…

In the end, Ex-Im survived, as a legal entity. Crucially, though, Senate Republican foes of the bank refused to confirm a quorum for the bank’s board; without a quorum, Ex-Im cannot approve loan transactions larger than $10 million.

As a result of this ploy, the bank has been unable to aid foreign sales of Boeing or other makers of big-ticket goods since June 2015.

And yet, in that time, Boeing has done awesomely well.

It’s not just Boeing that has survived or thrived during Ex-Im’s paralysis. Another company that received heavy Ex-Im support, construction-equipment-maker Caterpillar, achieved a record profit per share in 2018. Caterpillar’s outlook for 2019 is somewhat less rosy, due to broad economic factors such as the slowdown in China, but Ex-Im, or the lack thereof, hardly registers in analyst forecasts.

Here is more from Charles Lane.

Buy (or Rent) Coal! The Coasean Climate Change Policy

Since climate change and what to do about it are in the news it’s time to re-up an underrated idea, buy coal! Carbon taxes increase the price of carbon and induce economic and technological substitution towards lower-carbon sources of fuel in the countries that adopt them. As carbon-tax countries reduce fuel use, however, non carbon-tax countries see the price of their fuel decline. Thus, unless all countries join the tax-coalition, there is leakage. Supply-side policies are an alternative to demand supply policies. The United States, for example, could buy out and close coal mines, including giving the workers substantial retirement/reallocation bonuses, thus reducing the world supply of coal which is still the largest source of C02 emissions.

You can get rich by hitting an oil gusher, but coal is relatively expensive to mine and to transport. Thus, it’s relatively cheap to buy out coal mines because you aren’t buying the coal, you’re buying the right to leave the coal in the ground. Cutting the supply of coal raises its price which will increase the quantity supplied in other countries. Thus, there is the potential for supply leakage as well as demand leakage. It’s probably easier to use more coal when the price of coal falls (electricity, for example, can be generated in a variety of ways) than it is to mine more coal when the price rises. In other words, the elasticity of the demand for coal is greater than the elasticity of supply so supply leakage is probably less than demand leakage. Furthermore, supply leakage can be handled by buying out supply in the non-coalition countries. As Noah Smith pointed out with the graph at right (data) US CO2 emissions are actually falling while the rest of the world keeps rising (as they catch up in per-capita terms) so addressing the CO2 emissions problem requires bringing countries like China and India on board.

Coal use in China is very high and increasing. India has been canceling coal plants as solar becomes cheaper but coal is still by far the largest source of power in India. Thus, there is plenty of opportunity to buy out, high-cost coal mines in China and India.

It might seem odd to buy Chinese and Indian coal mines but we buy Chinese and Indian labor, why not a coal mine? Moreover, it’s important to understand that the policy is to buy only up to the point that it benefits both parties. Buying coal isn’t foreign aid, it’s a pollution reduction plan just like a carbon tax or R&D investment and because we can buy barely-profitable coal mines and avoid the problem of leakage this is a low-cost method to reduce CO2 emissions.

Collier and Venables worry that foreign voters won’t like foreign investors buying up coal mines, although foreign investment is hardly uncommon and foreigners do protect rainforests by buying the right to cut them down. In any case, Collier and Venables suggest a cap-extract and trade program. Under cap-extract there is a cap on global extractions of carbon (not use) but rights to extract can be traded. Since it’s more valuable to extract say oil than coal what this would mean is that payments would flow from mostly developed countries to developing countries which makes it clear that we are all in the boat together.

Even without a cap-extract and trade program, however, there are other factors that make buying coal attractive to people in selling countries, namely coal is killing them even putting aside the dangers of climate change.

NYTimes: Burning coal has the worst health impact of any source of air pollution in China and caused 366,000 premature deaths in 2013, Chinese and American researchers said on Thursday.

Coal is responsible for about 40 percent of the deadly fine particulate matter known as PM 2.5 in China’s atmosphere, according to a study the researchers released in Beijing.

India’s air quality is even worse than China’s and is responsible for some 1.2 million early deaths annually. A 25% cut in pollution in India could increase life-expectancy by 1.3 years and in some highly polluted cities such as Delhi by 2.8 years. Not all pollution comes from coal but a substantial amount does.

Buyers might worry that a foreign government will take their money and later renege on the deal. There are lots of ways to deal with this problem–turn the coal fields into a national park, for example, or develop them for housing. But let’s turn a problem into a solution. Instead of buying coal, we could rent it. In other words, buy the right to delay mining the coal for say 10 years. Given the rate of improvement in solar, many coal plants will be uneconomic in 10 years and given the rate of improvement in living standards and the consequent increased demand for clean air, many coal plants in India and China could well be unpolitical in 10 years. Thus, it is true that some solutions are naturally in the offing, but for exactly this reason some coal plants are going to be working extra hours in the next decade to squeeze out what profit they can while they still can. We can avoid this last push of CO2 into the atmosphere by buying up the right to extract and holding it for a decade.

A program to leave coal in the ground could easily pay for itself in lives saved and climate stabilized.

Sovereign Bonds since Waterloo — better than you had thought

This paper studies external sovereign bonds as an asset class. We compile a new database of 220,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering 91 countries. Our main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns averaged 7% annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of around 4% above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. The observed returns are hard to reconcile with canonical theoretical models and with the degree of credit risk in this market, as measured by historical default and recovery rates. Based on our archive of more than 300 sovereign debt restructurings since 1815, we show that full repudiation is rare; the median haircut is below 50%.

That is from Josefin Meyer, Carmen M. Reinhart, and Christoph Trebesch in a new NBER working paper.