Category: Law

The forthcoming Chinese charter city?

From Bloomberg BusinessWeek:

The government intends to ring-fence Port City from Sri Lanka’s legal system to facilitate currency movement and create favorable tax and investment incentives. Harsha de Silva, a state minister who once campaigned against the project but is now one of its most vocal supporters, is involved in drafting the separate legal structure. “This must be a top-10 city for doing business in the world,” he says. “Otherwise, what’s the point?” Sri Lanka is currently ranked 111 out of 190 nations on the World Bank’s ease-of-doing-business index.

And here is the take on one of the nearby port projects:

Today, Hambantota handles about one ship a day, not enough to make it commercially viable, and wild elephants regularly breach the perimeter fencing. At a nearby airport, which CCCC also helped build during Rajapaksa’s administration, the only commercial flight was canceled in June because of frequent peacock strikes and low demand.

Is it fair to call all this a “hegemon charter city“?

The three kinds of charter cities

First, there is the minimal charter city.  During a cruise ship vacation, everyone lives under cruise ship law.  This works fine, and is easy to start up, but it also has limited applicability.  No one has to make a big cultural shift, as long as they don’t get too drunk while playing shuffleboard out on the deck.

Second, there is hegemon-backed charter city.  The British empire ran Hong Kong, and the mainland United States (partially) has run Puerto Rico and earlier managed the Panama Canal Zone.  By definition, a hegemon is required to enforce the law in the external jurisdiction, and of course such hegemons may be scarce, unwilling, or their rule may be oppressive or counterproductive.  Portuguese rule over Goa was not a major success, nor was British rule over India more generally.  European extraterritoriality in China proper was an imperialist disaster.  One problem is that exporting legal systems without exporting their cultural preconditions can lead to failure.

Third, some charter cities are based on the idea of a complementary exported culture.  Singapore did in fact absorb many parts of British culture and law, and some parts of Western mores; it now feels like the most Western part of Asia.  The partial export of Western law and culture has been extremely successful, and the role of culture here means there is strong indigenous support, within Singapore, for Singapore being the Singapore we all know and love.  These are the charter cities that work best, but they are also the hardest to pull off.

You can think of the original charter city idea as postulating law as a non-rival public good.  Why not just spread the best laws to more jurisdictions?  But does spreading the law without the underlying culture suffice?  You can think of the three kinds of charter cities, as mentioned above, as varying responses to this problem.

And spreading culture does not seem to be a public good at all, rather it involves a lot of hard work and it often fails or backfires.

This blog post is drawn from a talk I gave in San Francisco at an inaugural conference for Mark Lutter’s new Center for Innovative Governance.

Revolving Door Patent Examiners

The revolving door between government and private industry creates opportunities for regulatory capture. Dick Cheney’s moves between Secretary of Defense, CEO of Halliburton and Vice-President certainly raised eyebrows. Secretaries of the Treasury, Robert Rubin, Hank Paulson and Steve Mnuchin were all former bankers at Goldman Sachs. Former members of Congress who become lobbyists are common as are bureaucrats and congressional staffers who turn to lobbying on behalf of the industries they previously regulated. At the same time, it seems desirable that government should be able to draw from top notch people in the private sector and it’s not surprising that private sector firms would want to hire people with government experience. It’s unfortunate (in my view) that government is so entwined with the private sector but that is inevitable in a mixed economy. Nevertheless, it would be useful if we had more data and less anecdote when it comes to the revolving door.

In a new and impressive paper (summary here), Haris Tabakovic and Thomas Wollmann take a detailed look at this issue using patent examiners. Using data on over 1 million patent decisions they find that examiners grant significant more patents to firms that later hire them.

It’s possible that examiners want to work for firms that have high quality patents but several considerations suggest that this is not the explanation for the correlation between grant probability and firm hiring. First, the firms doing the hiring are law firms that handle patent applications. We are not talking about USPTO examiners all wanting to work for Google.

Second, in a very clever analysis the authors show that USPTO examiners who leave for the private sector tend to go to a city near their college alma mater. Moreover, examiners who leave are more likely to approve patents to firms located their alma mater (even when these firms subsequently do not hire them). In other words, it looks as if (on the margin) patent examiners are more generous to firms that they might want to subsequently work for because they are located in places desirable to them. Patent examiners who do not leave do not show a similar bias which removes a home-city boosterism effect. All of these effects are after taking into account examiner fixed effects–so it’s not that examiners who leave are different on average it’s that examiners who leave act differently when firms are located in regions that are potentially desirable to those examiners.

Finally, the authors show that patent quality, as measured by future citations, is lower for patents granted to firms that later hire the examiner or to firms in the same city who are granted patents by the examiner (i.e. to firm-patents the examiner might have given a pass to in order to curry favor). The authors also find some evidence in the patents themselves. Namely, patents that are grant to subsequent employers tend to have claims that are shorter (i.e. stronger) because fewer words were added during the claims process.

The policy implications are less clear. Waiting periods are crude–in other contexts we call these non-compete clauses and most people don’t like them. Note also that these relationships appear to be driven by norms rather than explicit bargaining. USPTO examiners are paid substantially less than their private sector substitutes and that nearly always seems like a bad idea. Paying examiners more would reduce the incentive to rotate.

What is land for Georgist purposes?

Matthew Prewitt wrote this interesting piece “Reimagining Property: A Philosophical Look at Harberger Taxation.”  As he defines a Harberger tax, you report the value of your property, pay a tax on that amount, but if you under-report the value someone can buy the property from you at that price.  The goal is to encourage turnover of assets, rather than hoarding of assets.  Prewitt writes:

Recall that in a world where the natural and artificial components of capital were magically unmixed, we might impose a Harberger tax near the turnover rate on natural capital, and a Harberger tax near zero on artificial capital. But, recognizing that we do not live in such an ideal world, Posner and Weyl propose to set HT rates at varying percentages of the turnover rate for different assets, depending on those assets’ investment elasticities. That is, assets whose value increases more readily with investment should generally enjoy lower HT relative to their turnover rate, to facilitate investment.

…artificial capital is value that emerges in response to incentives

As time passes, artificial capital starts to resemble natural capital.

Think of a new boat, built yesterday. Now think of the Parthenon. The labor that made the boat can and should be rewarded. It makes sense for the spoils of boat ownership to accrue to its builder. But the labor that made the Parthenon has dissolved into the mists of time. There is no sense rewarding it. We simply find the building in our environment, like an ocean, a mountain, or a nickel deposit. Whoever possess it deserves an incentive for its upkeep, but not a reward for its existence. Any profits from Parthenon ownership ought to be distributed broadly, and not end up in any particular pocket. Thus, unlike the new boat, the Parthenon ought to be treated like natural capital. Yet it is the product of human labor; when erected, it was the very epitome of artificial capital.

Of course there is a decay function in how we treat rights in intellectual property, and this argument suggests there should be a decay function for rights in physical capital as well.  After some point in time, that physical capital becomes Georgist land, and thus subject to the efficiencies of the land tax, not to mention possible Harberger taxation.

Prewitt’s conclusion is:

  • artificial capital should have a Harberger tax rate near zero
  • natural capital should have a Harberger tax near the turnover rate
  • artificial capital becomes more like natural capital as more time passes and/or it changes hands more times

More generally, as I suggested about five years ago, the forthcoming fights will be about the taxation of wealth not income.

I wonder, however, if this one shouldn’t be argued in the opposite direction.  Let’s say excellence is under-rewarded.  If a structure or capital expenditure lasts for a long period of time, maybe that is strongly positive selection and it deserves a subsidy?  For one thing, such structures are likely to be iconic brands of a kind, with strong option value and the costs of irreversibility if we let them perish or fall into disrepair.  The example of the Parthenon is a useful one, because in fact the monument is endangered by air pollution, and arguably it should receive a larger subsidy for protection, whether for intrinsic reasons or for its economic contribution to Greek tourism.

For the pointer I thank David S.

The EU “link tax” has been resurrected

And here is commentary from Ben Thompson:

This is why the so-called “link tax” is doomed to failure — indeed, it has already failed every time it has been attempted. Google, which makes no direct revenue from Google News, will simply stop serving Google News to the EU, or dramatically curtail what it displays, and the only entities that will be harmed — other than EU consumers — are the publications that get traffic from Google News. Again, that is exactly what happened previously.

There is another way to understand the extent to which this proposal is a naked attempt to work against natural market forces: Google’s search engine respects a site’s robot.txt file, wherein a publisher can exclude their site from the company’s index. Were it truly the case that Google was profiting unfairly from the hard word of publishers, then publishers have a readily-accessible tool to make them stop. And yet they don’t, because the reality is that while publishers need Google (and Facebook), that need is not reciprocated. To that end, the only way to characterize money that might flow from Google and Facebook (or a €10-million-in-revenue-generating Stratechery) to publishers is as a redistribution tax, enforced by those that hold the guns.

Here is the full post, excellent as always.

A Win for Justice

Congratulations to the Institute for Justice for an important victory against the abuse of civil asset forfeiture:

Today, the Institute for Justice dismantled one of the nation’s largest and most egregious civil forfeiture programs.  For decades, Philadelphia’s forfeiture machine terrorized its citizens:  throwing them out of their homes without notice, seizing their cars and other property, and forcing victims to navigate a rigged kangaroo court system to have any chance of getting their property back.  And the property and money forfeited was then given to the very officials who were supposed to be fairly enforcing the law.
After four long years of litigation, IJ cemented a victory for all Philadelphians this morning with two binding consent decrees in which city officials agreed to reforms that:
    1.  Sharply limit when Philadelphia law enforcement can forfeit property;
    2.  Prevent law enforcement from keeping what they seize;
    3.  Establish robust protections for the due process rights of citizens; and
    4.  Create a $3 million fund to compensate innocent people who were ensnared by the city’s abusive system.
My paper, To Serve and Collect (with Makowsky and Stratmann) suggests that this victory will not only reduce civil asset forfeiture it will also change police behavior and decision-making, altering the number, type, and racial composition of arrests.

Tax salience and the new Trump tariffs

That is the topic of my latest Bloomberg column.  Here is one excerpt:

…tariffs distort consumer decisions more than sales taxes do. It may well be true that consumers don’t notice tariffs as such. But they respond by buying less, lowering their well-being and also possibly lowering GDP and employment.

It gets worse yet. President Donald Trump’s tariffs typically are applied to intermediate goods coming from China, such as circuit boards and LCD screens. The end result is more expensive computers at the retail level. But most consumers see only the higher price for computers. They probably don’t know which intermediate goods Trump put the tariffs on, and for that matter many U.S. consumers probably don’t even know what circuit boards are, much less where they come from.

The end result is that the tariffs are somewhat invisible, or at least they are invisible as tariffs. It’s highly unlikely there will be mass protests against a 10 percent tariff on circuit boards. No one will get “circuit board tariff charge” bill in the mail, as they might with their property taxes, and unlike gasoline, people don’t buy computers very often.

Most generally, it can be said that the new Trump policy makes the high prices salient, but the underlying tariffs not very salient at all. This is the worst possible scenario. The higher prices will reduce consumption and output, yet the invisibility of the tariffs will limit voter pushback.

Do read the whole thing.

The future of retail surveillance?

“We learn behaviors of what it looks like to leave,” said Michael Suswal, Standard Cognition’s co-founder and chief operating officer. Trajectory, gaze and speed are especially useful for detecting theft, he said, adding, “If they’re going to steal, their gait is larger, and they’re looking at the door.”

Once the system decides it has detected potential theft behavior, a store attendant will get a text and walk over for “a polite conversation,” Mr. Suswal said.

Here is more from Nellie Bowles at the NYT, via Michelle Dawson.

Markets in everything

I am surprised issues of this kind have taken so long to surface:

Amazon is investigating claims that employees accepted bribes to disclose confidential data that would give sellers that use its marketplace a competitive advantage. The company confirmed the investigation following a report in the Wall Street Journal that Amazon employees, working through brokers, have sold internal sales data, the email addresses of product reviewers, and the ability to delete negative reviews and restore banned accounts. “We are conducting a thorough investigation of these claims,” an Amazon spokeswoman said.

These practices seem to be a particular problem in China, though not only.  Here is more from Shannon Bond at the FT.  Here is further coverage at Verge: “The WSJ also reports that it costs roughly $300 to take down a bad review, with brokers “[demanding] a five-review minimum” per transaction.”

To Serve and Collect

My latest paper (co-authored with Michael Makowsky and Thomas Stratmann) is To Serve and Collect: The Fiscal and Racial Determinants of Law Enforcement (forthcoming in the Journal of Legal Studies):

We exploit local deficits and state-level differences in police revenue retention from civil asset forfeitures to estimate how incentives to raise revenue influence policing. In a national sample, we find that local fine and forfeiture revenue increases at a faster rate with drug arrests than arrests for violent crimes. Revenues also increase at a faster rate with black and Hispanic drug arrests than white drug arrests. Concomitant with higher rates of revenue generation, we find that black and Hispanic drug, DUI, and prostitution arrests, and associated property seizures, increase with local deficits when institutions allow officials to more easily retain revenues from forfeited property. White arrests are broadly insensitive to these institutions, save for smaller increases in prostitution arrests and property seizures. Our results show how revenue-driven law enforcement can distort police behavior.

We find that drug arrests, especially of blacks and Hispanics, generate revenues so police have the motive and opportunity to engage in revenue driven policing. What about the means? Arrests for murders or robbery are limited by the number of murders and robberies. Drug arrests, however, are more of a police choice variable, able to be ramped up or down almost at will. Thus, in addition to motive and opportunity, police also have the means for revenue driven law enforcement.

How can we test for this effect? In some states, police get to keep the revenues they collect from forfeitures but these states are not randomly assigned. Thus, we use deficits which are plausibly randomly assigned (relative to our variables of concern) and we identify off of the interaction of the two i.e. the marginal impact of additional budget deficits in states where seizure revenue is retained.

We find that black and Hispanic arrests for drugs, DUI, and prostitution arrests are all increasing with deficits in states where seizure revenues are legally retained while white arrests are broadly insensitive to deficits.

Our identification strategy is somewhat coarse so we are by no means the final word on this issue but surely it is time to forbid police departments from keeping the revenues they collect.

We conclude:

The prospects for justice are dimmed when the probability an individual is arrested varies not only by the character of their transgression but also by the potential windfall they present to the public coffer.

Mike Makowsky has an excellent tweetstorm going into further details.

My Conversation with Michele Gelfand

Here is the audio and transcript, and here is the summary:

Michele Gelfand is professor of psychology at the University of Maryland and author of the just-released Rule Makers, Rule Breakers: How Tight and Loose Cultures Wire Our World. In her conversation with Tyler, Michele unpacks the concept of tight and loose cultures and more, including which variable best explains tightness, the problem with norms, whether Silicon Valley has an honor culture, the importance of theory and history in guiding research, what Donald Trump gets wrong about negotiation, why MBAs underrate management, the need to develop cultural IQ, and why mentorship should last a lifetime.

Here is one excerpt:

COWEN: As you know, it’s a common distinction in cross-cultural analysis to call some cultures individualistic and others collectivistic. How does tightness and looseness differ from that distinction? What do you pick up that, say, the work of Triandis does not?

GELFAND: Actually, Triandis is my mentor. I went to Champaign to work with him. I did a lot of research on collectivism and individualism. For a long time, that was the one dimension that we looked at in cross-cultural psychology.

It’s almost akin to, in personality psychology, only studying extroversion to the neglect of other dimensions, like neuroticism. In cross-cultural psychology, we got a little bit narrow in what we were studying. Collectivism-individualism is related to tightness but distinct.

Part of the problem we’ve had is, we’ve confounded cultures in our research. We’ve been studying East Asia, which is both tight and collectivistic, with the United States and other Western cultures, which tend to be loose and individualistic. So they have been confounded.

But when you think about the off-diagonals of that two-by-two, you can imagine cultures like Germany, Switzerland, Austria that tend to be pretty individualistic. They emphasize privacy. They’re not hugely group and family oriented, but they’re relatively tight. They have strong rules and punishments for deviance.

On the flip side, you can think about Latin American cultures — in our data, that’s Brazil or Spain — that tend to be pretty family oriented and pretty collectivistic, but they’re rather loose.

In a lot of ways, you can disentangle that variation, even if they’re related. They tend to be related about 0.4. That’s found both in modern nations and also traditional societies. At the state level, they also tend to be related but again distinct. Only in that case, it’s about 0.2 or 0.3, the correlation between tightness and collectivism.

And:

COWEN: Overrated or underrated, Staten Island?

GELFAND: [laughs] I would say probably underrated. That’s because I actually am familiar with Staten Island. We have relatives that live there. It’s probably the last undiscovered place around the city. Brooklyn has become a chichi place to live, but Staten Island has not. There’s great delis there. I’ve spent some time there.

And:

COWEN: Putting aside your political views, but just if you observe Donald Trump as a negotiator — as a psychologist, what strikes you?

GELFAND: Donald Trump has a very classic negotiation style. It’s a distributive negotiation style. It’s a win-lose style. It works in certain contexts, especially contexts where there’s one issue or when there’s very little expected future interaction.

What Donald Trump does is, he takes that style to international [laughs] politics where these contexts, the structure of these situations is very different. There’s usually many issues at the table. There’s expected future interaction…His style is really mismatched with the context that he’s in.

Many of the best parts are at or near the end, so do read or listen all the way through.  And you can buy Michele’s book here.

Rejection is Good for Citation (maybe)

A paper in Science covering over 80 thousand articles in 923 scientific journals finds that rejected papers are ultimately cited more than first acceptances.

We compared the number of times articles were cited (as of July 2011, i.e., 3 to 6 years after publication, from ISI Web of Science) depending on their being first-intents or resubmissions. We used methods robust to the skewed distribution of citation counts to ensure that a few highly cited articles were not driving the results. We controlled for year of publication, publishing journal (and thus impact factor), and their interaction. Resubmissions were significantly more cited than first-intents published the same year in the same journal.

The author’s argue that the most likely explanation is that peer review increases the quality of manuscripts. Rejection makes you stronger. That’s possible although the data are also consistent with peers being more likely to reject better papers!

Papers in economics are often too long but papers in Science are often too short. Consider the paragraph I quoted above. What is the next piece of information that you are expecting to learn? How many more citations does a resubmission receive! It’s bizarre that the paper never gives this number (as far as I can tell). Moreover, take a look at the figure (at right) that accompanies the discussion. The authors say the difference in citations is highly significant but on this figure (which is on log scale) the difference looks tiny! This figure is taking up a lot of space. What is it saying?

So what’s the number? Well if you go to the online materials section the authors still don’t state the number but from a table one can deduce that resubmissions receive approximately 7.5% more citations. That’s not bad but we never learn how many citations first acceptances receive so it could be less than 1 extra citation.

There’s something else which is odd. The authors say that about 75% of
published articles are first-submissions. But top journals like Science and Nature reject 93% or more of submissions. Those two numbers don’t necessarily contradict. If everyone submits to Science first or if everyone never resubmits to Science then 100% of papers published in Science will be a first submission. Nevertheless, the 93% of papers that are rejected at top journals (and lower ranked journals also have high rejectance rates) are going somewhere so for the system as whole 75% seems implausibly high.

Econ papers sometimes exhaust me with robustness tests long after I have been convinced of the basic result but Science papers often leave me puzzled about basic issues of context and interpretation. This is also puzzling. Shouldn’t more important papers be longer? Or is the value of time of scientists higher than economists so it’s optimal for scientists to both write and read shorter papers? The length of law review articles would suggest that lawyers have the lowest value of time except that doesn’t seem to be reflected in their consulting fees or wages. There is a dissertation to be written on the optimal length of scientific publications.

Why did Prohibition end?

While most accounts trace prohibition’s demise to widespread noncompliance and the graft it generated, we argue that elite congressional support for prohibition gave way when civil service reforms removed federal prohibition agents as patronage resources. We also argue that by giving states control of designing state conventions, and thereby risking state malapportionment of conventions, Democrats succeeded in overcoming the traditional fissures that divided their southern and northern wings.

That is from a new paper by Aaron J. Ley and Cornell W. Clayton.  Maybe I got this from somewhere on Twitter?

Kiwi cat quotas?

A regional council in New Zealand has proposed banning all domestic cats in an attempt to protect native animals.

Environment Southland’s “pest plan” calls for all domestic cats in the region to be neutered, microchipped and registered. Then, when a cat dies, residents would not be permitted to have another.

“We’re not cat haters,” John Collins, of the Omaui Landcare Trust told Newshub. “But we’d like to see responsible pet ownership and this really isn’t the place for cats.”

Ali Meade, the council’s biosecurity operations manager, said that if the move was approved the improvement for the environment and bird life would be vast…

Kapiti Island’s Kotuku Parks subdivision has a no-cat rule and Auckland council is also looking at a plan to euthanise any cat caught in an “ecologically significant site” without a microchip.

Here is the full story, via Ian Bremmer.

Trump’s NAFTA renegotiation

That is the topic of my latest Bloomberg column, the deal will be “good enough,” but the method costly.  Here is one excerpt:

At what price? Canadians and Canadian politicians now feel slighted, and it will be harder for Canada to support U.S. initiatives, especially those led by Trump, in the future. It may be a long time before Canada feels like an even vaguely equal partner again. In the meantime, the U.S. and Canada have ongoing dealings and negotiations concerning water rights, border and migration issues, intelligence sharing, terror prevention, and presenting a (relatively) united front against other foreign powers, including Russia in the Arctic. The marginal gains in trade just don’t seem worth the deterioration in the relationship.

And should Mexico really feel elevated by getting the first crack at the deal? Surely it must know that it might not be the favored party the next time around.

Do read the whole thing.  The best extraction of rent policy, of course, is simply to let Canada keep its gains from trade right now, but later demand larger concessions when it comes to Arctic policy, which will really matter.  That’s assuming nationalism, of course, as a kind of second best rejoinder.  I am more comfortable with the alternative position that the citizens in the other NAFTA member countries count for just as much as Americans.