Tuesday, August 31, 2010

Why Parents of Girls Divorce More

Psychology Today
August 29, 2010

Yes, it's true. In generation after generation across many countries, parents of girls divorce more than do parents of boys.

As Steven E. Landsburg put it in his Oct 2003 article for Slate magazine, "All over the world, boys hold marriages together, and girls break them up."

Economists Gordon Dahl (at the University of Rochester) and Enrico Moretti (at UCLA) discovered the following facts in 2003: In the United States, the parents of a girl are nearly 5 percent more likely to divorce than the parents of a boy. The parents of three girls are close to 10 percent more likely to divorce than the parents of three boys.

Not only do parents of daughters divorce more, but divorced women with daughters are substantially less likely to remarry than divorced women with sons. Landsburg suggested that "daughters are a liability in the market for a husband. Not only do daughters lower the probability of remarriage; they also lower the probability that a second marriage, if it does occur, will succeed."

Perhaps most incredible are Dahl and Moretti's findings from unmarried couples who are expecting a child. If the couple is expecting a boy, they are more likely to get married. Landsburg interpreted this fact in the following way, "Apparently, for unmarried fathers, the prospect of living with a wife and a son is more alluring than the prospect of living with a wife and a daughter."


Filtering Through the Smoke Legalizing Marijuana Would Slash Its Price, but the Effects on Use and Revenues Are Hazy

by Beau Kilmer and Jonathan P. Caulkins

Rand Review
Summer 2010

Californians are considering two proposals that would make the state the only jurisdiction in the world to fully legalize marijuana, including its commercial production for nonmedical purposes.

The first proposal is state Assembly Bill 2254, often called the Ammiano bill after its sponsor, Assemblyman Tom Ammiano (D-San Francisco). The bill would legalize marijuana for those 21 and older, reduce marijuana possession from a misdemeanor to just an infraction for those under 21, allow home cultivation of up to six plants, and require the state’s Department of Alcoholic Beverage Control to regulate marijuana possession, sale, and cultivation in ways similar to the laws now regulating alcohol. The bill would initially impose a statewide excise tax of $50 per ounce on marijuana sales and require the funds to be spent “exclusively for drug education, awareness, and rehabilitation programs.” This $50-per-ounce excise tax may be reduced if revenues exceed spending on these programs.

The second proposal is Proposition 19, which will appear on the state’s November ballot. Proposition 19 would legalize marijuana use for those 21 and over and allow adults to cultivate marijuana plants for personal consumption in an area of up to 25 square feet. In contrast to the Ammiano bill, which would establish a state regulatory regime, the ballot proposition would empower each of the state’s more than 500 cities and counties to choose whether and how to regulate and tax commercial production and distribution within its jurisdiction.

California Governor Arnold Schwarzenegger has suggested that it is “time for a debate” about legalization. While such a debate is indeed taking place in the run-up to the November election, the debate is occurring mostly in the absence of impartial information about the effect of marijuana legalization on price, consumption, and tax revenues.


Monday, August 30, 2010

Ten Fallacies About Web Privacy

by Paul Rubin

Wall Street Journal
August 30, 2010

Privacy on the Web is a constant issue for public discussion—and Congress is always considering more regulations on the use of information about people's habits, interests or preferences on the Internet. Unfortunately, these discussions lead to many misconceptions. Here are 10 of the most important:

1) Privacy is free. Many privacy advocates believe it is a free lunch—that is, consumers can obtain more privacy without giving up anything. Not so. There is a strong trade-off between privacy and information: The more privacy consumers have, the less information is available for use in the economy. Since information helps markets work better, the cost of privacy is less efficient markets.

2) If there are costs of privacy, they are borne by companies. Many who do admit that privacy regulations restricting the use of information about consumers have costs believe they are born entirely by firms. Yet consumers get tremendous benefits from the use of information.

Think of all the free stuff on the Web: newspapers, search engines, stock prices, sports scores, maps and much more. Google alone lists more than 50 free services—all ultimately funded by targeted advertising based on the use of information. If revenues from advertising are reduced or if costs increase, then fewer such services will be provided.


Sunday, August 29, 2010

Evolution, Ethics, and the Market

by Michael Shermer

Big Questions
August 27, 2010

Given the economic roller-coaster ride of the past two years, the idea that capitalism promotes morality might seem like an oxymoron. The imperfections of the market system, the wild swings of the boom-and-bust cycle, and the "animal spirits" of irrational investors have revealed the gulf between economic theory and financial reality — and have put the advocates of capitalism on the defensive.

But let's not get carried away. As every economist knows, the market system, based on the free exchange of goods, is the greatest prosperity-generating machine ever invented. Nor are markets just a necessary evil that we must regretfully tolerate. To the contrary, trade itself leads directly and measurably to greater virtue — to higher levels of generosity, fairness, and trust. But don't take my word for it. There is plenty of experimental evidence to back me up, and it points to the deep evolutionary foundations of the market's moral effects.


The seven secrets of a happy life

by Nick Powdthavee and Carl Wilkinson

Financial Times
August 28, 2010

Many of us struggle to find real happiness. Why is that? Studies in psychology suggest that part of the reason is that most of us are very bad at predicting how we’ll react when faced with many of life’s experiences. Consequently, we end up making choices that are potentially harmful to our emotional well-being. According to Harvard psychologist Daniel Gilbert, we tend to overestimate, by a long way, the extent and duration of the emotional impacts of, say, a pay rise, the death of a loved one, or even moving to an area that’s sunny all year round. This is simply because, when we’re trying to imagine how an experience will affect us emotionally, we tend to focus too much of our attention on the most salient features of the experience in question.

In our minds, Los Angeles = sunny weather; money = nice cars and luxurious holidays. In reality, however, the many other less salient features that we often fail to consider will have emotional consequences. Los Angeles, for instance, is actually thousands of miles away from our friends and family; we need to work harder in order to earn more. This explains why happiness often eludes us when we blindly follow our imaginations or what conventional wisdom tells us about what makes us happy.

So where should we look for happiness? New research in psychology and economics suggests the answer lies in what we already have – things like friends and family. The secret to being happy is simply to devote more of our time and attention to these happiness-rich and fulfilling experiences.

As the US rabbi Hyman Schachtel once famously said: “Happiness is not having what you want, but wanting what you have.”


Saturday, August 28, 2010

One in four lap dancers has a degree, study finds

August 27, 2010

The first academic research project into lap dancing has found that, rather than being uneducated young women who have been coerced into the industry, one in four dancers has a degree and has been attracted by the money.

Dancers took home an average of £232 a shift after paying commission and fees to the club, with most working between two and four shifts a week – giving them annual incomes of between £24,000 and £48,000 a year.

The researchers found no evidence of trafficking in the industry, and concluded that career and economic choices were motivations for dancing rather than drug use or coercion.

Aspiring actresses, models and artists used exotic dancing as a career strategy which fitted alongside their other work, training or studies.

Unemployed new graduates – mainly with arts degrees – were also dancing because they could not find graduate jobs and found that lap dancing paid much better than bar work.

The research by Dr Teela Sanders and Kate Hardy, from the University of Leeds, found the vast majority of dancers reported high rates of job satisfaction.

The main attraction of the work was the flexibility it offered to combine different work options and studying.


Wednesday, August 25, 2010

Freakonomics Movie Trailer Released!


Never Pay a Speeding Ticket Again?

by Ian Ayres

New York Times
Freakonomics Blog
August 24, 2010

A couple weeks ago, I became briefly fascinated and somewhat appalled by the appearance of a new Internet business that offered a sort of insurance against speeding tickets. In return for an annual fee of $169, ticketfree.org promised to reimburse you for the costs of up to $500 in moving violations. Its webpage enthused:

  • We don’t promise that you won’t get a ticket; we just promise that you won’t have to pay for it.
  • Never pay another ticket again. Period!
  • Never pay late fees on tickets.
  • Never worry about speed traps or radar while driving.
  • Never need an expensive ticket lawyer.
  • Never have a take a day off work to fight a ticket.

The first reaction of any economist would be that ticketfree.org faces an enormous moral hazard problem. People who are insured against the cost of speeding tickets are more likely to speed. To be a viable business, the insurer has to hope that the hassle of being stopped, incurring “points” toward the suspension of your license or “demerits” on your auto insurance, and the cap of $500 will stop the average person from receiving more than $169 (the premium) in annual tickets. (Ticketfree.org was smart not to cover parking tickets. Because parking tickets don’t result in the hassle of a police stop or the accumulation of “points” like speeding tickets do, people like me would react to parking insurance by massively increasing the number of our parking violations.)


Legal practice

University of Chicago Magazine
July-August 2010

The Law School's Corporate Lab gives students hands-on experience in the work that awaits them after graduation.

There's an old saying that law school doesn't teach you how to be a lawyer, just how to think like one. The adage has an uncomfortable ring of truth that has become a hot-button issue among legal educators. At an April "Future of Education" conference, United Technologies' general counsel Chester Paul Beach put the problem in stark terms: "We don't allow first- or second-year associates to work on any of our matters without special permission," Beach said at the conference, according to the legal blog Above The Law, "because they're worthless."

Students might graduate with deep knowledge of case law, but it's theoretical, lacking in practical application for a recent graduate at a big firm. Law School Professor and Associate Dean David Zarfes, AB'82, AM'83, the former executive vice president and general counsel of Cap Gemini Ernst & Young, has developed a course to add that essential experience to the Chicago curriculum.

Corporate Lab puts students in direct contact with companies such as Microsoft, JPMorgan Chase, Accenture, and AT&T. Groups of five to eight students are assigned to a company. The students work on issues similar to those that await them during summer internships and after they graduate-such as reviewing contracts to identify potential risk areas, surveying industry trends in negotiations or alternative-fee arrangements, labor and employment law, government contracting, intellectual property, and data privacy. "The 3Ls who are leaving now say it's exactly the work they have done in the summer at law firms," says JPMorgan Chase team leader Alex Roitman. "It's real-world, really practical stuff."


Microsoft team members meet, while Zarfes and the Accenture group conduct a conference call.

The Politics of Plastic

Wall Street Journal
August 24, 2010

How much more consumer protection can credit-card customers stand? If President Obama selects activist law professor Elizabeth Warren to head the new Bureau of Consumer Financial Protection, we will soon have an answer. Meantime, thanks to a recent flurry of federal rule-making and legislating, consumers are already learning that "consumer protection" means higher interest rates and fewer card options.

It was among our safest predictions that reduced credit to consumers would result when the Federal Reserve announced new credit-card rules in 2008, and then Congress followed up with the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009. By limiting the ability of banks to increase rates on delinquent borrowers and to charge fees on unprofitable customers, Washington encouraged card issuers to be more selective in advancing credit and to demand higher rates when they do.

It's a simple equation. If politicians make it more difficult and expensive for banks to lend, customers will find it more difficult and expensive to borrow.


The Customer Always Comes Last

New York Times
August 24, 2010

The credit card industry is working hard to subvert the Credit Card Act of 2009, which banned many of the industry’s most predatory practices. The Federal Reserve Board, which oversees and coddles this industry, needs to ensure that consumers get the protections Congress intended, and Americans so clearly need.

The law’s final provisions went into effect this week, and if they are vigilantly enforced, they should end many of the abuses that had become standard practice.


The perverse incentives of private prisons

August 24, 2010

Last week authorities captured two fugitives who had been on the lam for three weeks after escaping from an Arizona prison. The convicts and an accomplice are accused of murdering a holiday-making married couple and stealing their camping trailer during their run from justice. This gruesome incident has raised questions about the wisdom and efficacy of private prisons, such as the one from which the Arizona convicts escaped.

Mother Jones reporter Suzy Khimm, writing at Ezra Klein's spot, observes that the portion of Arizona's prison population now residing in privately owned and operated facilities is 20% and growing. "Nationally," Ms Khimm notes, "there's been a similar surge in private prison construction as the inmate population has tripled between 1987 and 2007: Inmates in private prisons now account for 9% of the total US prison population, up from 6% in 2000." Should we welcome this development?


Tuesday, August 24, 2010

Empirical Methods in Law (Lawless, Robbenholt & Ulen)

The Case Against Corporate Social Responsibility

by Aneel Karnani

Wall Street Journal
August 23, 2010

Can companies do well by doing good? Yes—sometimes.

But the idea that companies have a responsibility to act in the public interest and will profit from doing so is fundamentally flawed.

Large companies now routinely claim that they aren't in business just for the profits, that they're also intent on serving some larger social purpose. They trumpet their efforts to produce healthier foods or more fuel-efficient vehicles, conserve energy and other resources in their operations, or otherwise make the world a better place. Influential institutions like the Academy of Management and the United Nations, among many others, encourage companies to pursue such strategies.

It's not surprising that this idea has won over so many people—it's a very appealing proposition. You can have your cake and eat it too!

But it's an illusion, and a potentially dangerous one.

Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests.

Irrelevant or ineffective, take your pick. But it's worse than that. The danger is that a focus on social responsibility will delay or discourage more-effective measures to enhance social welfare in those cases where profits and the public good are at odds. As society looks to companies to address these problems, the real solutions may be ignored.


Monday, August 23, 2010

Final phase of federal law restricting credit card fees, interest rates begins8

Washington Post
August 22, 2010

The final phase of the landmark federal legislation that placed new restrictions on credit card interest rates and fees takes effect Sunday. Though the bulk of the law's provisions were enacted earlier this year, there are still a few important changes you need to be aware of:

Limiting penalty fees

The law required the Federal Reserve to write regulations outlining how much credit card companies can hit you with for things such as late payments or over-the-limit purchases. The new rules ban them from charging fees that are larger than the infraction. For example, if you are late on a $20 payment, your penalty fee cannot be more than $20. Or, let's say you spend $5 more than your max. The charge for that cannot be more than $5.

Banning certain fees

Issuers will no longer be able to charge you an inactivity fee for not using your card. They also can only charge you one fee per infraction. So if you make one late payment, they can you only ding you once.


Sunday, August 22, 2010

The End of Management

by Alan Murray

Wall Street Journal
August 21, 2010

Business guru Peter Drucker called management "the most important innovation of the 20th century." It was well-justified praise. Techniques for running large corporations, pioneered by men like Alfred Sloan of General Motors and refined at a bevy of elite business schools, helped fuel a century of unprecedented global prosperity.

But can this great 20th century innovation survive and thrive in the 21st? Evidence suggests: Probably not. "Modern" management is nearing its existential moment.

Corporations, whose leaders portray themselves as champions of the free market, were in fact created to circumvent that market. They were an answer to the challenge of organizing thousands of people in different places and with different skills to perform large and complex tasks, like building automobiles or providing nationwide telephone service.

In the relatively simple world of 1776, when Adam Smith wrote his classic "Wealth of Nations," the enlightened self-interest of individuals contracting separately with each other was sufficient to ensure economic progress. But 100 years later, the industrial revolution made Mr. Smith's vision seem quaint. A new means of organizing people and allocating resources for more complicated tasks was needed. Hence, the managed corporation—an answer to the central problem of the industrial age.


Free That Tenor Sax

New York Times
August 21, 2010

For jazz fans, nothing could be more tantalizing than the excerpts made available by the National Jazz Museum in Harlem of newly discovered recordings from the 1930s and ’40s. Nearly 1,000 discs containing performances by masters like Coleman Hawkins, Lester Young, Billie Holiday and the long-neglected Herschel Evans suddenly re-emerged when the son of the audio engineer, William Savory, sold them to the museum.

The museum is doing its best to clean up and digitize the recordings. But because of the way copyright laws work, excerpts may be all that fans can hear for some time. The museum paid for the discs, but cannot distribute the music until it has found a way to compensate the estates of the musicians, many of which may be very difficult to track down after all these decades. Hawkins’s saxophone solo on “Body and Soul” may be reason enough for Congress to revisit this issue and free historical documents from excessive legal fetters.

Copyright laws are designed to ensure that authors and performers receive compensation for their labors without fear of theft and to encourage them to continue their work. The laws are not intended to provide income for generations of an author’s heirs, particularly at the cost of keeping works of art out of the public’s reach.


Spill Fund May Prove as Challenging as 9/11 Payments

New York Times
August 21, 2010

At first blush, it would seem that Kenneth R. Feinberg, the man tapped to dole out BP’s $20 billion oil spill compensation fund, has been down this path before.

As the special master who administered the $7 billion Sept. 11 Victim Compensation Fund, he wrestled with visceral questions of how much money each victim of the attacks was entitled to, endured the occasional emotionally charged taunts and criticisms from widows and grieving relatives, and succeeded in persuading the families of a vast majority of the victims to accept cash settlements rather than file lawsuits.

But some analysts say his new assignment could prove even trickier.

“Although he had a very difficult time placing a dollar value on human life, in some way that was a more straightforward job than estimating the long-term harm to a shrimper’s business,” said Richard A. Nagareda, a mass torts expert and law professor at Vanderbilt University.


Card Firms Gird for Cut to Late Fees

Wall Street Journal
August 21, 2010

Starting Sunday, credit-card issuers could lose more than $3 billion in revenue annually, as new federal laws on late-payment fees kick in.

The rule, which on average cuts late fees to $25, could fuel higher minimum payments required on plastic as companies deploy new tactics to claw back some of the lost revenue. The estimated decline in revenue comes from CardHub.com, a credit-card comparison website.

The new rules "restrict the ability of card issuers to impose late fees," said Rick Fischer, a partner at law firm Morrison & Foerster.

Odysseas Papadimitriou, chief executive of CardHub.com, estimates that in 2008, before the new regulations, issuers collected around $11.4 billion in late fees. He expects this revenue to drop 29% to around $8.1 billion, as the new rules governing late payments on card balances go into effect.

To be sure, calculating the financial impact is difficult because few card companies disclose how much revenue is derived from imposing fees and other penalties on customers who fall behind on their bills.


Tuesday, August 10, 2010

The Myth of Authoritarian Growth

by Dani Rodrik

Project Syndicate
August 9, 2010

On a recent Saturday morning, several hundred pro-democracy activists congregated in a Moscow square to protest government restrictions on freedom of assembly. They held up signs reading “31,” in reference to Article 31 of the Russian constitution, which guarantees freedom of assembly. They were promptly surrounded by policemen, who tried to break up the demonstration. A leading critic of the Kremlin and several others were hastily dragged into a police car and driven away.

Events like this are an almost daily occurrence in Russia, where Prime Minister Vladimir Putin rules the country with a strong hand, and persecution of the government’s opponents, human-rights violations, and judicial abuses have become routine. At a time when democracy and human rights have become global norms, such transgressions do little to enhance Russia’s global reputation. Authoritarian leaders like Putin understand this, but apparently they see it as price worth paying in order to exercise unbridled power at home.

What leaders like Putin understand less well is that their politics also compromise their countries’ economic future and global economic standing.

The relationship between a nation’s politics and its economic prospects is one of the most fundamental – and most studied – subjects in all of social science. Which is better for economic growth – a strong guiding hand that is free from the pressure of political competition, or a plurality of competing interests that fosters openness to new ideas and new political players?


Monday, August 9, 2010

Economic Policy 'Nudge' Gives Way to a 'Shove'

Wall Street Journal
March 8, 2010

A little more than a year into its ascendancy at the White House, behavioral economics as a key policy-making tool may be on the wane.

The opening weeks of the Obama administration were a coming-out party for economists who hold that incomplete information, subtle obstacles to participation and confusion tend to make people act in economically irrational ways. Economic policy can "nudge" people and institutions into more efficient, economically beneficial behavior without heavy-handed command-and-control measures in regulation and legislation, they argue.

Cass Sunstein, co-author of the behaviorist bible, Nudge, took up residence at the White House Office of Information and Regulatory Affairs, while behavioral economist Jeff Liebman is acting deputy director of the Office of Management and Budget. Yet another true believer, Austan Goolsbee, took a seat on the Council of Economic Advisers.

At this time a year ago, the order of the day was disclosure, transparency and light-touch policy proposals, such as automatically enrolling workers into 401(k) plans and simplifying student-loan forms.

But in recent weeks, President Barack Obama has proposed regulating health-insurance rate increases, separating commercial banking from investing on behalf of their own bottom lines, and prohibiting commercial banks from owning or investing in private-equity firms or hedge funds.


Sunday, August 8, 2010

The Music-Copyright Enforcers

by John Bowe

New York Times
August 6, 2010

There was the time her pet hamster, Herschel, died. There was the time she was run over by a car. Neither episode provoked tears. Not even close. And yet, on a recent Thursday, as Baker drove down Highway 60, about 55 miles northwest of Phoenix, she had to wonder, Is today one of those days when I’m gonna cry?

Baker, who has preternaturally white teeth, green eyes, soft brown hair and a friendly way that she’s the first to describe as “country,” was on her once-a-month, weeklong road trip. She’d flown to Phoenix to meet with bar and restaurant owners to discuss a rather straightforward business proposal. Off she went on her rounds each day, navigating with a special Microsoft Streets and Trips plan she prepared in advance, with 60 to 80 venues marked with dots, triangles or blue squares, according to size, dollar value and priority, wearing her company badge with photo ID, hoping for a little friendly discussion. Except it didn’t always work out so friendly.

Once, a venue owner exploded, kicked her off his property and told her, as she recalled, “to get the bleep outta here.” Another hissed at her that she was “nothing more than a vulture that flew over and came down and ate up all of the little people.” It wasn’t fun. It was just the sort of thing, in fact, that could bring Devon Baker to tears.


Divorce Insurance (Yes, Divorce Insurance)

New York Times
August 6, 2010

Here’s a new option for those worried they’ll end up on the wrong side of the statistics that show so many marriages ending over time: divorce insurance.

SafeGuard Guaranty Corp., an insurance start-up based in North Carolina, recently released what it’s billing as the first world’s first divorce insurance product. Here’s how its WedLock product works.

The casualty insurance is designed to provide financial assistance in the form of cash to cover the costs of a divorce, such as legal proceedings or setting up a new apartment or house. It is sold in “units of protection.” Each unit costs $15.99 per month and provides $1,250 in coverage. So, if you bought 10 units, your initial coverage would be $12,500 and you’d be paying $15.99 per month for each of those units. In addition, every year, the company adds $250 in coverage for each unit.


Economics for Lawyers

Whether dealing with contracts, tort actions, or government regulations, lawyers are more likely to be successful if they are conversant in economics. Economics for Lawyers provides the essential tools to understand the economic basis of law. Through rigorous analysis illustrated with simple graphs and a wide range of legal examples, Richard Ippolito focuses on a few key concepts and shows how they play out in numerous applications. There are everyday problems: What is the social cost of legislation enforcing below-market prices, minimum wages, milk regulation, and noncompetitive pricing? Why are matinee movies cheaper than nighttime showings? And then there are broader questions: What is the patent system's role in the market for intellectual property rights? How does one think about externalities like airport noise? Is the free market, a regulated solution, or tort law the best way to deliver the "efficient amount of harm" in the workplace? What is the best approach to the question of economic compensation due to a person falsely imprisoned?

Along the way, readers learn what economists mean when they talk about sorting, signaling, reputational assets, lemons markets, moral hazard, and adverse selection. They will learn a new vocabulary and a whole new way of thinking about the world they live in, and will be more productive in their professions.

Richard A. Ippolito retired in 2004 as Professor of Law and Economics from the George Mason University School of Law, where he taught the materials that form the basis for this book to more than 1,000 law students over the course of his five-year tenure. He earned his Ph.D. in economics from the University of Chicago in 1974, and spent twenty-five years working with lawyers on policy and regulatory issues. His previous books include Pension Plans and Employee Performance.

Wednesday, August 4, 2010

Brussels' Antitrust Revolution

by Frank L. Fine

Wall Street Journal
August 4, 2010

The European Commission is seeking to drastically expand its power to fine companies for their participation in so-called "information exchanges," a form of cartel under EU competition law involving the communication of sensitive business information between competitors. The commission's new cartel-enforcement powers were revealed earlier this year in its draft Horizontal Guidelines, which are due to enter into force next January. These changes would criminalize a wide range of currently legal, and in some cases innocuous, conduct.

The commission has already been turning the screw on companies that transmit sensitive business information to their competitors, such as intended future prices or output. In June, the commission handed down a cartel decision involving producers of bathroom fittings and fixtures. This case relied heavily on their exchange of intended future prices. One of the producers, Ideal Standard, was fined €326 million. Similarly, in the commission's pending investigation of airfreight carriers, the commission's case depends largely upon the alleged exchange of carriers' rates and surcharges.

The commission argues that by engaging in such exchanges, competitors create "artificial market transparency." It is seen as anticompetitive for competitors to "announce" to each other their future prices, for example, because doing is seen as an invitation to collude on prices. Even the communication of one's recent prices is viewed as inviting future collusion.


A Labor Market Punishing to Mothers

New York Times
August 3, 2010

The last three men nominated to the Supreme Court have all been married and, among them, have seven children. The last three women — Elena Kagan, Sonia Sotomayor and Harriet Miers (who withdrew) — have all been single and without children.

This little pattern makes the court a good symbol of the American job market. Women and men with similar qualifications — age, education, experience — are much more likely to be treated similarly today than in the past. The pay gap between them, while still not zero, has shrunk to just a few percentage points.

Yet once you look beyond the tidy comparisons of supposedly identical men and women, the picture is much less sunny. There are still only 15 Fortune 500 companies with a female chief executive. Men dominate the next rungs of management in most fields, too. Over all, full-time female workers make a whopping 23 percent less on average than full-time male workers.


Tuesday, August 3, 2010

Can behavioral economics save us from ourselves?

The University of Chicago Magazine
February 2005

Traditional economics holds that humans, as rational beings, make choices to maximize their welfare. Chicago’s Richard Thaler argues that policy makers—including those working on President Bush’s plan to partially privatize Social Security—would do well to remember that rationality has its bounds.
The advertisements appeared in late August 2000 on Swedish television and in women’s magazines, traveling to billboards and bus stops and the pages of daily newspapers. They were variations on a theme. Two people have a discussion. One has made provisions for old age, the other has not. Then comes the good news: Sweden is partially privatizing its social-security system, so it’s not too late for the slacker to catch up. Last comes the tag line, which translates, “There is another way to secure your future. Make sure you choose where to invest your premium pension this autumn.”

A few weeks later Sweden’s 4.4 million working-age adults received blue packets in the mail. They had four weeks to select an investment portfolio and return the form in a postage-paid envelope. They could, a personalized letter explained, invest 2.5 percent of their annual pay in the new funds, while the rest of the 18.5 percent of their annual income contributed to social security would remain in the traditional pension system. A “What to Do” brochure described the procedure in four steps. A catalog gave an “easy to understand” list of 456 funds from which investors could pick. Although a default fund offered a low-cost, well-diversified allocation of assets, the overall message was clear: Swedes should take charge of their own financial futures.

So began what Richard Thaler, the Robert P. Gwinn distinguished service professor of behavioral science, economics, and finance in the Graduate School of Business, considers a massive field experiment into what could happen if every Lars, Olaf, and Kristina chose how to manage their social-security funds. In the American Economics Association’s May 2004 AEA Papers and Proceedings Thaler and GSB doctoral candidate Henrik Cronqvist analyzed early results from Sweden’s Pension Premium Authority (PPM). Moving beyond Sweden, the research offers timely insights as President George W. Bush renews his efforts to partially privatize Social Security. While most economic writings on social-security design focus on macroeconomic aspects such as funding, Thaler and Cronqvist’s approach is microeconomic. Analyzing the particulars of PPM’s set-up and how those details influenced the users’ behavior, they found some “undesirable” results: Swedes who actively invested their own pensions chose more expensive, less diversified funds than those picked by the default plan.


Monday, August 2, 2010

The Soak-the-Rich Catch-22

by Arthur Laffer

Wall Street Journal
August 2, 2010

Tax reduction thus sets off a process that can bring gains for everyone, gains won by marshalling resources that would otherwise stand idle—workers without jobs and farm and factory capacity without markets. Yet many taxpayers seemed prepared to deny the nation the fruits of tax reduction because they question the financial soundness of reducing taxes when the federal budget is already in deficit. Let me make clear why, in today's economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarged the federal deficit—why reducing taxes is the best way open to us to increase revenues.
President John F. Kennedy,
Economic Report of the President (January 1963)

If only more of today's leaders thought like JFK. Sadly, in the debate over whether to extend the 2001 and 2003 tax cuts, and if so whether the cuts should be extended to those people who are in the highest tax bracket, there is a false presumption that higher tax rates on the top 1% of income earners will raise tax revenues.

Anyone who is familiar with the historical data available from the IRS knows full well that raising income tax rates on the top 1% of income earners will most likely reduce the direct tax receipts from the now higher taxed income—even without considering the secondary tax revenue effects, all of which will be negative. And who on Earth wants higher tax rates on anyone if it means larger deficits?


Sunday, August 1, 2010

Trading Tricks The Economics of Prostitution

Research by Steven D. Levitt

Steven D. Levitt is William B. Ogden Distinguished Service Professor in Economics and the College at the University of Chicago

Capital Ideas
April 2009

Despite being called the oldest profession in the world, little is known about how this unique market works. A recent study sheds light on the business of selling sex in the city of Chicago and finds that it is much like any other business.

Most crimes involve a victim and a perpetrator. The perpetrator typically looks for his victim and the victim avoids the perpetrator as much as he can. The crime of prostitution, however, is quite different. There are two parties involved but it isn’t clear who the perpetrator is and who the victim is. Moreover, it is in the interest of both the prostitute and the client to do their best to find one another. As a result, prostitution operates just like a market: it is populated by buyers and sellers who mutually benefit when they come together to perform a transaction.

Interesting questions emerge when one thinks of prostitution as a market, but there is surprisingly little research on the economics of this particular profession. How do prostitutes and their customers, or “johns,” find one another? How much do prostitutes charge for a service, or “trick,” and how is that price negotiated? If a john prefers not to use a condom, how much more does he have to pay? How does a prostitute’s wage compare to what she earns for doing other jobs? What happens when there’s a sudden surge in demand for prostitutes, and how do prostitutes meet this demand? The difficulty of obtaining reliable data is partly to blame for the dearth of empirical analysis on the subject.

In a recent study, “An Empirical Analysis of Street-Level Prostitution,” University of Chicago professor Steven D. Levitt and Sudhir Alladi Venkatesh of Columbia University uncover intriguing answers to these questions by using publicly available information from the Chicago Police Department and, more importantly, detailed and real-time transaction data for over 2,200 tricks performed by about 160 prostitutes in three Chicago neighborhoods that the authors collected with the help of pimps and prostitutes. The bulk of this massive data undertaking was done by trackers who were hired to follow prostitutes for two years. The trackers are mostly former prostitutes. They stood on street corners and sat in brothels, recording valuable information on every trick performed immediately after a customer left. Embedding data trackers in the daily activities of prostitutes and collecting data in real time has the potential to generate more accurate information than standard survey methods. “The prostitutes know the data collectors, trust the data collectors, and hopefully will be honest with the data collectors,” Levitt says.

The study offers a rare glimpse into the business of prostitution, as well as a unique window to view the workings of the inner city of Chicago that may have been difficult to reveal otherwise. “In the end, our study is not just about prostitution, but also about the lives of the people of the inner city,” Levitt says.


Read the unpublished working paper

Transactions Costs in Charitable Giving: Evidence from Two Field Experiments

by Steffen Huck and Imran Rasul
University College London

The B.E. Journal of Economic Analysis & Policy
Vol. 10, Iss. 1 (Advances), Article 31 (2010)

In large-scale fundraising campaigns based on direct mailings, typically less than 5% of individuals donate to the charitable cause. We present evidence from two field experiments designed to measure the existence of transaction costs that inhibit charitable giving in such fundraising campaigns, and shed light on the nature of such transaction costs. The experiments are designed in conjunction with the Bavarian State Opera House. The first mail-out experiment was implemented over two stages using a within-subject design. We develop a theoretical framework that makes precise the identifying assumptions under which we can exploit this two-stage design to measure the following structural parameters among potential donors: (i) the share of donors who would make a strictly positive donation in the complete absence of transaction costs and (ii) the probability that a potential donor has sufficiently low transactions costs to make a strictly positive donation. Our results imply response rates to mail-out solicitations would almost double in the complete absence of transaction costs. The second field experiment provides more evidence on the nature of transaction costs. We distinguish between ex ante transaction costs, which prevent the choice problem from being considered and ex post transaction costs, which prevent choices being implemented. We find that the likelihood of a donation being made increases by 26% in response to even a small reduction in ex post transaction costs.


Altered State? Assessing How Marijuana Legalization in California Could Influence Marijuana Consumption and Public Budgets

by Beau Kilmer, Jonathan P. Caulkins, Rosalie Liccardo Pacula, Robert J. MacCoun, Peter H. Reuter

Rand Corporation
Drug Policy Research Center

Occasional Paper OP-315-RC/2010

To learn more about the possible outcomes of marijuana legalization in California, RAND researchers constructed a model based on a series of estimates of current consumption, current and future prices, how responsive use is to price changes, taxes levied and possibly evaded, and the aggregation of nonprice effects (such as a change in stigma). Key findings include the following: (1) the pretax retail price of marijuana will substantially decline, likely by more than 80 percent. The price the consumers face will depend heavily on taxes, the structure of the regulatory regime, and how taxes and regulations are enforced; (2) consumption will increase, but it is unclear how much, because we know neither the shape of the demand curve nor the level of tax evasion (which reduces revenues and prices that consumers face); (3) tax revenues could be dramatically lower or higher than the $1.4 billion estimate provided by the California Board of Equalization (BOE); for example, uncertainty about the federal response to California legalization can swing estimates in either direction; (4) previous studies find that the annual costs of enforcing marijuana laws in California range from around $200 million to nearly $1.9 billion; our estimates show that the costs are probably less than $300 million; and (5) there is considerable uncertainty about the impact of legalizing marijuana in California on public budgets and consumption, with even minor changes in assumptions leading to major differences in outcomes.


Read the Paper

Turbines Too Loud? Here, Take $5,000

New York Times
July 31, 2010

Residents of the remote high-desert hills near here have had an unusual visitor recently, a fixer working out the kinks in clean energy.

atricia Pilz of Caithness Energy, a big company from New York that is helping make this part of Eastern Oregon one of the fastest-growing wind power regions in the country, is making a tempting offer: sign a waiver saying you will not complain about excessive noise from the turning turbines — the whoosh, whoosh, whoosh of the future, advocates say — and she will cut you a check for $5,000.

“Shall we call it hush money?” said one longtime farmer, George Griffith, 84. “It was about as easy as easy money can get.”