We do not know the deterrence effect of capital punishment

Whether to enforce or not capital punishment is one of those never-ending debates Europeans and Americans cannot grow tired of. In theory (and the classroom), we economists like to think that imposing a capital punishment on a specific action will make it disappear. Yet, people still do get the capital punishment, despite the fact that it is well know it is exists. Well, maybe the criminals were not quite sure of that, or they were wrongly convicted, or they were framed. But in any case, we should be seeing some evidence that capital offenses should be less prevalent in jurisdictions where capital punishment is enforced.

Steven N. Durlauf, Chao Fu and Salvador Navarro look at the literature and find that there is no consensus whether capital punishment has a deterrence effect. And quite far from it. These diverging results sometimes even come from the same datasets. This is an indication that the model specification matters a lot, and they demonstrate that indeed this matters. A linear specification always leads to a positive deterrence effects, while a non-linear one favors a negative deterrence effect. Of course, we have no idea which specification is the right one, thus we have no idea whether capital punishment is effective or not.

Are ignorant managers better?

It is commonly assumed that managers should be making well-informed decisions. That is just common sense and should apply at all levels. In fact, one of the reasons why it is believed a centrally managed economy like in the Soviet Union failed is that central managers could not have all the relevant informations. Interestingly two Russians claim there are situations where it is better that managers should be to some extend ignorant.

Sergei Guriev and Anton Suvorov bring the following idea. Suppose employees need to make some sort of investment in a project. If managers subsequently get little information, they will not change decisions, stick to the course and this gives good incentives for the employees to make that investment. On the other hand, if managers get a steady flow of information, they may change the course of the project, and employees facing this uncertainty will be more reluctant to invest effort in it. It is thus in the interest of managers to avoid getting information.

Encouraging early retirement does not increase youth employment

The goal of early retirement incentives is to shed expensive older employees for a younger workforce. This has two intended consequences: reduce the unemployment rate of the young, which is particularly high, and reduce the costs for the employer. I am not convinced about the latter in the case that the employer has to supply a pension, but what about the former?

Sorry to disappoint you, but that does not seem to work either, at least at the aggregate level. Adrian Kalwij, Arie Kapteyn and Klaas de Vos show using data from 22 OECD countries that the young and old labor forces are not substitutes, they may even be slight complements. Thus: scrap those silly early retirement incentives, and think seriously about allowing workers to work past 65, or even raise the retirement age. It will not affect youth employment.

Sharing NIMBY

The NIMBY (Not in my backyard) problem is well known: a globally social good that involves a local private bad is impossible to provide if locals can have veto power. One would think that the Coase Theorem would apply: there is a transfer scheme that compensates the hurt community, paid for by those who benefit. The problem, however, is that the proper compensation is difficult to determine due to the public good and the incentive to lie for all parties. Think about the localization of a new power plant, where locals claim they will all die within a year and the other dispute any significant private benefits.

Jérémy Laurent-Lucchetti and Justin Leroux claim to have solved the problem. The mechanism they propose is the following. Every community proposes a compensation, but before a location is selected. Thus, it is not clear from the onset whether a community will be hosting the public good or not. And in the event it is, it wants to make sure the compensation is good. While this induces truth-telling, it does not necessarily balance the budget: there may not be sufficient compensation for the host to give in. However, the public can be provided if one imposes some information structure in the game. The authors suggest that it works by assuming that every community knows something about the preferences of the other communities. That is perfectly reasonable as long as the number of communities is limited.

Specifically, it should be know which community has the lowest hosting cost, and in equilibrium this is also where the public good is located. The game proceeds in two rounds. First every one announces what the lowest hosting cost overall is. Then, all but the one indicating the lowest cost (the "optimist") reveal their own cost. The one with the lowest cost in that second group is selected, as long as its accepts the compensation determined by the optimist. If not, the optimist is selected. This is a nice example of a game where everyone is kept in check, akin to a divide-and-conquer strategy.

A little money gets people to exercice in the long term

Sometimes, small incentives can bring great rewards. Think for example about the 10 cent toys some fast food outlets give to children in return of the loyalty of a whole family (and a lifetime of business thereafter). One could equate this to the little tryout that tips you into an addiction, providing great returns to the provider of the initial investment. But can we obtain such behavior on a more positive side?

Gary Charness and Uri Gneezy show that giving people a monetary incentive to attend a gym for a month will make them more likely to attend thereafter. They claim that a non-trivial incentive managed to create a good habit, but one can also view this incentive to be relatively small compared to the present value of future benefits from going to the gym.

It looks like context matters. People already were aware of the benefits, they just needed to overcome some fix costs to try and the incentive was sufficient. But the more interesting aspect of the study is that compared to a control group, those who received incentives for a sufficiently long time then kept going to the gym thereafter, thus a habit was created. But it looks like this habit was already underlying, waiting to awakened. Why would this habit be stronger with the monetary incentive?

The experiments were carried out in Chicago and San Diego. In particular in the second location, there is a culture centered around the gym: it is the place to be, the meeting place. There is something of an expectation in California that everybody respectable goes to the gym. What does this mean for this study? The peer pressure to go to the gym should not be different according to the receipt of an incentive or not. But does the feeling of guilt about not going to the gym become stronger if you used to be paid to go?

Why three medals at the Olympics?

It is interesting to follow Olympics in various countries. While everywhere there is focus on domestic athletes, big countries, say the US, only consider gold medals to be worth mentioning, while in small ones, say Denmark, even Olympic diplomas (ranks 4-8) make major news. This brings up the question: why reward more than the winner?

Pavlo Blavatskyy demonstrates that giving a single prize elicits a lot of effort from a few athletes. Giving several prizes reduces the effort of those few, but this may increase the overall effort as more athletes participate.

Given, as I suggested above, only gold medals are worthwhile in big countries, I wonder whether we can see more effort from the top athletes from big countries, while we see more effort from small country citizens among diploma-worthy athletes. An empirical test of this would be difficult, though. Indeed, a prediction of this theory would to find proportionally more athletes from small countries in ranks 2-8. But larger country athletes could simply be missing from because a fellow citizen won.

Subsidizing the brain drain

Plenty of studies have documented the brain drain: Highly educated workers migrate to richer countries, thus reducing the domestic return of education in poor countries. This phenomenon applies to all levels, within developing economies, from developing to developed economies and within developed economies. But it turns out some are actually subsidizing the brain drain.

Indeed, many countries would provide grants to their best students to study in the best universities, knowing full well that many of them will not return. The hope is that at least some will return, and this is worthwhile enough. The same applies to the high tech sector. For example, Finland encourages through FinNode young Finnish entrepreneurs to set up shop in the Bay Area and find collaborations there. The hope again is that some will return to Finland, knowing full well that some will stay in the United States and would not have tried without this help.

Of course, the United States is a net beneficiary in this, as it get free human capital. But the moral here is that subsidizing the brain drain can be a win-win sutuation.

The fitness tax credit

Healthy people are good for an economy: they are productive, happy and in particular do not generate (poor) health related costs. As long as all those characteristics are private, there is no need for the government to intervene and promote good health. Everybody is free to choose the lifestyle she prefers, and suffer the consequences.

If there are externalities, it is another story. Second-hand smoke, drunk driving, are all example of lifestyle choices that have a negative impact on others. But health itself also has an impact if health care costs are at least partly carried by the community. This is the case in socialized health care, like in the United Kingdom and Canada, in mandatory group health insurance like in Germany, or in state supported old age health care like in the United States. There are two ways to address this: tax bad behavior, or subsidize good behavior.

Thus the plethora of sin taxes. Among existing ones, let us mention cigarettes and alcohol. But other possibilities could be trans-fat, French fries, corn syrup and sodas. One can also encourage good behavior: some health insurance companies offer lower rates for non-smokers or subsidize various sports activities. Canada introduced last year a tax credit for up to C$500 towards a child's sport activities. There is now a proposal on the table to create a similar tax credit for adults, up to C$1,500.

Telling people to exercise and eat well is only going so far if they are bombarded with temptations. But making them see the consequences in their budget, and early rather than later when they get sick, is bound to have more impact.

How to stick to your New Year's resolutions

Soon is the time to make resolutions, and like most resolutions, they will fall to the wayside within days or at best weeks. Now, how could Economics help you?

StickK.com is run by a group of faculty at Yale University following on a very simple principle: if nothing tangible is at stake, there is little incentive to stick to a resolution. However, if you have committed to some amount of money, then the thread of losing that amount will make you stick. Thus, at StickK.com, you set a price and a deadline for a goal, typically losing weight. If you succeed, and independent auditor verifies your claim and you are home free and happy. If not, you have to pay in your collateral, which will then be forwarded to a charity. If you are wondering, the website hopes to make money from ads, in particular for weight loss (surprise...).

Will this work? It is clear that once money is at stake, anybody is more careful. Just think about all the liability threats and how they restrict actual behavior. There are, however, a few issues with the case at hand:

1. How can such a contract be enforced? This looks like a big hassle StickK.com will face once it has to collect money from people who cannot commit. If they cannot commit to losing weight, aren't they also likely not be able to commit to paying?
   
2. Would courts accept this as a valid contract? Indeed, it seems to be quite one-sided. I am no lawyer, but it looks like StickK.com is not providing a service when it asks for payment, as the person has not lost weight...
3. It is not clear how the auditing could be performed at low cost.
   
4. A payment to charity may not be a sufficient incentive to stick to a resolution. A much better deterrent would be a payment to, say, your mother-in-law, the Mafia or your local property owners association. This would, by the way, also take care of the auditing.

At least this is a start. Let's see how it works out. But, at the time of this writing, the scheme is not yet functional and the busiest time for resolutions is approaching fast. I wonder how the founders have committed to that deadline.

Car pollution: the wrong way, but in the right direction

The US Congress approved stricter standards for fuel efficiency in cars, the so-called CAFE standards, and President Bush signed this law. The European Union is also working towards stricter requirements. So there seems to be broad agreement that cars should become more efficient. But is this the best way to reach this goal?

Mandated higher fuel efficiency standards have one main consequence: the cost of cars should increase. In economic terms and for households, this means the fix cost of owning a car increases. As cars are more efficient, the marginal cost of driving then decreases: same cost of gas, more mileage out of a gallon. Thus, conditional on owning a car, people will be driving more. But will there be fewer cars on the road? Allow me to doubt that in the US, where it seems to be a God-given right and duty to own a car. And if a multi-car family decides to downsize, the remaining car(s) will be driven more. Things may be a bit different in Europe, where car loans are not as widespread to pay for the fix cost and alternatives to driving are well developed, even in rural areas.

All in all, I seriously doubt that this will reduce pollution and I am sure this will increase traffic. Just what we need. So what is the (better) solution? You guessed it, tax gas. This increases the marginal cost of driving, internalizes the relevant externalities, increases, whether you like it or not, the revenue of governments, and pushes manufacturers to provide more fuel efficient vehicles as they are demanded by drivers. No need for complex regulation and coercion to achieve those higher standards. All the incentives are right.

Congestion Charge, the London Experience

Now that it seems Mayor Bloomberg is getting really serious with the Manhattan congestion charge, to be about US$8 for every incoming vehicle, it is opportune to assess the London experiment. The following lines are largely based on a piece by Jonathan Leape, published in the Journal of Economic Perspectives, a peer-refereed publication of the American Economic Association, unfortunately not available online for recent publication years.

The premise in London was a desperate situation with an inescapable gridlock in the central district: day-time average speed was 14.3 km/h compared to 32 km/h at night, public transportation and congestion were viewed by Londoners as more important problems than crime. Charging for entering Central London had been discussed for a long time but was thought impossible to implement. The 2000 election of Ken Livingstone to Mayor changed this. Within three years, an impressive system of cameras that recognize license plates was in place and a £5 daily charge was implemented in February 2003, increased to £8 in July 2005. Within a year, day-time average speed increased to 16.7 km/h, the traffic of cars decreased by 34%, trucks 7% and vans 5%, however, taxi traffic went up 22%, and 6% for motorcycles. Other measured of congestion also showed significant relief.

In view of this success, and the welcome net revenue it brings to London, many other cities in Europe as well as New York City are considering a similar congestion charge. One should keep in mind, however, that not everything is rosy in London, though. Circumstantial evidence shows that traffic has increased close to the tariffed zone, presumably from cars driving around it or looking for parking. Also, it appears that cars that have bought a daily pass tend to take more advantage of it than before. Finally, an increasing number of vehicles that are exempt from the charge undermines its impact.

Again and again, it has been shown that congestion cannot be solved by building roads, as the latter just encourage more cars to use them. Besides, this was not an option in London. But incentives can work, making people pay makes them take notice. The availability of a good public transportation system is a requirement, to serve as an alternative to private transportation, and the ability of having a well-defined tariff area is a plus. All criteria apply to London, except maybe the tariff area: it is well-defined by a ring road, but the neighborhoods just outside clearly suffered.

In the case of New York City, the congestion charge has all but one reason to work well: Manhattan is very well serviced by public transportation, it is a well-delimited island that should not lead to a negative externality on neighboring boroughs and towns. But will car drivers take notice? I am not sure about this, considering the number of them who are willing to spend that much time caught in traffic every day while public transportation is available. At the going wage in Manhattan, the opportunity cost of their lost time is much higher than $8, and they seem to think sitting in gridlock is worth it. And looking at their car, $8 a day will not hurt them. But even if it does not reduce congestion, it will bring revenue from the city from those using Manhattan but living outside.

And I do not want to hear about those that do not live close to public transportation and need to work in Manhattan. They chose to live where they live. It is less expensive there for a reason. Take housing closer to rail/metro/bus/boat/work, sell the car, and they will be better off despite higher rent or house costs.

Update (January 24, 2008): This post has been translated to Italian on InterBlog.