by Jim Naughton, for The Harvard Law School Forum at Harvard Law School, November 5, 2009.

(Editor’s Note: This post comes to us from Yeon-Koo Che of Columbia University and Yonsei University and Navin Kartik of Columbia University.)

Difference of opinion would be obviously valuable if it inherently entails a productive advantage in the sense of bringing new ideas or insights that would otherwise be unavailable. But could it be valuable even when it brings no direct productive advantage? Moreover, are there any costs of people having differing opinions? In our forthcoming Journal of Political Economy paper entitled Opinions as Incentives, we explore these questions by examining the incentive implications of difference of opinion.

We employ a framework that captures common themes encountered by many organizations.  More specifically, we study a setting in which a decision maker, or DM for short, consults an adviser before making a decision. Both individuals’ payoff from the decision depends on some exogenous state of the world. We model the decision and the state as real numbers, where the DM’s payoff-maximizing decision is equal to the state. At the outset, however, neither the DM nor the adviser knows the state; they only hold some prior views about it. The adviser can exert costly effort to try and discover an informative signal about the state; the probability of observing such a signal is increasing in his effort. Effort is unverifiable, however, and higher effort imposes a greater cost on the adviser. After the adviser privately observes the information, he strategically communicates with the DM. Communication takes the form of verifiable disclosure: sending a message is costless, but the adviser cannot falsify information, or equivalently, the DM can judge objectively what a signal means. The adviser’s strategic choice therefore is whether or not to reveal any information he has acquired. Finally, the DM makes her decision given her updated beliefs after communication with the adviser…(complete article)

A new study in the Journal of Political Economy by University of Michigan economist David Albouy finds that workers in expensive cities pay a disproportionate share of federal taxes. Overall, city residents pay 27 percent more in federal taxes than workers with similar skills in small cities or rural areas. According to the study:

In the United States, workers in cities offering above-average wages—cities with high productivity, low quality of life, or inefficient housing sectors—pay 27 percent more in federal taxes than otherwise identical workers in cities offering below-average wages. According to simulation results, taxes lower long-run employment levels in high-wage areas by 13 percent and land and housing prices by 21 and 5 percent, causing locational inefficiencies costing 0.23 percent of income, or $28 billion in 2008. Employment is shifted from north to south and from urban to rural areas. Tax deductions index taxes partially to local cost of living, improving locational efficiency.

HT: Richard Florida

An interesting study out of the University of Michigan on the federal income tax and how that tax burden is spread out by region and size of your home town or city.

The release:

City dwellers bear disproportionate federal tax burden

Live in an expensive city? Think you pay too much in federal taxes? If so, a study in the current issue of the Journal of Political Economy finds that you’re exactly right.

According to David Albouy, a University of Michigan economist, workers in expensive cities in the Northeast, Great Lakes and Pacific regions bear a disproportionate share of the federal tax burden, effectively paying 27 percent more in federal income taxes than workers with similar skills in a small city or rural area.

Why the disparity? Workers in cities are generally paid higher wages than similarly skilled workers in smaller towns, so they’re taxed at higher rates. That may sound fair, until one considers the higher cost of living in cities, which means those higher wages don’t provide any extra buying power. The federal income tax system doesn’t account for cost of living. So the effect is that workers in expensive cities like New York, Los Angeles and Chicago pay more in taxes even though their real income is essentially the same as workers in smaller, cheaper places.

The extra burden wouldn’t be so excessive if more federal tax dollars were returned to urban areas in the form of higher federal spending. But according to Albouy’s research, that’s not the case. His data show that more federal dollars are actually spent in rural areas, despite the fact that cities send far more cash to Washington. The net effect of all this is a transfer of $269 million from workers in high-cost areas to workers in lower cost rural areas in 2008 alone.

Over the long haul, Albouy says, the larger tax burden causes workers to flee large urban centers in the Northeast and settle in less expensive places in the South. So to some extent, it may have been the federal tax system that put the rust on the rust belt.

Detroit is a perfect example of a city that gets the short end of the stick.

“With its high wage levels, Detroit was, until recently, contributing far more in federal revenues per capita than most other places for over one hundred years,” Albouy said. The recent federal bailout to Detroit automakers “is peanuts relative to the extra billions the city has poured into Washington over the 20th Century.”

One expensive area that escapes the higher burden is Hawaii. Costs in Hawaiian cities are high, but wages remain low because people are willing to accept lower pay to live by the beach. As a result, Hawaiians aren’t pounded by taxes the way New Yorkers are. But it also means that “powerhouse cities like New York indirectly subsidize people to live in really nice locations like Hawaii,” Albouy said.

Albouy’s analysis adds new empirical weight to a debate that started in the 1970s with the late New York Senator Daniel Patrick Moynihan. Moynihan commissioned a series of reports that showed the Northeast and Midwest sent far more money to Washington than it got back. Albouy’s research is the first to provide an estimate of how much more individual workers in cities pay.

Albouy says that city folk shouldn’t expect relief from this system anytime soon.

“Highly taxed areas tend to be in large cities inside of populous states, which have low Congressional representation per capita, making the prospect of reform daunting,” he writes.

 

###

 

David Albouy, “The Unequal Geographic Burden of Federal Taxation,” Journal of Political Economy 117:4, August 2009.

One of the oldest and most prestigious journals in economics, the Journal of Political Economy has since 1892 presented significant research and scholarship in economic theory and practice. The journal aims to publish highly selective, widely cited articles of current relevance that will have a long-term impact on economics research.

Lee Ohanian

Contact Information

Lee E. Ohanian
UCLA
Phone: (310) 825-0979
Email: ohanian@econ.ucla.edu

Harold Cole
UCLA
Phone (310)-794-5349
E Mail: hlcole@econ.ucla.edu

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt’s record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

“Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump,” said Ohanian, vice chair of UCLA’s Department of Economics. “We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”

In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

“President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services,” said Cole, also a UCLA professor of economics. “So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies.”

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt’s policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.

In the three years following the implementation of Roosevelt’s policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

“High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns,” Ohanian said. “As we’ve seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market’s self-correcting forces.”

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

Roosevelt’s role in lifting the nation out of the Great Depression has been so revered that Time magazine readers cited it in 1999 when naming him the 20th century’s second-most influential figure.

“This is exciting and valuable research,” said Robert E. Lucas Jr., the 1995 Nobel Laureate in economics, and the John Dewey Distinguished Service Professor of Economics at the University of Chicago. “The prevention and cure of depressions is a central mission of macroeconomics, and if we can’t understand what happened in the 1930s, how can we be sure it won’t happen again?”

NIRA’s role in prolonging the Depression has not been more closely scrutinized because the Supreme Court declared the act unconstitutional within two years of its passage.

“Historians have assumed that the policies didn’t have an impact because they were too short-lived, but the proof is in the pudding,” Ohanian said. “We show that they really did artificially inflate wages and prices.”

Even after being deemed unconstitutional, Roosevelt’s anti-competition policies persisted â€â€? albeit under a different guise, the scholars found. Ohanian and Cole painstakingly documented the extent to which the Roosevelt administration looked the other way as industries once protected by NIRA continued to engage in price-fixing practices for four more years.

The number of antitrust cases brought by the Department of Justice fell from an average of 12.5 cases per year during the 1920s to an average of 6.5 cases per year from 1935 to 1938, the scholars found. Collusion had become so widespread that one Department of Interior official complained of receiving identical bids from a protected industry (steel) on 257 different occasions between mid-1935 and mid-1936. The bids were not only identical but also 50 percent higher than foreign steel prices. Without competition, wholesale prices remained inflated, averaging 14 percent higher than they would have been without the troublesome practices, the UCLA economists calculate.

NIRA’s labor provisions, meanwhile, were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labor’s bargaining power, rising from 14 million strike days in 1936 to about 28 million in 1937. By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been, based on 1929 figures, Cole and Ohanian calculate. Unemployment persisted. By 1939 the U.S. unemployment rate was 17.2 percent, down somewhat from its 1933 peak of 24.9 percent but still remarkably high. By comparison, in May 2003, the unemployment rate of 6.1 percent was the highest in nine years.

Recovery came only after the Department of Justice dramatically stepped enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.

“The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes,” Cole said. “Ironically, our work shows that the recovery would have been very rapid had the government not intervened.”

En Estados Unidos, una mujer deberá pagar 200.000 dólares por bajar música de Internet, dice la noticia.

El economista Stan Liebowitz, experto en estos asuntos, publicó el mes pasado un paper que refuta, punto por punto, la metodología y las conclusiones de Oberholzer-Gee y Strumpf.

A comienzos del 2007, dos economistas sostuvieron en una publicación del Journal of Political Economy que la caída de las ventas de CDs de música no se debe al aumento de descarga de música por Internet.

“En particular, las mutaciones en el proceso de trabajo del músico han tenido poco estudio. Así, nuestro esfuerzo más reciente consistió en preguntar, observar y, ciertamente, participar de las enormes transformaciones que los músicos en tanto trabajadores están viviendo en la actual etapa del capital. Nuestro interés en este punto no estaba tanto en completar el panorama respecto del campo de la música, como en buscar indicios que quizás nos permitieran pensar el trabajo en otros ámbitos del capitalismo cognitivo. Por eso, a la hora de interpretar el material empírico, la categoría de trabajo inmaterial, (Lazzaratto, 1996; Lazzarato y Negri, 2001, etc.) y otras de Hardt, Negri y Virno, parecían ser una referencia estimulante por donde comenzar.” Es uno de los fragmentos del paper de Stan Liebowitz..

Felix Oberholzer-Gee (de la Universidad de Harvard) y Koleman Strumpf (Universidad de Kansas), publicaron que Internet y los programas de descarga de archivos de mp3 no son culpables de la caída del 25% de las vetas en EE.UU. entre 2000 y 2005

“El impacto de las descargas (de las redes P2P) sobre las ventas de música es estadísticamente indistinguible de cero”, dicen los autores. “Las consecuencias para la industria no alcanzaron a más del 0,7% de las ventas”, escribieron.

Para los economistas la caída en la industria de CDs es “efecto de una creciente competencia por parte de otras formas de entretenimiento. Solamente considerando el cambio en el gasto en entretenimiento en favor de las películas en DVD alcanza para explicar la reducción en las ventas de música. Las ventas de DVD y VHS aumentaron más de 5.000 millones de dólares entre 1999 y 2003. Esta cifra más que compensa la caída de 2.600 millones de dólares en CDs de música desde 1999″.

“Esta señora violó la ley”, declaró el presidente de RIAA (Recording Industry Association of America), Cary Sherman en la CNN. “Necesitábamos enviar el mensaje de que bajarse música es algo que está haciendo mucho daño a la industria”.

Fuente:

http://weblogs.clarin.com/economedia/

http://www.utdallas.edu/~liebowit/

On nous rabâche les oreilles de ces histoires de discrimination. C’est mal de discriminer, c’est horrible, inhumain, barbare. Il faut traquer ceux qui discriminent contre l’Autre, les clouer au pilori, en faire un exemple, les exterminer.

Or, discriminer, est-ce que c’est vraiment si mal que ça ?

Non, car certaines nationalités ont un Quotient Intellectuel moyen plus faible que les autres. En général, les gens préfèrent avoir affaire à des gens intelligents, ou du moins aussi intelligents qu’eux, plutôt que de s’embêter avec des gens moins intelligents. Il est donc rationnel de discriminer sur cette base.

On entend le bobo de base s’agiter dans son VIème arrondissement parisien : « Hou la la ! Mais ça implique que certaines ethnies sont supérieures à d’autres dans les tests de QI, c’est dégueulasse… »

Bon, admettons. Eh bien, même si toutes les nationalités avaient exactement les mêmes aptitudes moyennes (intellectuelles ou autres), alors il serait quand même naturel et rationnel de discriminer.

Pourquoi ? Pour une question de goût, tout simplement. Les êtres humains peuvent très bien avoir une préférence pour ceux qui leur ressemblent. Il existe d’ailleurs une explication darwinienne très convaincante de cet état de fait. On dit bien en langage populaire : « Qui se ressemble, s’assemble. » Ce n’est pas criminel de préférer les pommes aux oranges, les frites aux spaghettis, et ceux qui sont comme nous à ceux qui sont étrangers. On vit en pays libre, non ?

À ce moment-là, le bobo du VIème se remet à éructer : « Hou la la ! Mais ça implique que les gens n’aiment pas la diversité, qu’ils nient le potentiel enrichissant du métissage multiculturel, qu’ils sont fermés d’esprit. C’est dégueulasse… »

Bon, admettons une deuxième fois. Je me sens d’humeur généreuse aujourd’hui.

Eh bien je prétends encore que, même si toutes les nationalités ont des aptitudes strictement identiques, et même si personne n’a de préférence ethnique pour les gens qui sont comme eux, alors il est quand même rationnel de discriminer.

Ça va en boucher un coin au bobo du VIème, ça !

Ce résultat a été prouvé par deux chercheurs américains très sérieux, Bradford Cornell et Ivo Welch, professeurs à l’université de Californie à Los Angeles, dans leur article intitulé Culture, Information and Screening Discrimination (en français : Culture, information et filtrage discriminatoire) publié en juin 1996 dans le Journal of Political Economy.

Pour ceux qui ne connaissent pas, le Journal of Political Economy n’est rien d’autre que la plus prestigieuse revue de recherche universitaire au monde, dans le domaine de l’économie politique.

L’intuition est très simple. Il y a deux points majeurs.

Premièrement, les gens ont besoin de filtrer ceux avec qui ils interagissent dans tous les aspects de leur vie. D’abord dans les grosses décisions : qui épouser ? qui embaucher ? qui admettre comme membre d’un club ? avec qui se lier d’amitié ? Et aussi dans les petites décisions, telles que juger si la personne qui s’avance vers vous sur le trottoir vous veut du mal ou du bien.

Deuxièmement, nous pouvons mieux distinguer entre les bons et les mauvais (« séparer le bon grain de l’ivraie », comme on dit dans le langage populaire) quand les gens appartiennent à la même culture que nous. La culture, ce sont des codes, des références communes, une histoire partagée, qui permet de « voir » des choses qui sont invisibles à ceux qui n’ont pas été élevés dans cette culture.

Par exemple, les hommes d’affaires japonais, quand ils interagissent entre eux, suivent des codes de conduite élaborés qui signalent quelle genre de personne ils sont ; mais vous et moi serions incapables de comprendre la signification de ces gestes subtils, à moins de nous immerger dans la culture japonaise à temps plein, et encore.

Donnons le cas d’un employeur Français de souche qui a un poste à pourvoir. Il interviewe 10 candidats Français de souche et 10 candidats d’une autre culture pour un poste. Il les classe du meilleur au moins bon. Parce qu’il « sent » intimement la culture française, l’employeur peut décrypter le CV et se faire une opinion de la personnalité des candidats beaucoup plus précisément dans le premier groupe que dans le second. Par conséquent, les 3 candidats qui font meilleure impression seront certainement des Français. Mais ça marche dans les deux sens : les 3 candidats qui font pire impression seront certainement des Français aussi ! Ce n’est donc pas du racisme.

Il sera beaucoup plus difficile à l’employeur de se faire une opinion fortement tranchée sur ceux qui viennent d’une culture avec laquelle il est peu familier. Il tendra à les classer dans la moyenne, ce qui reflète son incapacité à interpréter les signaux culturels fins.

Est-ce que je sais si les Algériens de Tizi-Ouzou sont des mecs droits, et ceux de Tamanrasset sont des petits roublards – ou bien est-ce le contraire ? Est-ce que je sais si le Lycée Lyautey de Casablanca est excellent, et le lycée Victor-Hugo de Marrakech est nullard – ou bien est-ce le contraire ? Est-ce que je sais si les citadins de Dakar ont tendance à se lever tôt pour pointer au boulot à l’heure, et les ruraux de la région du Tambacounda ont tendance à être lève-tard – ou bien est-ce le contraire ?

Comme dit le proverbe : « La nuit, tous les chats sont gris. »

S’il n’y a qu’un poste à pourvoir, le patron embauchera le meilleur des trois « bons » Français. Les trois « mauvais » Français et les 10 autres qui viennent d’une culture différente seront recalés.

Ceci marche aussi pour le choix d’un locataire : un propriétaire aura beaucoup plus de facilités pour distinguer entre « bons » et « mauvais » locataires parmi ceux qui sont de la même culture que lui ; il aura du mal à former une opinion très tranchée (positive ou négative) au sujet de ceux qui sont culturellement éloignés de lui. Il louera donc son appartement à quelqu’un de la même culture que lui.

On voit d’ici les conséquences politiques de cette analyse irréfutable.

Si le testing ou les statistiques ethniques révèlent qu’un employeur ou un propriétaire Français de souche a une proportion anormalement forte d’employés ou de locataires Français de souche comme lui, alors ça ne prouve pas qu’il croit que sa race est supérieure aux autres races. Ça ne prouve même pas qu’il préfère par goût personnel s’associer aux gens qui lui ressemblent. Ça veut simplement dire que la culture est un tissu de codes subtils qu’on ne peut pas totalement pénétrer – même avec la meilleure volonté du monde – quand on est originaire d’une culture différente.

Si les avocats des personnes accusées de discrimination lisent ça, alors la HALDE n’a plus qu’à fermer boutique.

For the record, the Journal of Political Economy is exceedingly legit. It’s one of the oldest peer-reviewed, scholarly journals out there, and has extremely high editorial standards. You may not agree with the way the study is done, but their findings are generally pretty hard to impugn.

Downloads are not the primary reason for the decline in music sales

Downloading is not the primary reason for the decline in music sales, argues a new study by researchers from Harvard University and the University of Kansas. The study, which appears in the current issue of the Journal of Political Economy, is the first to examine the correlation between the rise in file sharing and the decline in CD sales using large amounts of actual data from the log files of working servers. The researchers captured information on more than 1.75 million music downloads from file-sharing individuals who were unaware that their actions were being recorded.

“We match an extensive sample of downloads to U.S. sales for a large number of albums,” write Felix Oberholzer-Gee (Harvard University) and Koleman Strumpf (University of Kansas). “While file sharers downloaded billions of files in 2002, the consequences for the industry amounted to no more than 0.7% of sales.”

Oberholzer-Gee and Strumpf compared songs successfully transferred by U.S. users with songs on albums that had appeared on Nielsen Soundscan charts across eleven genres – including both Top Current and Catalogue Albums – during the study period. They matched 47,709 downloads in the server log files to the list of songs to compile their sample.

“Although our sample is representative of all commercially relevant music in the second half of 2002, it is striking to see that more than 60% of the songs in our sample are never downloaded,” the researchers write.

As expected, the resultant sample of matched songs included tracks from bestselling albums, but it also included many albums with lower sales figures, including two albums that sold fewer than 100 copies during the study period (September – December 2002). Songs from the Top Current chart were the most frequently downloaded, representing 48% of all file transfers.

Since the popularity of an album drives both file sharing and sales, Oberholzer-Gee and Strumpf then sought to determine if an increase in availability of a file for downloading negatively affected sales. They developed an empirical analysis that took advantage of the fact that German users provide about one out of every six files downloaded in the U.S., with the supply of files increasing during weeks when many German students are on vacation from school. Accounting for factors such as band tours in Germany, time zone differences, or misspelled song titles, the researchers found that an increase in the number of files available to download had surprisingly little effect on U.S. music sales.

“Downloads have an effect on sales that is statistically indistinguishable from zero. Our estimates are inconsistent with claims that file sharing is the primary reason for the decline in music sales during our study period,” write the authors.

Thus, the recording industry’s claim that file sharing causes significant “market harm” is an overstatement and has little effect on the incentives to produce music. Even with the most generous estimate derived from the data, file-sharing cannot possibly be the main driver behind the recent decline in CD shipments, which fell by 25% between 2000 and 2005.

Instead, the authors cite changing distribution models or an increase in spending on DVDs, video games, and cell phones as possible culprits that may more accurately explain the decline in music sales.

Les produits verts: pas si verts!

(Agence Science-Presse) – Les produits et services “ verts ”, bénéfiques pour l’environnement, prennent une place croissante dans l’économie. L’environnement y gagne-t-il à tous les coups? Pas si certain, d’après une étude publiée dans le Journal of Political Economy. Certes, ces produits et services ne polluent pas, puisqu’ils proviennent de sources renouvelables, ou bien ils favorisent la biodiversité, comme les plantations de café en forêt tropicale. Mais… ils sont cher! On paye pour le café et la conservation de la nature, par exemple. Or, ayant payé le prix fort, le consommateur risque d’être moins enclin à donner directement aux causes environnementales. Au bout du compte, ironiquement, c’est l’environnement qui y perd…