Wednesday, 22 March 2017

Economic Impact Assessments and the value of fishing

The New Zealand Marine Research Foundation’s commissioned economic impact assessment of recreational fishing in New Zealand says that fishing generates $1.7b in economic activity. Legasea argues “We now have a handle on the value of recreational fishing” and that the results provide “enough evidence to support a recalibration” from commercial fishing to high-value recreational fishing.

But there are two problems. First, even if the economic impact assessment figures were correct, that still provides no basis for deciding whether the next fish caught would be more valuable in a commercial boat or on a recreational hook. And, second, the numbers come from an economic impact assessment. Let’s deal with the second one first.
Enjoy! I also got to quote from one of my favourite Stephen Gordon tweets.

Our Research Fellow Dr Randall Bess provided the numbers I used at the end of the piece. Keep an eye out for his coming report on recreational fishing....

Age-restricted fast foods?

Doug Sellman's latest prescription for reducing obesity:
Does the fast food industry need to be regulated?

Prof Sellman believes only New Zealand's law makers can forcibly change and control the booming fast food industry.

"Government regulation is the answer. It is the tobacco and alcohol industry story all over again.

"The price of freedom from government regulation is enslavement of large numbers of the population to these profit, rather than health-driven industries."

But Prof Sellman isn't optimistic the Government will do anything to effect meaningful change in the fast food industry.

"Unfortunately, we live in intense neo-liberal economic times when public health is given less value by governments to the GDP contribution of big business, while the harms are relatively discounted."

What can be done to combat the booming fast food industry?

Prof Sellman suggests the following measures:
  • Dismantle the marketing
  • Increase the price
  • Reduce accessibility (density of outlets and hours of sale)
  • Increase the age of purchase
  • More incentives for people to leave their cars at home
Yup. Total neoliberal conspiracy that we don't have minimum purchase ages for food.

But remember, there are no slippery slopes from tobacco regulation to every other damned thing that Doug Sellman doesn't like.

Tuesday, 21 March 2017

Myopia and Discounting

Gotta love any technical paper that opens with a Böhm Bawerk cite. 

Gabaix and Laibson have a new framework up in which patient Bayesian imperfectly informed agents display behaviour observationally equivalent to hyperbolic discounting.

The intuition of the model is pretty simple. Agents get noisy signals about the future state of the world, and so there's option value in deferring some decisions until you get more certainty. You consequently get things that look like preference reversals, but they're really just information updating by patient agents.

Their summary here is rather nice:
We provide an illustrative example of our framework in Section 2, where we study a binary choice problem: an actor chooses between an early reward and a mutually exclusive later reward. We show that when the variance of forecasting noise rises linearly with the event horizon, Bayesian agents will act as if they are hyperbolic discounters, even though their deep time preferences are perfectly patient.

In Section 3, we describe the broader implications of our framework, and identify predictions that distinguish our framework from time preference models. First, we show that our (perfectly patient) agents exhibit preference reversals of the same kind that are exhibited by agents with hyperbolic discount functions. However, these preference reversals do not reáect a self-control problem. The preference reversals arise because the agents obtain less noisy information with the passage of time. Accordingly, our agents do not wish to commit themselves; they act as-if they are naive hyperbolic discounters (Strotz 1957, Akerlof 1992, OíDonoghue and Rabin 1999) rather than sophisticated ones (Laibson 1997).

In the cross-section, our framework implies that agents with greater intelligence exhibit less as-if discounting - their superior forecasting ability enables them to make choices that are more responsive to future utility flows.

In addition, our agents exhibit as-if discounting that is domain specific. They exhibit less as-if discounting (i) when they have more overall life experience, (ii) when they are more experienced in the specific choice domain, (iii) when they have more time to think about an intertemporal choice (e.g., Imas, Khun, and Mironova, 2016), and (iv) when they have more cognitive bandwidth to think about their choice (e.g., Benjamin and Shapiro, 2015).

In Section 4, we generalize our example by making the action set continuous. We provide sufficient conditions that imply that perfectly patient agents who are imperfect forecasters will act as if they are naive hyperbolic discounters.
And the Böhm Bawerk quip:
Diminishing sensitivity to future utils is also explained by imperfect information. For example, Böhm-Bawerk (1889) wrote that "we possess inadequate power to imagine and to abstract, or that we are not willing to put forth the necessary effort, but in any event we limn a more or less incomplete picture of our future wants and especially of the remotely distant ones. And then, there are all of those wants that never come to mind at all."
Hyperbolicy behaviour is a reasonably common justification for behavioural economics type interventions. Where the problem is information rather than self-control, providing information may well be the better solution.

Getting out of transitional gains traps

The only way I'd ever seen of getting out of transitional gains traps efficiently was by compensating the losers by taxing the winners.

Is that what's going on in Australia with Uber?

Let's recap.

Recall that Tullock's transitional gains trap obtains whenever the excess profit from a regulatory rent gets capitalised into the price of the asset in regulatory fixed supply. In the taxicab case, that's the medallion that gives you the right to drive a cab in supply-regulated markets. Once that capitalisation happens, the owners of the asset will have enjoyed a capital gain, but future buyers only should earn normal rates of return on investment. And there's the trap: the rule no longer conveys excess profits to anybody, but any changes will be fought because they'd impose capital losses.

Tullock thought that Pareto solutions were impossible in that kind of case, but I proposed something close to one anyway. Buy out existing licence holders at the value of their permits and abolish the permit regime (obviously use a price from before wind of the announcement got out). Issue bonds to cover the buy-out cost. Implement a tax on taxicab usage that pays off the bonds, and retire the tax when the bonds are paid off.

Advantage: the winners compensate the losers, and we get to move to the more efficient state of the world. It is not a Pareto move, because plenty of owners would prefer not to have had their permits taken at yesterday's price, but it's not far.

Now what does all of that miss? Technological change always affects equilibrium regulatory outcomes. That's the standard Peltzman work on regulation. We haven't had disruptive technological change in Canadian dairy as yet (another great transitional gains trap), but we have in taxicabs.

Uber makes maintaining the taxicab cartel more expensive. Cartel enforcement requires political will, and Uber makes the costs of the cartel more obvious to voters. And Uber also enables cartel driver defection: they can drive Uber on the side. Equilibrium stringency then should fall.

And we've seen that in New York. Medallion prices are way down. I used to lecture on this stuff, and noted the successes of Medallion Financial, a specialised lender that provided capital for folks to buy taxicab medallions. Their website once bragged* about how medallions provided above market returns for decades and were highly secure. Here's their stock ticker:

Meanwhile, the price of medallions has dropped from about a million dollars in 2014 down to $250,000 again.

So what does this have to do with paying off the losers? The main point of paying off the losers to get out of a transitional gains trap is to enable the switch to the more efficient outcome. If you're going to get to the more efficient outcome regardless, then paying the medallion owners is just a transfer that might have potential equity justification. 

And so we come to Australia, where they're looking to tax Uber riders to compensate owners of cab licences. 

If the change were going to happen anyway, should the existing cab owners be paid? I hadn't before caught this excellent piece by Richard Holden

He works out which licence holders already earned back the price of their licences on a normal rate of return and argues there's no need to compensate those who've already earned back the value of their licenses. Most require no bailout on those grounds alone. Excess returns on these things are due to their inherent political risk anyway. Licence-holders in New South Wales who bought prior to 2012 had already earned back their investment, as had those in Victoria who bought before 2006. 

For those who haven't yet earned a fair return on their investment, because they bought their licenses too recently, there could be hardship grounds for providing assistance, but he argues that it's little different than other cases where risky investments have not paid out. Do we bail out everyone who invested in IPOs of companies that fizzle? People who bought late bought knowing that the tech was changing. And if the case for payment is on hardship grounds, it should be means-tested and funded out of general government revenues rather than by cab riders. 

Holdin also points out pernicious incentive effects if innovators have to pay off affected industries all the time. I've seen compensation as a last resort way out of horrible political equilbria, like Canadian dairy - not as something that should be the default. 

* This was on their website circa 2000. I saved it and used it in my lecture notes on rent-seeking and transitional gains traps. 
My grandfather got to this country from Europe, via Argentina, in 1923. He had $150 in his pocket, and soon after he got here, New York City issued 11,787 taxi medallions - the same number as there were until just a few years ago. Back then, they cost $10 apiece. My grandfather bought one, and he started driving a cab. In his mind, it was one of the few jobs in which success depended only on how hard you worked.

Soon, he had saved up enough to buy his second medallion, and by the 1960's, he had 150. They were terrific investments - better than stocks. We recently figured out that since the 1930's, the Dow Jones industrial average has gone up 11 percent a year on average, and taxi medallions 17 percent. Today, they sell for $250,000 each. In the 1970's, my father started selling off some of the medallions to diversify. But no bank would lend money to the buyers - immigrants from the Soviet Union, Haiti and India - because they didn't have any bank statements. So he started a loan business. We've lent over $1 billion and never had to possess a single loan even though the interest rates are higher than on bank loans.

Monday, 20 March 2017

A regulatory flexibility act?

The law focuses on “small entities” -- not only small businesses but also small nonprofits and small governmental units such as towns and school districts. It recognizes that small entities often bear no responsibility for health and safety problems that give rise to regulation; that regulation deters potential entrepreneurs from innovating; that treating small entities the same as large ones impairs productivity; that regulation is often a barrier to entry; and that it can be easy for big companies, and tough for small ones, to comply with expensive federal mandates.

To reduce the problem, the Regulatory Flexibility Act directs federal agencies to identify and reassess existing rules that have “a significant economic impact upon a substantial number of small entities.” The legal requirement is simple: Ten years after rules are finalized, agencies have to determine whether they are having such an impact, and must decide whether they should be amended or rescinded.
Sunstein notes that the law hasn't had much effect as yet, but provides some recommendations for President Trump in order to make it more effective:
With a memorandum issued in 2011, President Barack Obama explicitly drew attention to the requirements of the law, directing agencies to offer flexibility to small entities unless they justified their failure to do so.

That was a start, but the Trump administration could go further. For example, it could make explicit provision for public outreach to small entities whenever it appears that they will be adversely affected by an expensive regulation. It might require agencies to respond, in writing, to serious objections from the Office of Advocacy (and thus give greater power to that occasionally important office). It might state that the Office of Information and Regulatory Affairs will not approve significant rules unless the most adverse effects on small entities have been eliminated, reduced or justified.

To be sure, small entities are not entitled to automatic exemptions from regulations. Whether large or small, companies should not be allowed to impose serious health risks on their workers. But it always makes sense to ask whether the arguments that justify regulation – for example, those in favor of increased energy efficiency – really apply to small companies, or whether the costs of burdening them outweigh the benefits.
It's fun to imagine consequences of this kind of rule in New Zealand. Maybe somebody in the system would have been forced to stop and think about the compliance costs they were layering on tiny iPredict in pursuit of money launderers.

Friday, 17 March 2017

Unintended consequences: bees edition

In this morning's mailbag:
I just had to share an observation that a colleague made when I casually raised the issue of beehive theft becoming an issue.

He said “You know why?  The Department of Corrections began providing bee-keeping courses to inmates who quickly ascertained the money to be made.”  Evidently the Beekeepers association had raised this concern explicitly with the Department but gained no traction.

He then said “You know what is next?  Agricultural spraying equipment.  Evidently the latest course to be introduced by Corrections is Agricultural Management.”

The courses are no doubt empowering the inmates but perhaps they should start with ethics.
From Bevan Wallace.


Wednesday, 15 March 2017

Like Uber, but for finding a realtor

I didn't particularly like the process of finding a realtor when we sold our house in Christchurch. We were happy with the ones we found, but the process wasn't all that great.

And so it's interesting to see this from Andreas Heuser and Henry Milne. Their startup, Agent Auction, promises to make things a bit easier, with realtors submitting marketing plans and fees for a vendor to choose among.

We've no plans on selling our place; if you're selling and wind up using Agent Auction, let us know how it goes. Andreas is with the Law & Economics Association, and will have thought carefully through the incentives on both sides of this market.