Thursday, April 17, 2014

Margins and averages: college edition

College grads earn more than those who don't go to college. Does it follow that governments should encourage more kids into university? Not necessarily. 

Bryan Caplan here points to work by Eberly and Athreya showing that while the college premium increased substantially, college enrolment did not. Why? Because mediocre students are likely to fail out, and the returns to dropping out of college aren't that high. Caplan summarises:
Let me illustrate.  Suppose you're at the 90th-percentile of high school graduates, so your probability of graduating college if you enroll is around 90%.  When the college premium ascends from 50% to 70%, your expected premium goes from 45% to 63%.  In plain English, the payoff goes from very good to excellent.  Either way, enrollment is a no-brainer.
If instead you're at the 25th-percentile of high school graduates, your probability of graduating college if you enroll is around 20%.  When the college premium ascends from 50% to 70%, your expected premium goes from 10% to 14%.  In plain English, the payoff goes from really crummy to crummy.  Either way, non-enrollment is a no-brainer... especially when you dwell on the fact that colleges don't refund drop-outs' tuition, much less the earnings and work experience they forfeited to attend.
 Bryan then looks to other "no-brainers":
My favorite feature of Eberly-Athreya: Their story readily generalizes to other weighty life choices widely seen as "no-brainers."  Conventional wisdom condemns dropping out of high school.  After all, standard estimates say that finishing high school raises your income by 50%.  For good students, it's easy money.  For stereotypical "bad students," though, it's hard money - or a waste of money.  Why?  Because when bad students attend high school, their probability of graduation - and their expected return - remains fairly low.
The same holds for marriage.  The economic benefits of stable marriage are massive.  But as Charles Murray explains, the probability of stable marriage varies widely by social class.  Divorce rates for the working class are about four times as high as for professionals.  Marginal brides and grooms therefore face a high probability of marital failure - and can reasonably fear that marriage will make them worse off despite its palpable benefits.
To be fair, Eberly and Athreya are not the first or only education researchers to highlight the chasm between ex ante and ex post returns to education.  But as far as I can tell, no one makes the logic clearer.  If anyone taunts, "So your kids should go to college, but other people's kids shouldn't," the honest answer is "Don't shoot the messenger - or his kids."  The numbers don't lie: College is a great investment for great students, a mediocre investment for mediocre students, and a bad investment for bad students.  
This mirrors what Wolfers and Stephenson have been saying about the returns to marriage: the decline in marriage among the poor comes down to its lower expected value for poor people.

I will leave as an exercise for the student the following problem. New Zealand recently changed the university funding model. Previously, universities were funded based on student numbers and research output. Now, they're also rewarded for their degree-completion rates: they're punished for drop-outs. What happens to:

  • equilibrium standards for passing grades
  • the average college premium
  • the absolute college premium for better students
  • the expected college premium for better students
  • the absolute college premium for worse students
  • the expected college premium for worse students

Wednesday, April 16, 2014

Gender quotas

Annick Masselot of Canterbury's Management department wants gender quotas on boards of companies listed on the NZX.
UC associate professor Annick Masselot said the NZX should go further with the introduction of quotas.
"In fact I think they have a duty to do that . . . Diversity is not an option."
She said NZX's diversity rules should at least match rules from the Australian sharemarket that required companies to disclose whether they had a formal diversity policy, and "if not, why not".
Masselot said several studies found that having women on boards led to an improvement in financial metrics.
Countries including Norway had introduced gender quotas in company boards using hard legislative measures. Others, including Australia had increased the number of women on boards with the use of "soft" self-regulation, she said.
The NZX would have the power to introduce gender quotas, but did not consider it appropriate to introduce them and had no intention to do so, a spokeswoman said.
I wouldn't be surprised if there were some studies finding benefits, but I doubt that they'd be sufficient to overturn the general conclusion that quotas aren't necessarily that hot an idea.

Adams and Ferreira, in the Journal of Financial Economics, found that mandating gender quotas for directors reduces firm value for well-governed firms. Forcing Boards to take on more women can help performance where those firms had existing problems that could be solved by greater Board monitoring. But on average, greater diversity yielded worse firm performance in the set of S&P firms (500, MidCaps and SmallCaps) studied.
Given that our previous findings suggest that more gender-diverse boards have stronger governance, these results imply that, on average, tough boards do not improve firm value. But they do not imply that tough boards never add value. There is no reason to expect tough boards to add value in all firms. The value of a tough board should depend on the strength of the other governance mechanisms. If firms have otherwise strong governance, having a tough board could lead to overmonitoring. But if firms have otherwise weak governance, we would expect tough boards to be particularly valuable.
I read this as a strong argument for shareholders' demanding greater female board representation if they think the Board has governance issues. But as for quotas:
Our results highlight the importance of trying to address the endogeneity of gender diversity in performance regressions. Although a positive relation between gender diversity in the boardroom and firm performance is often cited in the popular press, it is not robust to any of our methods of addressing the endogeneity of gender diversity. The true relation between gender diversity and firm performance appears to be more complex. We find that diversity has a positive impact on performance in firms that otherwise have weak governance, as measured by their abilities to resist takeovers. In firms with strong governance, however, enforcing gender quotas in the boardroom could ultimately decrease shareholder value. One possible explanation is that greater gender diversity could lead to overmonitoring in those firms.
More generally, our results show that female directors have a substantial and value-relevant impact on board structure. But this evidence does not provide support for quota-based policy initiatives. No evidence suggests that such policies would improve firm performance on average. Proposals for regulations enforcing quotas for women on boards must then be motivated by reasons other than improvements in governance and firm performance.

Tuesday, April 15, 2014


An Eleanor by any other name might be as smart, but would have worse odds of winding up at Oxford. A snippet from Greg Clark's work on names and surnames:*
It isn't that the name itself is particularly powerful, or destructive; rather, the sorts of people who wind up naming their daughters Eleanor are very different, on average, from the sorts of people who wind up naming their daughters Kayleigh. From the BBC piece:
However, there is no evidence that it's the names causing such a marked discrepancy, rather than other factors they represent, Clark says. Different names are popular among different social classes, and these groups have different opportunities and goals.

"That's something that's emerged in modern England that didn't exist around 1800," he says. When he re-ran his study, but this time looking at students attending Oxford and Cambridge in the early 19th Century, he found the correlation between names and university attendance far less marked. First names simply weren't the social signifiers they are now.

What's happened since then is a move towards unusual, even unique, names. Before 1800, Clark says, four first names referred to half of all English men. In 2012, according to the Office for National Statistics, the top four names (Harry, Oliver, Jack, Charlie) accounted for just 7% of English baby boys (and the picture was much the same in Wales).

Similarly in the US, in 1950, 5% of US parents chose a name for their child that wasn't in the top 1,000 names. In 2012, that figure was up to 27%.

As late as the 18th Century, it wasn't uncommon for parents to call multiple children the same name - two Johns for different grandfathers, for example. Now parents increasingly look for unique names or spellings of names. As Jean Twenge points out in her book the Narcissism Epidemic, Jasmine now rubs shoulders in naming lists with Jazmine, Jazmyne, Jazzmin, Jazzmine, Jasmina, Jazmyn, Jasmin, and Jasmyn.
Our baby-naming algorithm, which wound up choosing Eleanor for our girl, started with a domain of names in the top 1000 from 1880 to 1930 in the US, then eliminated any names that were in the top-100 any time in the last three decades. So you rule out the made up stuff while also ruling out having too many classmates with the same name. But we're the kind of people who would choose that kind of algorithm.

I especially liked the BBC piece's pointing to Figlio's work on names. It's pretty common for researchers to use audit studies to test for racial discrimination: they send out otherwise-equivalent vitae, but put a 'black-sounding' name on some and a neutral one on others. They tend to find a penalty for having a black-sounding name. The problem with these kinds of studies is that they simultaneously test for black-sounding and for class-linked names: instead of testing black versus white, they're effectively testing lower-class versus upper-class names. Here's Figlio:
This paper investigates the question of whether teachers treat children differentially on the basis of factors other than observed ability, and whether this differential treatment in turn translates into differences in student outcomes. I suggest that teachers may use a child's name as a signal of unobserved parental contributions to that child's education, and expect less from children with names that "sound" like they were given by uneducated parents. These names, empirically, are given most frequently by Blacks, but they are also given by White and Hispanic parents as well. I utilize a detailed dataset from a large Florida school district to directly test the hypothesis that teachers and school administrators expect less on average of children with names associated with low socio-economic status, and these diminished expectations in turn lead to reduced student cognitive performance. Comparing pairs of siblings, I find that teachers tend to treat children differently depending on their names, and that these same patterns apparently translate into large differences in test scores.
I wish that audit studies instead used a cross-cutting method that would test Da'Quan against Dwayne and Cleetus instead of just against Peter. Put it into a 2x2 matrix with race on one axis and class on the other.

First names may just be signals, but "just signalling" hardly means unimportant. If you're economising on time while going through the resumes or university applications, and if a Cleetus is less likely than a Peter to know which fork to use at the important dinner with a client or donor, well, a Cleetus would have to be better than a Peter to get a second look. Because parents who have some minimal social capital expect this to be at least somewhat likely to be true, they make different naming choices than those who don't.

Colby Cosh is right:
The separating equilibrium separates.

I'd tell you to avoid giving your kids dumb names, but if you're reading this, you almost certainly already know it.

* I really need to get his book. The interview teasers have been very tempting.


Monday, April 14, 2014


Free riding kills voluntary contributions in public good games. When individuals see that free-riders are able to do well, and where there's no way of excluding those free-riders from the benefits of contibutions, or of punishing them, they lower their likelihood of contributing.

And so organ donation rates are pretty low. Donors provide a public good: they increase everyone else's chance of getting an organ if they need one, but don't get much out of it other than the knowledge that they're potentially helping others. Non-donors have equal access to organs should they need one. It's a sharing club that doesn't punish members for failing to share; takers gonna take.

Israel's solution: the Priority Law. Organ donors get extra points in the priority queue should they ever need an organ transplant. And they had to navigate a lot of the same ethical issues that New Zealand faces. Consider the parallels here to certain aspects of Maori concerns around tapu:
Orthodox Israelis opposed to organ harvesting on religious grounds have called the system discriminatory. But Lavee argues that the willingness of those same people to accept donated organs ultimately dissuaded potential donors from participating in the organ pool. “There was a dismay among the Israeli population that there were many, many free riders,” he explained. “Why should people donate if their organs would go to people who would never donate themselves?”
It isn't a full no-give-no-take system. Instead, donors simply get priority over non-donors. And, beautifully, the families of donors also get priority.
Launched in April 2012, the new Israeli system grants first priority for transplants to living donors and the family members of donors—who, in the event of brain death, make the ultimate decision whether to donate their kin’s organs. Registered donors of three years or more receive second priority; family members of registered donors receive a third tier of priority.
The system confers an advantage to candidates in the same tier of need; it never enables transplant candidates to supersede needier counterparts. Priority can’t catapult Status 2 recipients into the heart-transplant Status 1 list, but it can take them to the top of Status 2. With other organs, like kidneys, where a point system assigns values weighing age, waiting time, and compatibility create a 0 to 18 score, signing up as a donor can add a 1- to 5-point boost.
In 2013, the first full year of the new system, there were a record number of transplants in Israel; meanwhile, transplants received by Israeli patients abroad fell to a quarter of their 2007 peak. Most of what continues is the result of lawful allocations many nations offer foreign transplant candidates. Another feature of the 2008 Organ Transplant Act—full reimbursement to living donors for lost work time, and health and life insurance for five years—has helped spur donations of kidneys, and lobes of liver and lungs. Between 2011 and 2013, the number of Israeli living organ donors increased by 67 percent over the preceding three-year period, and the Israeli transplant waiting list contracted in 2013.
It certainly hasn't abolished the waiting list. But it's helped. New Zealand could well save a lot of lives by following the Israeli example. Otago University hand-wringers prefer deaths to incentives; it would be nice if Parliament could pay a bit less attention to them.

Hit the "Organ Markets" tab for all the prior posts on the topic.

Friday, April 11, 2014


Income-linked benefits with abatement regimes can do nasty things to work incentives. Here's Casey Mulligan on the recent changes to US health care:
Under the Affordable Care Act, between six and eleven million workers would increase their disposable income by cutting their weekly work hours. About half of them would primarily do so by making themselves eligible for the ACA's federal assistance with health insurance premiums and out-of-pocket health costs, despite the fact that subsidized workers are not able to pay health premiums with pre-tax dollars. The remainder would do so primarily by relieving their employers from penalties, or the threat of penalties, pursuant to the ACA's employer mandate. Women, especially those who are not married, are more likely than men to have their short-term financial reward to full-time work eliminated by the ACA. Additional workers, beyond the six to eleven million, could increase their disposable income by using reduced hours to climb one of the "cliffs" that are part of the ACA's mapping from household income to federal assistance.
As StatsNZ is starting to link up all their individual datasets, we might finally be able to start working out whether New Zealand's Working for Families regime had similar effects on second earners in particular income/child categories. WFF benefits abate with family income and so strongly increase effective marginal tax rates. Since second earners' labour supply is more elastic, this ought to have disproportionately affected female labour supply. It's a Masters thesis waiting to be written.

Local Government Financing

Local Government New Zealand is looking for alternative funding mechanisms.
Basing rates on property values alone may soon no longer be sustainable as the sole taxation form for many councils, says Local Government New Zealand (LGNZ).
Instead, it would investigate other forms of taxation such as local consumption and local income taxes as "complementary alternatives".
The LGNZ Local Government Funding Review comes as an ageing population contributes to an increased number of asset rich/cash poor ratepayers who struggle to pay their rates.
Some councils also face major growth pressures to fund large-scale infrastructure investments to meet the needs of future generations and sustain economic growth, with limited funding tools at their disposal. Yule said this would place severe pressure on a pure property tax model.
Oh dear.

As we've noted before here, there are two very good ways of dealing with this particular problem while maintaining a reliance on property taxes.

First, the wealthy elderly could be encouraged to take out a reverse mortgage. These are available in New Zealand. You lose equity in your home, but you pay your taxes. The wealthy elderly would then provide a smaller bequest to their middle-aged kids, but that's hardly the end of the world.

Second, it doesn't seem like it would be crazy hard to set up a scheme in which the wealthy but cash-poor elderly could defer rates on the house, with interest, so long as the accumulated bill is less than the value of the house. When the owner dies, Council gets the house, sells it, and pays any remaining amount to the Estate. Alternatively, the estate's beneficiary could buy out Council's interest in the house. Either way, we're not "forcing" politically important constituents out of their half-million-dollar-plus homes, although there'd be important implementation issues around ensuring that the scheme is only available to those fully agreeing that the house could be sold on the death of the registered owner if the estate's beneficiary couldn't pay the accumulated tax bill.*

So, the problem isn't really that bad, if we're willing to contemplate that ageing property-wealthy-but-cash-poor Boomers might might be called upon to consider paying their bills.

Because LGNZ has put taxing the wealthy cash-poor elderly into the too-hard basket, they're starting to draw funding ideas from the too-silly basket.
Potential taxes for councils
Local income taxes – an extra tax on income
Local consumption taxes – an extra tax on goods and services
Congestion charges – a charge for a vehicle using congested roads at certain times
Visitor charges – taxing visitors, typically through accommodation bills
Payroll taxes – extra tax collected by an employer when paying an employee
I had a call from Jim Mora's producer asking if I could talk about some of this stuff with The Panel yesterday. I'd written up my notes before noticing that the time clashed with my son's swim lessons and so I wouldn't be able to do it. Stephen Hickson capably filled in for me [hit around the 20 minute mark]. But I'll copy my notes below anyway.
On local taxation, I could note a few things:
  1. Local income taxes are pretty much always a bad idea. If there were a 10 Commandments of Local Government Finance, "Thou Shalt Not Implement A Local Income Tax" would be one of them. Andrei Shleifer and Ed Glaeser had a great paper about a decade ago called "The Curley Effect". The basic model is as follows: where a mayor can use local tax policy to drive out those who would vote against him, he'll do it. And so Coleman Young hiked local income taxes, driving richer voters out of Detroit and funding programmes for his poorer supporters. He also implemented a pretty hefty commuter tax. Detroit's current prosperity owes no small part to his local tax policies. The Curley Effect was named for James Michael Curley, who ran similar policies in Boston to drive out the rich protestants, leaving him with an electorate of poorer Catholics who supported him.

  2. Congestion charges are a great idea, if you can make them implementable. They're not a great idea because of the revenue that they raise, though. Rather, they're a great idea because they help fix local congestion issues. Further, they're a great idea because they might help attenuate some of the current opposition to sprawl and densification. If those who wind up contributing to congestion through sprawl and density wind up bearing the bulk of the costs of that through congestion charges, maybe people wouldn't oppose sprawl so much. But, again, the point isn't revenue-raising. Maybe you could put it in instead of hiking other taxes, but the fees should be set entirely to try to get towards optimal levels of congestion rather than to raise money. Where it's seen as a revenue grab, or where it's likely to be a revenue grab instead of a congestion abatement mechanism, it's less likely to be supported or to be run properly.

  3. Local sales taxes are a bad idea. We have a great clean GST currently. A local sales tax on top of it would mess things up. Local bodies would be tempted to exempt all the feel-good stuff like kids' clothes, vegetables and the like - that makes a hash of any sales tax. Or, if it were just a levy on top of the GST implemented by local government, is it levied on all businesses in the local district? What if they're selling mail-order to folks outside of the city? What if folks outside the city are selling mail-order to those inside the city? We get all of the stupid transactions costs of implementing GST on imports except across all of the local bodies. Bad idea.

  4. One potentially interesting idea, though, or at least worth thinking about: a capitation payment from central government to local bodies. Right now, there's a pretty strong local interest group equilibrium barring development. Homeowners oppose any densification near them and any sprawl on the urban limits because of the reduced amenity value to them and because more houses would reduce the value of their houses. So the nay-sayers hold sway. But imagine if we had a transfer from central government to local government based on the number of people living in the jurisdiction. Do a better job of attracting more people to your city or town and your budget increases. That could provide at least some counterveiling force to the current "don't build anything anywhere ever" pressures. The New Zealand Initiative suggested something similar last year: a payment to local councils from central government for each new dwelling built in their area where that dwelling was able to be built within a specified time from initial consent application. These kinds of things are worth thinking about.
Land use issues are pretty badly messed up in New Zealand. Most of what LGNZ's here proposing will substantially worsen things. And all because they're scared of having the soon-to-be-elderly take out reverse-mortgages.

* Otherwise you get the inevitable sob story about the widow forced out of her house because she wasn't on the title.

Thursday, April 10, 2014

Meatball surgery and disaster recovery

I love the description of “meatball surgery” in M*A*S*H (the original book, not the saccharine sit-com that came two degrees of separation later). To quote Hawkeye Pierce:
We are not concerned with the ultimate reconstruction of the patient. We are concerned only with getting the kid out of here alive enough for someone else to reconstruct him. Up to a point we are concerned with fingers, hands, arms and legs, but sometimes we deliberately sacrifice a leg in order to save a life, if the other wounds are more important. In fact, now and then we may lose a leg because, if we spent an extra hour trying to save it, another guy in the pre-op ward could die from being operated on too late. Our general attitude around here is that we want to play par surgery. Par is a live patient.
This seems to be a general principle: Processes that have evolved as useful heuristics to satisfice in normal times based on the precautionary principle—the cost of a small delay is small relative to the cost of a mistake whose effect will last for a long time—may need to be replaced by discretion when situations are critical and the costs of delay are become large.

The meatball principle can be applied to administrative processes following a natural disaster like an earthquake. For example, careful consent processes and restrictions on the types of housing development that can occur might make sense in normal times: Once built, an inappropriate dwelling by some value judgement will stand for a long time; it might be worth erring on the side of caution in terms of what types of buildings are approved and in taking time to make a consent decision. After a natural disaster, however, the costs of delay can be huge. There are multiple equilibria in which a city could come back stronger than before or permanently move to a more depressed state, based on self-fulfilling prophesies of investor optimism or pessimism. In that environment, delays in providing sufficient housing to make the city affordable for rebuild workers and others, and delays in providing certainty about what land is subject to compulsory purchase, are not appropriate application of the precautionary principle; they are potentially decisions akin to letting the next patient die while trying to save the first patient’s leg.

Similarly, in normal times, there is some sense to universities having very careful procedures for approving new courses and programmes, even if that means 12 month delays in getting the new programmes started. But a university on the cusp of either a virtuous cycle of increased student enrolments and investment in new programmes and facilities or a vicious cycle of reduced numbers and further retrenchment needs to think in terms of meatball surgery rather than the precautionary principle.

I hope the city and university leaders in Christchurch have read M*A*S*H. We really need a meatball rebuild.