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.

Market competition and product quality

There is common perception that more competition can lead to lower quality, as firms try to lower prices. Of course, this presupposes that buyers do not require quality, or that the trade-off between prices and quality is tilted towards giving up quality. Thus, a lowering of quality cannot be a general phenomenon, but must be limited to some good. One area where we would think that quality is important and would not be traded off is health care. Yet there is evidence that where competition increased, lower quality has been provided. How could that be?

Kurt R. Brekke, Luigi Siciliani and Odd Rune Straume provide a theory that can can explain this under particular circumstances: First, sellers need to be motivated in the sense that they care for quality. Second the marginal utility they get from profits is decreasing as they make higher profits, which implies risk-aversion. These assumption does not seem unreasonable, especially for health care provision (but not for the financial industry, for example, where the bonus payment is so important). The intuition of more competition yielding lower quality is rather twisted: increase competition, and prices fall. Profit margins are smaller, hence also profits. With a higher marginal utility of profit, sellers try harder to increase profits, and quality is a dimension that is available. How to counteract this? Make people care more about quality (how?), tax lower quality (how?). Not obvious.

Are rickshaw pullers myopic?

It is sometimes difficult to imagine why some people take decisions that make no economic sense. Take those that accept to receive payday loans at interest rates that defy any reason. Yet it can make economic sense, under some circumstances. In a similar vein is the observation that some people pay rent that seems to be far too high compared to the intrinsic value of the good.

Magnus Hatlebakk reports about one such example, rickshaw pullers in Nepal. They typically rent their rickshaws, and the rent cumulated over a year corresponds to the price of the rickshaw. It is particularly puzzling as microcredit is available, although at a different payment schedule: rent is 40 rupees a day, while servicing a loan would be 240 rupees a week. From a survey, Hatlebakk concludes that rickshaw pullers are not myopic, excessively impatient or financial completely illiterate: their income is simply so close to subsistence consumption that they cannot save up the 240 rupees for the loan service. At least this is what Hatlebakk argues, which I do not understand. If they do not pay rent, they could have save 40 rupees a day and be able to pay the weekly 240 rupees after six days. I suspect what is at play is more something like what makes ROSCAs so popular in many developing economies: people unable to keep significant amounts of cash, either because of the risk theft, misuse or, yes, myopia.

It would have helped the paper if it mentioned what the average lifespan of a rickshaw is, and whether rental provided some form of insurance, for example by providing a replacement in the event a rented rickshaw breaks. Indeed, the insurance aspect could also be important if there is substantial risk, or if the owner provides for repairs.

On the state of economic research blogging

If you are an economist and maintain a blog, the best way to get an audience is to get into fights with pundits and journalists, and you then easily become a pundit yourself, losing the impartiality you are supposed to have as a scientist. The most popular economist bloggers are either openly libertarian or quite far right, or in reaction resolutely on the left. Almost all engage in politicking and wars of words and have basically abandoned the principles of impartiality their scientific upbringing taught them. The impartial scientists are drowned.

EconAcademics.org tries to rectify that, aggregating blog posts that discuss research, or at least refer to research. The list of monitored blogs is impressively long, yet it saddens me to see that the "popular" blogs are nowhere to be seen near the top of those who have discussed the most research, despite their considerable volume of posts. While I could be proud to be (far) ahead on this last list, it saddens me again how little consistent discussion of research there is. Out in the blogosphere, are we really so few economists doing this? Why can't the top economics blogs relate more to the results of their field?

A positive externality of EconAcademics.org is that is compiles a list of all papers I discussed, including where the ultimately got published. I have put the link in the sidebar and will come back to discuss it sometime soon.

We need more tax inspectors

The question on how to best tax people according to some criterion is the fundamental question of much of public economics. But it is little explored how the willingness of people to pay their taxes matters in this, except for a small literature on the underground economy.

Philipp Doerrenberg, Clemens Fuest, Denvil Duncan and Andreas Peichl Study a model economy where households have heterogeneous tax morale. It should come to no surprised that under such circumstances and if the tax authority can discriminate in this regard, it will tax more heavily those that are more willing to pay. That seems to be the pay of least effort for the tax authority. But the model completely neglects that the government can do something about those with low tax morale: go after them. Of course, it costs some resources, but when the objective is to maximize revenue, it can be worth it.

In fact, I find it amazing how a government in a budget crunch often first reduces the budget of its fiscal authority, thereby amplifying the problem. That can be viewed as a smart political move, tax authorities are never popular, but I am not even convinced of that. Think precisely about those with high tax morale: seeing there getting off free may reduce their tax morale, making things even worse.

Why less secure jobs pay less

In financial markets, risk is generally rewarded with higher returns. On labor markets, this is much less obvious. While some public jobs like police officers, jail guards and firefighters are rewarded with early retirement packages, the private labor markets is ironically much less willing to reward risk. Just compare miners and white collars. It is even worse for those facing unemployment risk, especially within firms. How could such an equilibrium come about?

Roberto Pinheiro and Ludo Visschers can explain this with a labor search model where firms differ in job separation probabilities. In firms with short expected job tenures, the value of a job is low for both workers and firms. As workers can search for better opportunities while on the job, they are willing to accept low wages with the riskiest firms, who thus also remain competitive. But some workers also get scarred but getting stuck with such jobs. Of course, this logic is not valid for low risk firms. This leads to wage heterogeneity across firms and workers. Coincidentally, workers tends to move to safer jobs, thereby increasing the average job tenure as they age, a nice feature of the model.

Why the rich save more

It surprises no one that the rich save more. But they save even more than what could be accounted for the lower propensity to consume that one would get from any reasonably parametrized model. What could account for the difference?

Annamaria Lusardi, Pierre-Carl Michaud and Olivia Mitchell that survey evidence tends to indicate that the rich are financially more literate, whereby the direction of the causality is not clear. They build a life-cycle model where financial literacy is endogenous. The mechanism generating higher savings is interesting. As the rich get retirement benefits that are relatively small compared to their permanent income, they need to have more precautionary savings. To manage these savings, they get more financially literate. This allows them to get higher returns and get even richer, while those that are content with their public retirement package see no need to save more and learn how to get better returns. One more reason to improve economic literacy in the public.