Monday, April 14, 2014

The Bundy Ranch Confrontation

    Many on the  Right have been discussing the Bundy Ranch Confrontation, which seems to have ended with the surrender of the federal government. Breitbart is one place to look, and has links to legal documents.  Mr. Bundy has not been paying his grazing fees for 20 years or so, because he thinks the State of Nevada is the legitimate owner of the land, not the federal government. That is clearly a crazy position, but many people sympathize with him because he is a rancher whose family has been there for generations. He also seems to be arguing that anyone should be able to graze there for free. To me, his position seems literally communist (as does the associated fact that as it turns out he's the one who ends up making all the  money from the communist policy).  From the blog comments I've seen, though, many western libertarians actually don't believe in property rights and do believe they should have the right to live off of the government. Conservative commentators that I've seen treat the subject are a bit perplexed as to what to say, since they realize the situation but don't want to call other conservatives communists. 

      If everyone were forced to learn law and economics, we wouldn't have this problem. Then people would realize that government ownership, common ownership by neighbors, and lack of property rights are three different things. 



April 14, 2014 | Permalink | Comments (0) | TrackBack (0)

Sunday, April 13, 2014

ALEA Early-Bird Registration Deadline Approaching

For readers who may not already be on the ALEA e-mail distribution list, information on this year's meeting of the American Law & Economics Association (to be held May 8-9 in Chicago), can be found at their web site.  As the site notes, those registering after April 30 pay a $25 late registration fee.  Or should that be a $25 early-registration bonus?

April 13, 2014 | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 9, 2014

A Tax Idea: Pay Bonuses for Clean Audits

        Everyone dreads a tax audit. Some people have cheated on their taxes, so they obviously are running scared. Others have pushed close to the line in making deductions, and expect to have some of them disallowed. Still others need have no fear of paying more, but have to expend time and effort showing that to the auditor.

    This is easily remedied.  Our objective is to catch the cheaters, make the aggressive deductors step back from the line, and reward the good citizen who pays just what he’s supposed to. Let’s start with the good citizen. I propose that we pay anyone who gets a clean audit. If you are audited, and the auditor gives you a clean bill of health, he also presents you with a $1,000 check.  Perhaps it should be more, perhaps less, but the aim should be to make someone pleased with the chance to prove his honesty to the government.

  Will the auditors manufacture defects in your return so as to block your bonus?  They could, but it’s not their $1,000; it’s the Treasury’s. The Treasury could announce a policy of rewarding auditors who find defects, but there’s no way that policy wouldn’t become public, and the Treasury is, after all, a political organization. Anyway, if the Treasury is out to make people pay illegally high taxes, that’s a problem regardless of whether we adopt the bonus scheme; even now, Treasury could instruct its auditors to charge fake taxes and increase the revenue.

  What about the  second group--- the aggressive deductors?  With this scheme in place, they’d have less incentive to be so aggressive. It would be easier to be conservative with deductions and take the occasional audit bonus instead.

 And what about the third group--- the cheaters? They, too would have more incentive to clean up their act. But we might combine the bonus program with stepped-up penalties, as a  way to make it revenue neutral. It’s hard to object to tax cheats paying more so that honest taxpayers bear less of the burden of the audits the cheats make necessary. 

April 9, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, April 7, 2014

State carbon taxes in the works?

Adele Morris, fellow and policy director for Climate and Energy Economics at Brookings, has posted on the Brookings Tax Policy blog, TaxVox, a discussion of the possibility that the EPA, in issuing a proposed rule due out in June on what states may do to reduce greenhouse gas emissions under section 111(d) of the Clean Air Act. She thinks that EPA should, and maybe could, allow states to implement a state carbon tax to comply with whatever rule EPA issues in June. There is much unexplored territory here, and I expressed skepticism as to whether a statute that is fairly detailed in its prescriptions, and that has been interpreted by courts to be restrictive in its menu of allowable policies, could be interpreted to allow for something as radically flexible and sensible as a carbon tax. I remain skeptical, but hopeful. It would be politically meaningful if some red states actually seized on a carbon tax as being more efficient and sensible than the usual command-and-control-like standards issued under the Clean Air Act, while Congress continues to fight last century's fight (whether climate change is a problem or not), and continues to oppose carbon taxes on emotional grounds, not economic ones.

April 7, 2014 | Permalink | Comments (0) | TrackBack (0)

Revealing Loopholes: Including Loopholes in Legal Rules for Purely Strategic Reasons

Suppose that a lawmaker is designing a system of legal rules, such as a tax code or financial regulations.  Regulated parties have an incentive to find and exploit loopholes, as long as the expected benefits exceed the expected costs.  These search/exploitation investments are purely redistributive and thus wasteful.  A loophole depends both on the legal rule and the characteristics of the regulated parties.  One can envision a legal code drafted in two steps.  In its first iteration, the code will be replete with loopholes that are easy to identify and exploit.  Regulated parties that partake of the loopholes will reveal information about their types that the lawmaker will then use to draft a second iteration of the code, with fewer loopholes.   

Most likely the lawmaker will need more than two periods to reduce loopholes to the optimal number.  However, the point is that instead of drafting a system of rules that tries to minimize loopholes from the start, it is better for the lawmaker to strategically include loopholes that, when exploited, will reveal information.  In fact, a lawmaker should use information-revealing-loophole-rules even when they are superfluous, from a purely regulatory standpoint.

Of course, sophisticated regulated parties will know that the lawmaker is trying to trick them into revealing information.  If there are unsophisticated parties that are sufficiently similar to the sophisticated ones (in all things but their level of sophistication), the lawmaker can use the information revealed by the unsophisticated parties.  If the number of sophisticated parties is large and a failure to exploit the loophole will put a party at a competitive disadvantage, then colluding to confuse the lawmaker becomes difficult due to collective action problems.  But suppose that regulated parties can reach a self-enforcing agreement to collude—i.e., they agree not to exploit the loopholes.  So be it: that was the goal all along. 

In fact, a lawmaker can speed things along by announcing: “I have adopted a legal code with strategically placed loopholes.  Please exploit them.  Doing so will reveal private information about yourselves that I will use to redraft the code.  My goal is to reduce the aggregate costs from loopholes.  I just need your help, so I can do it efficiently.  I will always include information-revealing-loopholes.  So if you ever come across a loophole, ask yourself—‘Do I feel lucky?’”

April 7, 2014 | Permalink | Comments (0) | TrackBack (0)

Sunday, April 6, 2014

The Promise and Perils of Individual Differences in Law

A while ago, in the beginning of the previous decade, as a doctoral student of law and behavioral economics, I was looking for a topic for my PhD dissertation and I had suggested my advisor to write on whether individual differences could be a factor in legal policy making.

 Having studied the huge importance of individual differences and personality theories in psychology, I felt it has been a huge omission of the newly emerged law and behavioral economics[1]. At the time, my advisor thought the idea is too premature and hence risky, and I have decided to study the interaction between law and social norms. A decade later I am pleased to see that the interest in individual differences seems to be on the rise. This interest appears to be developing from various directions.

Firstly, research on big data has led some to suggest the potential for a more fine-tuned approach to default rules. See for example, Porat and Strahilevitz (2013). Secondly the rising nudge approach obviously raises the importance of individual differences to a higher level, given the areas of life it attempts to regulate Sunstein’s (2013).

Thirdly, newly acquired knowledge about individual differences in areas such as risk or intuition are disseminating into legal theories. My wonderful colleague, Avishalom Tor is organizing a terrific conference on individual differences in law that will be held in London in June, and I hope to report more on the topic following the conference.

Naturally, adopting individual differences in law is not a dichotomist decision, as it could be adopted only in areas where the theory is strong and the impact is significant. Furthermore, while I think we should be excited with the development of these lines of reasoning and the dramatic potential to its impact on both private law and public law[2], a few words of caution are necessary:

First, how much of the individual differences can we identify ex-ante?  This is obviously highly important for most private law contexts. Second, is the categorization offered by the different personality theories reliable and stable enough? Third, how substantial are the differences and whether the benefit from being sensitive to them, outweighs the cost of acquiring the information and the uncertainty associated with incorporating it into law. Fourth, how to relate between psychological based individual differences and demographic based differences. The latter might be more identifiable and reliable but more controversial from a normative standpoint.

The last point, emphasizes an obvious fact. The more we will care about individual differences in law, there will be a need not just to improve the social science aspect of it but also the jurisprudential infrastructure, in terms of concepts such as equality, fairness and welfare.




Strahilevitz, L., & Porat, A. (2013). Personalizing Default Rules and Disclosure with Big Data.


Sunstein, C. R. (2012). Impersonal default rules vs. active choices vs. personalized default rules: A triptych.


Sunstein, C. R. (2013). Deciding By Default. University of Pennsylvania Law Review, 162(1).

[1] This omission, might have been related to the dominance of economics to which I have referred to in my previous blog.

[2] To some extent, it is already widely used in criminal law, especially, when it comes to theories of punishment.

April 6, 2014 in Science | Permalink | Comments (0) | TrackBack (0)

Price Instruments and Insider Trading Rules

Say I’m the CEO of a company with toxic waste buried in our back yard.  One day on my way into work, I spot John Travolta climbing over our fence holding a chemistry kit and a spade.  After I press the button that releases the hounds, my next step should be…calling my broker?  Until John files A Civil Action, I have a window in which I can sell my stock with no market discount. 

            That has to be a problem for deterrence theories of tort law, doesn’t it?  Read on, friend.

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April 6, 2014 | Permalink | Comments (0) | TrackBack (0)

"Trouble in Turkey’s Elections" by Erik Meyersson

Local elections were held in Turkey last week. Many people were wondering whether AKP, the dominant party in Turkish politics, would allow fair elections or whether they would try to illegitimately influence them. Weeks before the elections many interesting developments took place, including the dissemination of audio recordings of stigmatizing phone conversations (allegedly) between the prime minister and other parties (including his son). Many were under the impression that these developments would lead AKP to lose a significant share of their votes, since these developments cast doubt on the legitimacy of the ruling party and their leaders. When the election results came out, many people were surprised to see that AKP had maintained power in many big cities (including Istanbul, the most populous city in Turkey). This led many, including academics, to question whether the elections were fair.

An interesting study by Erik Meyersson attempts to empirically address this question. He finds a positive “relationship between the share of invalid ballots and higher voting share of the ruling AKP government in last week’s local elections in Turkey.” He explains his analysis and findings here

He concludes as follows: “All together, these last results further supports the hypothesis that Turkey’s most recent elections may have been implemented with substantial irregularities. Until a valid explanation for these results is presented that does not include voter fraud it is difficult to imagine what else could be going on.”

I wanted to bring this noble attempt to uncovering facts about the recent elections to your attention, and any comments by empirical economists would be appreciated. 

April 6, 2014 | Permalink | Comments (2) | TrackBack (0)

Reducing Inequality

    A  full-time minimum wage worker--- a burger flipper, say---  earns  $15,000 annually.  The median doctor earns $190,000. The average pay of a Fortune 500 CEO is $10.5 million.  Is this inequality bad? Ought we to tax the doctor to give money to the burger flipper, and tax the CEO to give money to the doctor?  Many, probably most, people think so, though I personally wonder why redistribution, as opposed to "equal sacrifice in taxation" or "taxation for benefits"  is justified. 

   If it is, though, should we be taking from the CEO to give to the doctor? Or should the transfer go straight from CEO to burger flipper, with no transfer to the doctor? It depends on your theory of why inequality is bad, I suppose--- and I'd be interested in hearing answers in the comments. 

      Of course, ought redistribution to benefit anybody in the United States? Median household income in Russia is $12,000, in India it is $3,000, and in Liberia it is $1,000. 

April 6, 2014 | Permalink | Comments (0) | TrackBack (0)

Thursday, April 3, 2014

Confusion Regarding Paternalism versus Negative Externalities: The Case of Cigarette Bans

I quit (or took a break from) smoking about half a month ago. During that time, I’ve come to understand some of the dynamics of pubs that allow smoking versus those that do not. I’ve realized that these places provide an informative case study for crystallizing a frequent confusion that arises in law and economics discussions, namely the labeling of paternalistic arguments as externality based arguments.

[For those readers who are not familiar with these terms, here are brief and informal definitions. Paternalism essentially refers to the limiting of people’s freedoms to act under the theory that without such limitations these individuals will act in ways that are contrary to their self-interests. Negative externalities refer to costs incurred by (third) parties who did not engage in the activity that caused those costs.]

In my law and economics class, when I ask my students to question whether there is a utilitarian justification for a given rule or practice, they rarely rely on paternalistic arguments. There’s a simple reason for this: I do not teach them much about paternalism, and I do not provide them with any analytical tools to study paternalism. (I explain the concept and discuss how it may affect analyses etc., but never formally cover it.) However, I do teach them about negative externalities.

I have noticed over the last few years that some students, and unfortunately also some law professors, mistake paternalistic arguments as arguments based on negative externalities. Some may call this an unimportant semantic problem;  I believe that this problem not only makes it hard for two people to communicate with and understand each other, but it also disguises an argument that relies on the existence of some behavioral problems as one that could exist in a world where every individual is acting completely rationally. Due to this ‘disguising effect’ the rule for which the justification is provided appears to be desirable under a broader set of circumstances than is actually the case.

The policy of banning cigarettes or smoking in pubs provides an excellent example to illustrate this point. Consider two potential rules: (i) the owner of the pub gets to decide whether or not people can smoke in the pub, and (ii) smoking is prohibited in pubs. Imagine that I ask my students to provide an efficiency based justification for rule (ii). That is, are there any reasons to believe that rule (ii) would generate higher social welfare than rule (i)?

The following (hypothetical) dialogue is close to what I had with some of my students in the past (S=student, M=Murat)

M: “Is there a good justification to choose rule (ii) over rule (i)?”

S: “By banning smoking in pubs we’re eliminating the negative externality that smokers impose on non-smokers in those pubs where the owner would otherwise allow smoking.”

M: “Okay. So, let’s step back a second. What is the pub-owner presumably trying to maximize?”

S: “Profits.”                          

M: “Under rule (i) will he not choose that policy that maximizes his profits?”

S: “I guess so.”

M: “If the negative externalities imposed by smokers on to non-smokers are sufficiently high, would you not, as a profit maximizing pub-owner, choose to compete with smoker-pubs, by opening up a non-smoking-pub, and attract all individuals who suffer great negative externalities in smoker-pubs?”

S: “Probably.”

M: “So under rule (i), if we observe pubs that allow smoking, does this not imply that (1) non-smokers who go to those pubs do not suffer great negative externalities, and/or (2) the competitive process leads to a good distribution of smoker/non-smoker pubs in town?”

S: “Maybe. But, you are making an implicit assumption that need not be true.”

M: “Most likely. What is that assumption?”

S: “That people can accurately tell how much negative externalities they suffer. And more importantly, when there are smoking-pubs, more people tend to become smokers. We’re incentivizing bad-habits.”

M: “Those are excellent points. But, both of these points rely on people not accurately knowing themselves. The first point you raise is basically that people do not accurately estimate the cost of becoming a second-hand smoker, and the second point is that people do not accurately estimate the cost of being a smoker. Is that right?”

S: “Sounds right.”

As this dialogue demonstrates, the hypothetical student starts off by making a negative externality argument and then quickly switches to a paternalistic argument. The distinction is important. Negative externality arguments are valid to the extent that we believe regulatory responses are legitimate ways of protecting people from others. Furthermore, negative externalities can exist in situations where all individuals are rational. Paternalistic arguments, on the other hand, are valid to the extent that we believe regulatory responses are legitimate ways of protecting people from themselves. Perhaps more importantly, problems that give rise to paternalistic arguments commonly require individuals who act irrationally. 

April 3, 2014 | Permalink | Comments (5) | TrackBack (0)

Monday, March 31, 2014

Greens, Still in the Dark on Gas

No one should trivialize the environmental harm from natural gas exploration, and from hydraulic fracturing in particular. The air and water quality implications are sobering. And the Obama Administration needs to clamp down on the natural gas industry on methane leakage (they are). But the most strident green groups continue to display a stunning sanctimony, one that suggests they exchange ideas only in their exclusive echo-chamber, producing an ideological purity that would make Tea Party fanatics blush. 

In a March 18 letter to the President, sixteen environmental organizations urged the President to reject a plan to build the Cove Point liquified natural gas export facility in Lusby, Maryland, and to "commit to kepping most of our nation's fossil fuels in the ground."

It is an intentional conflation to lump natural gas in with coal as "fossil fuels," much the same way that Tea Party fanatics lump all taxes together as evil. Some taxes are better than others; some fossil fuels are better than others. Natural gas emits about half the carbon dioxide than does coal for unit of energy produced, and virtually none of the sulfur dioxide, particulate matter, or mercury emitted by coal. Methane leakage is still so serious that it may cancel out the carbon dioxide benefits. But stopping methane leakage can be done. As many have pointed out (including myself), there are countries out there, most notably China, that do not appear to be terribly concerned about the critisicm heaped upon them by the likes of, the Sierra Club, or Friends of the Earth. Coal is the fuel of choice for countries that can afford it. The only potential rival is natural gas. The U.S. now produces enough of it to export, and export it to countries that would not otherwise consider reducing greenhouse gas emissions. There is reason to believe that China, in particular, would be a buyer, given the crippling smog suffered by so many Chinese cities, a product of cars and coal-fired electricity generation. 

The 16 green groups also invoke the specter of higher "U.S. gas prices -- harming virtually all Americans" as a reason to dial back export of LNG. Of course! That is what we need to make our economy more energy-efficient! Low gas prices! That's the answer! We can have (indeed, must have) lower gas prices because it is the moral suasion of these great green groups that will cause us to consume less energy!

Many Democrats have heaped scorn on the Tea Party as being irresponsible, intractably stubborn and self-serving, and delusionally ideological. Those people might take a hard look at some green groups and wonder if they really are any different.

March 31, 2014 | Permalink | Comments (0) | TrackBack (0)

An Institutional Perspective on Cartel Enforcement

Vivek Ghosal and Daniel Sokol have posted to SSRN The Evolution of U.S. Cartel Enforcement, which takes a closer, more institutional look at cartel enforcement policy following seminal but less detailed treatments in Antitrust Law: An Economic Analysis, by Posner (1976), and The Antitrust Paradox, by Bork (1978). Ghosal and Sokol illustrate how the evolution of cartel enforcement can be traced to the evolution of the institutions involved, including the Justice Department. Though not inconsistent with Posner and Bork, this view lends more richness to the understanding of how cartel enforcement has arrived at its present juncture.

March 31, 2014 | Permalink | Comments (0) | TrackBack (0)

Saturday, March 29, 2014

A Crimea Game Tree, with Thoughts on Estonia

 Below is a question from the final for my half-semester PhD game theory course. I've put the game tree answer right below. For the other answers, see the comment section, where I'll put them as a comment. 


Bonus question for blog readers: Will Russia invade Estonia and Latvia?

      They are the modern analog of Czechoslovakia, as the Crimea is the analog of Austria, Syria the analog of Spain,   the Ukraine proper the analog of Poland, and Finland the analog of the Baltic Republics. NATO is  the analog of France, America the analog of the UK, and  China the analog of the Soviet Union, but fortunately Russia's army isn't analogous to the Werhrmacht and would have to stop with Finland. 

Question. Russia’s leaders are either bold or timid. President Obama puts a 70% probability on them being bold. The Russian leaders must decide whether to invade the Crimea or not. If they do, Obama must decide whether to send troops to the Ukraine or not. If he does, then Russia’s leaders must decide whether to withdraw or risk a fight. The status quo payoffs can be set at (0,0)....

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March 29, 2014 | Permalink | Comments (1) | TrackBack (0)

Thursday, March 27, 2014

Should state governments enact policies to combat climate change?

            One of the reasons I love being a tax scholar is that tax law intersects with most everything.  In addition to writing about tax law and theory, I thus spend significant time and energy thinking about the intersections between taxation and other areas of domestic policy (especially health care).

            As one manifestation of these interests, I've been talking over the past few months with California lawmakers and staff about potential reforms to California's policies for combating climate change.  You can find some of my thoughts on these reforms and on issues relevant for comparing carbon taxes and cap and trade policies in an op-ed I recently co-published with my colleague Mark Gergen, available here.

            In this post, I thought I'd share some tentative thoughts on a fundamental question underlying this whole area: should state governments even try to combat climate change?

            There is little doubt that federal efforts to combat climate change would be more effective than state efforts, and that global efforts would be even more effective.  California has little power to influence the world price for fuels or for other sources of greenhouse gas emissions on its own.  At least in the short term, to the extent that California’s policies drive up the price Californians pay for fuels in order to deter greenhouse gas emissions, the major beneficiaries may well be the consumers of fuels in other states and in other nations. 

            Why then do I think it is potentially desirable for California (and for other states) to enact policies to combat climate change?

            First, in my view, there is more to policy analysis than consequentialist reasoning.  I take seriously the notion that California has a duty to do its part in terms of combating global warming, even if other states or nations shirk on their duties.    

            Second, by acting as an early mover, California might help cultivate constituency groups for policies to combat global warming in other states or at the federal level.  I think it likely that each jurisdiction that enacts policies to combat global warming makes it easier, politically, for other jurisdictions to do the same.  This is so because California adopting policies to combat climate change can accustom voters in other states to these policies and can illuminate through practical experience how these policies might be administered.  Moreover, businesses operating in California who become subject to these policies may then lobby for similar measures to be adopted in other states or federally so as to ensure a level competitive playing field.

            Global warming is one of the central challenges of our time.  California is a rich state both by national and (especially) by global standards.  If the U.S. is to ever adopt an effective carbon tax or cap and trade policy, California seems a likely starting place.

            Of course, from my perspective as a tax scholar, all of this is just background to the fascinating design problems of enacting a state-level policy for combating climate change.  I hope to write more on some of these issues in future blog posts.

March 27, 2014 | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 26, 2014

Bad Economics in the Hobby Lobby Oral Argument: The Helpful Mandate, and Double Counting

   Well, I was only going to post one tax piece this week, but I can't resist commenting on  the oral argument yesterday in Hobby Lobby  (transcript here), which was notable for some bad economics. The first was when Justice Sotomayor and Kagan argued that Hobby Lobby and Conestoga actually would benefit from not complying with the mandate, because they could just drop health insurance entirely and pay the $2,000/employee fine (ok--- “tax”, if you’re Justice Roberts).  The second  was the apparent confusion of Justices Kennedy, Ginsburg, Sotomayor, and Kagan in counting the employees’ harm from the employers’ noncompliance separately from the government’s “compelling interest”. [Come to think of it,   if the effect of noncompliance on the employees is to be considered, isn’t the employer’s  dropping insurance altogether as a result of the mandate a more substantical burden than the government allowing it to drop just the morning after pill?]

1.  The Helpful Mandate. Hobby Lobby doesn’t want to pay for morning after pill  insurance. Its best option is to drop insurance coverage entirely, because offering noncomplying insurance incurs ruinous fines, but dropping insurance is okay if the company pays $2,000/employee to the IRS.Since Hobby Lobby is paying more than $2,000/employee for health insurance now, the company will actually be better off! So the mandate doesn’t impose a “substantial  burden”--- rather, it removes one.

2. Double Counting.   Suppose the religious freedom statute requires a balancing test  rather than just thresholds of substantial burdens and compelling interests (that is a separate issue in the case). Then we have to consider not just Hobby Lobby and the government, but third parties such as Hobby Lobby’s employees. They won’t get their free morning after pills. This will be an important addition to the balancing test, probably weighing just as much as Conestoga’s harm from having to pay for the  pills.

There's more detail, including excerpts from the transcript, below: 

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March 26, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 25, 2014

Another Example of Illegal but Unchallengeable IRS Granting of Tax Exemptions

  Today the US Supreme Court decided Quality Stores by an 8-0 vote in favor of the IRS. The IRS argued that when Quality Stores gave severance pay to its workers, the company and workers had to pay FICA (social security/medicare) tax on that pay.  The Supreme Court agreed, and rightly so. Severance pay is just as much pay as regular wages, so this makes sense in terms of economics, and the Supreme Court agreed with the basic principle that all forms of labor compensation  that required income tax withholding should required FICA in Rowan Cos. v. United States, 452 U. S. 247 (1981).

  So how could Quality Stores have won in the lower courts? ---Because the IRS issued regulations in 1990 that contradict Rowan.

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March 25, 2014 | Permalink | Comments (1) | TrackBack (0)

Make Tax Returns Public

       How about this as a way to increase government revenue, reduce crime, raise economic efficiency, and increase civic virtue:  make  everybody’s tax returns public. If it’s public information that Mr. Smith is reporting only $34,000 in income from his roofing business, but the neighbors know he lives in a $400,000 house, it would be easy for a neighbor to pass along his suspicions to the IRS.  Suspicious amounts of business travel expenses by someone who never seems to leave home, returns filed in the names of dead men, sizeable charitable giving by a notorious skinflint, filing of Texas state taxes by someone who lives in California, a red ink year for a thriving small business, sabbatical living deduction by a professor who never left town… the possibilities are endless.  We would be crowdsourcing tax compliance, or at least pointing out to the IRS where to focus its energies.

What about privacy?

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March 25, 2014 | Permalink | Comments (3) | TrackBack (0)

A Cost-Benefit Analysis for Sugary Drink Regulation in New York City

Why the Big Apple? Because it where former Mayor Michael Bloomberg first tried, by executive fiat, to curb sugary drink consumption by city regulation. New York City's "Portion Cap Rule" would limit the sale of sugary drinks within the city to 16 oz or less in certain "food service establishments," most significantly full-service restaurants (including pizza parlors and cafes, as well as New York’s famously expensive restaurants), limited-service restaurants (fast food joints, mostly), and movie theaters. The Portion Cap Rule remains in legal limbo, awaiting a hearing before the New York State Court of Appeal later this year. Current Mayor Bill deBlasio has committed to carry this rule forward, notwithstanding his campaign platform of being the anti-Bloomberg.

The Portion Cap Rule was met with derision, cries of foul, and warnings of the coming Bloomberg "nanny state." Even New York State NAACP President Hazel Dukes weighed in against this affront to "freedom of choice." The naïve (like myself) might have found that surprising; New York City’s obesity problem and related type 2 diabetes problem that is in significant part attributable to the consumption of sugary beverages has hit communities of color especially hard. While the overall obesity rate in New York State is 23.6%, it is 26.3% for Hispanics and 32.5% for non-Hispanic blacks. Rates of diabetes are twice as high for Hispanics and non-Hispanic blacks as for whites. If there were populations that would have benefited from a paternalistic curb on sugary drink consumption, it would be these communities of color.

Missing from this polemicfest was any attempt to ascertain any sense of proportionality of the health benefits of sugary drink regulation, as opposed to the costs of this infringement of liberty. Given the continuing importance of the obesity problem and related health disorders, some quantitative analysis would appear to be useful. I have posted a paper on SSRN that sets out a very rough cost-benefit analysis of sugary drink regulation in New York City. Stemming from a joint research project with my students at Florida State University College of Law, we originally attempted an analysis of the Portion Cap Rule itself, but trying to ascertain the amount of behavioral change effected by the Rule proved to require too much guesswork. Instead, this paper simply estimates the costs and benefits of a total ban on sugary drinks in New York City. Such a ban is fanciful, but it helps to identify the regulatory endpoint. One might plausibly presume that the costs and benefits of any partial ban (like the Portion Cap Rule) would capture roughly the same fraction of costs and benefits of a total ban. The total costs are the total profits of sugary drink sales specific to New York City. I do not include an estimate of the consumer surplus of sugary drink consumption for two reasons, one principled and one convenient: (1) diet drinks and numerous other caloric substitutes are readily available, and (2) that would be really hard to estimate. The total benefits are in the form of the reduced health costs achieved from lower intake levels of sugary drink consumption, again specific to New York City. If a sugary drink regulation such as the Portion Cap Rule managed to curb sugary drink consumption by 50%, one might assume that the costs would be about half the total profits from sugary drink sales in New York City, and the benefits would be about half the total health costs attributable to sugary drink consumption.

The costs of a total ban on sugary drink sales in New York City would be over $500 million, and are unlikely to approach $1 billion annually. The total potential benefits range from $3.2 billion to over $13.0 billion. The benefits are the reduced health costs of treating diseases associated with excess sugary drink consumption, namely obesity, type 2 diabetes, and coronary heart disease. The benefit estimate also includes estimates of the costs of premature mortality that can be attributed to sugary drink consumption. The costs of these relatively few premature death are very large, and drive the results. Without estimates of the costs of premature mortality, the costs and the benefits appear roughly comparable.

Looking beyond the Portion Cap Rule, which seems likely to go down in defeat, the broader question is this: should sugary drink consumption be regulated, and who should do the regulating? The cost-benefit analysis strongly suggests that it is worth doing, and Bloomberg's imperial style aside, this political and legal micro-drama suggests that cities with obesity problems stand to gain significantly. Within cities, the costs (in the form of lost profits) are small, because most of the profits of sugary drink sales accrue at the manufacturer level, not the retail level (i.e., Coca-Cola company, based in Atlanta). The benefits, on the other hand (in the form of improved health outcomes) are enjoyed on the local level. Insofar as the obesity problem is attributable to excessive sugary drink consumption, the best point of attack would appear to be at the local level. Moreover, as a political matter, a citizenry is more likely to tolerate a paternalistic "nanny-state," by its local government, less likely by its state government, and Congress, well, that would be something to watch, wouldn't it?

March 25, 2014 | Permalink | Comments (3) | TrackBack (0)

Monday, March 24, 2014

Some thoughts on the interplay between psychology and economics in law and behavioral economics

Recently, I attended a fascinating conference at the University of Liège named Nudging in Europe co-organized by Anne-lise Sibony and Alberto Armano.

The conference raised some interesting issues related to behavioral economics and its use for policymaking, I might write about in future posts.  

One classic, but still unanswered question raised in the discussion – which I'm not sure a blog about law and economics is the right place to raise, but I will do it any way -  is do we need economists to "baby-sit" the relationship between law and psychology. While this phrase might seem a little harsh, it does raise a few important puzzles; why is it that when most legal scholars think about law and psychology, they would think first about the mediation by behavioral economics, which at least originally, was narrower in comparison to psychology (this aspect is definitely changing in recent years). See for example Kahneman's (2003) paper.

Indeed, since the late 90' when the behavioral approach to law came to its own, many have criticized the relatively narrower scope of psychology in this “new” movement. At the same time, one might argue that it is hard to ignore the higher visibility of the triangle relationship of psychology, economics and law over the dual relationship of law and psychology, at least in the legal scholarship.

While the original approach of law and psychology focused on well-defined populations (i.e. the mentally ill, criminals, children and jury/judge (the law and behavioral economics literature has indeed lead to a dramatic increase in the areas of law researched, the type of populations analyzed and the variety of normative solutions offered. Along these lines, it has been argued that psychology will always need economics because it lacked the normative coherence and the dominant founding fathers, economics have.

In an important paper, Norton and Ariely (2007) document the differences between the methodological assumptions of psychology and those of behavioral economics. Based on these distinctions, they further describe the effect of their experimental techniques as well as the generalizability of the findings. From a legal perspective, it seems clear that the contextual sensitivity of psychology, put then in an inferior position relatively to the greater abstraction allowed in experimental economics.

In my view, no good answer is available to this dilemma. Nonetheless, those of us who do write in these areas should be aware of this tension and recognize the pros and cons of each approach. Whatever the benefits of the triangle model, it is crucial to be aware of the price being paid in the current state of affairs.


Ariely, D., & Norton, M. I. (2007). Psychology and Experimental Economics A Gap in Abstraction. Current Directions in Psychological Science16(6), 336-339.

Kahneman, D. (2003). Maps of bounded rationality: Psychology for behavioral economics. American economic review, 1449-1475.

March 24, 2014 in Science | Permalink | Comments (0) | TrackBack (0)

Sunday, March 23, 2014

The Law School "Scam": Of Transaction Costs & Empirics

Nearly all law schools are nonprofits.  I know, that isn’t the kind of hard-hitting economic insight you surfed here for.  But nonprofits have a certain set of governance problems, by now pretty well-understood.  A lot of what commentators have been pointing to as the problems of law schools are, in many ways, the problems of nonprofits generally. 

            A fundamental nonprofit problem is that customers have a tough time knowing whether they’re going to get a fair deal.  If the quality of the experience they’re purchasing is difficult to measure, then opportunistic managers could divert some of the payment to profit, and cut corners on quality.  As Henry Hansmann argues, the nonprofit form is supposed to be a way of efficiently contracting around this problem; by guaranteeing that managers cannot extract profit, customers are reassured that opportunism will be lessened.

            So what happens at firms that conduct two different tasks---say, research and teaching---only one of which is the task customers are paying for?  If monitoring allocation of labor between the two is difficult, managers again have an opportunity to “shirk” on the paid task to pursue the other.  It may also be easier to measure scholarship than teaching, pushing faculty incentives towards emphasizing scholarship (the classic “two-task problem”).  Rational consumers should be reluctant to pay the firm, given the large risk of opportunism available.

            Although it’s not been put in quite these terms, a lot of the criticism of law schools fits this mold.  “Scam” bloggers suggest that professors spend their time on irrelevant research instead of class preparation and time-intensive skills training.  And they say that the high price of tuition is unjustified when much of it is spent in those unproductive ways.  Customers, in other words, are starting to realize that the nonprofit form is no guarantee that their agents will be faithful ones.

            Or that’s the perception, anyway.  I believe it’s a false choice, but the data I’ve seen aren’t really conclusive.  If good scholars make for better teachers, then the opportunism dilemma is no dilemma at all.  I have lots of theoretical reasons for thinking that research and quality teaching are complements, but then it’s in my interest to think that.  Let’s look at some evidence.

            One data point is that major research universities have no lack of applicants.  Students could choose to apply to equally selective schools with greater faculty emphasis on undergraduate education (Amherst, Wellesley), but they overwhelmingly apply to Harvard and CalTech instead.  Maybe these are just unsophisticated consumers who don’t perceive the agency cost dilemma.  More rigorous studies find some modest positive or zero correlation between research output at universities and student evaluations.  Zero correlation is very good news for law school defenders of the status quo: it suggests shift of faculty energy to teaching costs students nothing.

            Is law school different?  There have been three major studies of the research-teaching correlation at law school.  Merritt (1998), Barton (2008), and most recently, Ginsburg & Miles report little correlation in most of their specifications, which, as G&M say in their double-negative way, “[does] not support the existence of a tradeoff between scholarship and teaching.” (17).  It’s possible this is too optimistic.  For example, first-year courses are more demanding for instructors, and also tend to produce lower evaluations.  That will tend to produce a spurious positive correlation between productivity and evaluations (upper-level teachers can publish more and get better reviews).  But Ginsburg & Miles do control for first-year responsibilities in their regressions. 

            Another important finding G&M report is that the relationship between teaching and scholarship is not necessarily linear.  (22-23).  That is, there are some factors that align the two and some that push them apart.  On balance, they find, the relationship is positive for all but the most devoted scholars.  (23).  They don’t “motivate” this test -- that is, we aren’t given any clear theory for why there might be two oppositely-signed effects.  But it’s easy to think of some: maybe knowledge of the field and preference for work over leisure produce positive correlations, while time devoted to one reducing time for the other produces negative. 

            Should we believe any of these studies?  I’m not sure.  For example, Merritt uses a survey with self-reported outcomes.  As she acknowledges, good teachers may have been more likely to respond; it would have been nice to see a regression design that accounts for selection bias, such as a “Tobit.”  G&M’s data are all at Chicago, and as they admit it could just be that the Chicago environment is not representative of others. 

            More critically, as G&M hint at the very end of their paper, there is a big “endogeneity” problem for all these projects.  That is, there are a lot of unobservable things happening in the background that could be driving the results.  Maybe academic deans account for teaching quality and research productivity when they make course assignments.  Maybe weak teachers select into courses that are more forgiving (although the counter-point there is that I’m voluntarily teaching tax classes, which get the worst evaluations of all in every study). 

            For my part, I continue to have good theoretical reasons to think that the agency problems of law schools are overblown.  But I don’t think the data are there yet to show I’m right.  What do you think?

March 23, 2014 | Permalink | Comments (0) | TrackBack (0)