Friday, 18 January 2019

Gaming the Lambda School system and avoiding the tax

The New York Times reported last week:
Now, Silicon Valley is backing a novel idea that proposes to rewrite the economics of getting an education.
The concept is deceptively simple: Instead of charging students tuition — which often requires them to take out thousands of dollars in loans — students go to school for free and are required to pay back a percentage of their income after graduation, but only if they get a job with a good salary.
The idea, known as an Income Share Agreement, or I.S.A., has been experimented with and talked about for years. But what’s happening at Lambda School, an online learning start-up founded in 2017 with the backing of Y Combinator, has captivated venture capitalists...
At Lambda, students pay nothing upfront. But they are required to pay 17 percent of their salary to Lambda for two years if they get a job that pays more than $50,000. (Lambda says 83 percent of its students get a job with a median salary of $70,000 within six months of graduating.) If they don’t get a job, or their salary is lower, they pay nothing. Payments are capped at $30,000, so a highly paid student isn’t penalized for success, and if a student loses a job, the payments pause.
It is a model that so far has been aimed at vocational education but has the potential to end the crushing cycle of student debt and change the way schools think about students.
“It aligns the incentives fully,” said Mr. Lewis, the venture capitalist.
I'm not sure whose incentives are aligned here, but I doubt they are aligned fully in the way Mr Lewis thinks they are. Sure, the Lambda School has a strong incentive to make their graduates employable, and employable at a high salary, in order to maximise their return in the two years that the graduate is paying the 17 percent Lambda tax.

However, the student's incentives are not necessarily aligned with those of Lambda. They'd rather avoid paying that Lambda tax, and the more income they earn, they more they have to pay to Lambda. On the surface, the student still maximises their income by finding the highest paying job after graduation.

However, I'd say this system also creates some strong incentives for students in the opposite direction to what Lambda wants. There is an incentive for the student to engage in moral hazard. Moral hazard the tendency for someone who is imperfectly monitored to take advantage of the terms of a contract (a problem of post-contractual opportunism). In this case, the student takes advantage of their free tuition, but then tries to avoid paying the 17 percent Lambda tax.

There are several ways students could game the Lambda system, by their actions after completing their education. For instance, the student could choose to take the first two years off after graduating, thereby paying Lambda back nothing. Of course, the student also gives up two years of earnings, so that isn't very attractive. And in any case, surely Lambda has thought of that already and there is a contract clause preventing it (say, the students have to pay 17 percent of their first two years' working after graduation).

So, maybe the student could work as a volunteer, or in the Peace Corps? Or go on a Mormon mission? The student is still giving up their salary for two years, but they are adding to their CV and might earn more once they start working, and they don't have to pay anything to Lambda. Of course, Lambda could no doubt contract around those situations as well (e.g. 17 percent of the student's first two years of paid work after graduation).

So, what if the student joins a start-up and is paid a nominal salary in cash, which is less than the $50,000 threshold, and receives the rest of their salary as stock options? Again, Lambda could contract for that eventuality. So, the smart student play here might be to find an employer who would agree to some form of deferred salary payment, payable after more than two years and thereby not subject to the 17 percent Lambda tax. Or they go into self-employment and pay themselves the $50,000 salary, but the remainder in dividends. Or... you can probably see by now there are lots of alternatives to get around the Lambda tax.

Of course, not all students would engage in this opportunistic behaviour. But it's clear to me that Lamba's system is too easily exploited. One solution for Lambda (if they don't want to move to a formal student loan system) would be to have some minimum required payment, which would be paid back regardless of how many years it takes, and 17 percent for two years otherwise. That makes it less attractive for students to engage in moral hazard to avoid the Lambda tax.

[HT: Marginal Revolution]

Wednesday, 16 January 2019

This couldn't backfire, could it?... Cane toad edition

One of my favourite topics to write about (and to talk about in my ECONS102 class) is unintended consequences. There is a famous story about cobras that exemplifies the topic, as I wrote about in 2015:
The government was concerned about the number of snakes running wild (er... slithering wild) in the streets of Delhi. So, they struck on a plan to rid the city of snakes. By paying a bounty for every cobra killed, the ordinary people would kill the cobras and the rampant snakes would be less of a problem. And so it proved. Except, some enterprising locals realised that it was pretty dangerous to catch and kill wild cobras, and a lot safer and more profitable to simply breed their own cobras and kill their more docile ones to claim the bounty. Naturally, the government eventually became aware of this practice, and stopped paying the bounty. The local cobra breeders, now without a reason to keep their cobras, released them. Which made the problem of wild cobras even worse.
So, I was interested in this article in The Conversation last week by David Smerdon (University of Queensland), which references to cobra story, as well as this one about rats in Vietnam:
When the colonial government built a sewerage system under Hanoi early in the 20th century, it inadvertently helped create a rat plague. Its solution was a cash-for-rats scheme - though to save the government having to dispose of hundreds of thousands of rat carcasses, it only required collectors turning in a rat’s tail to claim their bounty...
The consequences this time were not only the creation of pop-up rat-breeding farms, but also hordes of tail-less rats roaming the city streets.
Seen from 2019 New Zealand, this story is hilarious. But, the point of Smerdon's article is this:
[Australian Senator Pauline] Hanson’s proposal involves paying welfare recipients 10 cents for each toad they collect (alive) and hand over to their local council. The council would then kill the toads humanely in large freezers.
The senator is right to be concerned about the cane toad problem. Introduced in the 1930s as a biological fix to control native beetles eating sugar cane crops, the animals have prospered with devastating impact on native flora and fauna. It’s estimated there are now more than 200 million across Queensland and northern New South Wales.
So, cane toads are almost a double example of unintended consequences, given the reason they were introduced into Australia in the first place! In any case, even though paying a bounty for cobras, rats, ragweed, possums, or cane toads sounds good in theory, surely we could learn the folly of this approach from historical examples?

Read more:


Wednesday, 9 January 2019

Does studying economics make you sexist?

Economics has a gender problem. If you don't believe it, just watch this webcast of the session "How can economics solve its gender problem?", from last week's AEA meeting in Atlanta. Or the several posts I have written on the gender gap (see the list at the end of this post).

The question of whether economics is sexist is pretty much settled (the answer is, yes it is). The relevant question now, is why? Is it because studying economics somehow makes students more gender-biased (maybe because they encounter fewer female peers, or fewer female faculty members)? Or is it because students who are already more gender-biased (perhaps they have more socially conservative views) are more likely to study economics?

Another paper presented at the AEA meetings, by Valentina Paredes (Universidad de Chile), Daniele Paserman (Boston University), and Francisco Pino (Universidad de Chile) provides an initial answer to the question of whether studying economics makes students more sexist. They used survey data from 3228 Chilean students, of which about 26% were enrolled in 'Business and Economics'. Their sample includes both first-year students, and senior undergraduate students (Years 2 to 6), so they are able to see how gender attitudes differ between economics and other students, and how this difference changes between those just starting out as students, and those who are late in the university education (this is what economists refer to as a 'difference-in-differences' research design). They use several measures of gender-biasedness, including a composite score of all of their various measures. They report that:
For eight of the nine individual measures, we find that B&E students are more gender biased than non-B&E students, and five of the differences are statistically significant at the 5% level (in the specification with controls). The bias of B&E students appears to be particularly pronounced in the IAT-career score, hostile and benevolent sexism, and the gender roles-normative measure.16 The raw gap in the aggregate gender-bias score 0.19 standard deviations, and it falls to 0.14 standard deviations after inclusion of controls. In other words, the gap between B&E and non-B&E students is about one quarter as large as the gap between men and women. This is a sizeable difference.
So, there is more gender bias among Business and Economics students than among other students. But, is this a result of studying economics, or were they more biased to begin with? Paredes et al. report that:
The difference-in-differences estimator is positive for all measures (in the version with controls), but never statistically significant. Therefore the evidence in support of the training hypothesis is rather mixed.
I wouldn't call that evidence mixed. I'd call it unconvincing. It appears that students choosing to study Business and Economics are already more biased before they start their studies. However, there are some interesting gender differences:
For women, there is some evidence of selection: economics students are more gender-biased upon entry, and the gap increases at most moderately in subsequent years. For male students, on the other hand, we observe a moderate-sized but insignificant gap at entry, a large and statistically significant gap among upperclassmen, and a large and statistically significant difference-in-differences estimate.
So, it appears that studying economics might increase gender bias, but only for male students. Paredes et al. go on to look at some possible mechanisms that might explain the difference. The proportion of female peers doesn't explain it, and neither does differences in political ideology. However:
The share of female faculty has a strong and statistically significant association with the gender bias score for both first year and upperclass male students, but is almost unrelated to female students’ score. The difference-in-differences estimate for male students drops from 0.175 to 0.105, implying that about 40% of the B&E-non-B&E gap for male students can be explained by differential exposure to female faculty.
A substantial proportion of the effect of studying economics on gender-biased attitudes among students can be explained by differences in exposure to female faculty. In other words, this suggests that having more female faculty is a good thing for reducing gender bias in economics. However, as noted in the webcast I linked above, this leads to a chicken-and-egg problem - the solution to reducing gender bias is to have more female economists, and to have more female economists, we need less gender bias. And given that the key difference is between first-year students and older students, we need more female faculty teaching introductory economics (am I talking myself out of my current teaching allocation?).

Of course, there are some caveats to the Paredes et al. paper. Chile has a huge gender gap problem, as noted in the paper:
The raw gender gap in monthly wages is 31.7%. Even among full-time employees, the gender gap in hourly wages is 19.4%. The United Nations Gender Inequality Index ranks Chile 65th out of 188 countries (the U.S. is ranked 43), while the World Economics Forum Gender Gap Index ranks Chile 63th of 144, and only 117th in the Economic Participation and Opportunity subcategory.
That might contribute to the results in a way that makes them less representative for other countries where gender gaps are not quite as pronounced. There is also the problem that there is a gender bias only for female first-year students (but not males), which leads to the statistically insignificant effect overall when both groups are combined. There doesn't seem to be a good explanation for why female students would exhibit gender bias on entry to university, but not male students. So, there is definitely scope for more of this type of research.

[HT: Marginal Revolution]

Read more:

Sunday, 6 January 2019

Parachutes may be ineffective as safety devices

A lot of what you read about research in mainstream media is taken from press releases (by universities or research institutes), or at best, is taken from the abstracts of research papers. Randomised controlled trials are the gold standard in evaluation research (especially in health), so many readers might not take a critical eye when reading the studies. This would be a mistake.

A good example of where a lack of critical reading would go horribly wrong is this article from the Christmas issue of the British Medical Journal, by Robert Yeh (Harvard Medical School) and co-authors, entitled "Parachute use to prevent death and major trauma when jumping from aircraft: randomized controlled trial". Here's the first sentence of the conclusions from the abstract:
Parachute use did not reduce death or major traumatic injury when jumping from aircraft in the first randomized evaluation of this intervention.
One could conclude from that sentence that parachutes are ineffective as safety devices. However:
Compared with individuals screened but not enrolled, participants included in the study were on aircraft at significantly lower altitude (mean of 0.6 m for participants v mean of 9146 m for non-participants; P<0.001) and lower velocity (mean of 0 km/h v mean of 800 km/h; P<0.001).
The authors tried to enrol people into their randomised controlled trial by asking people:
...whether they would be willing to be randomized to jump from the aircraft at its current altitude and velocity.
They would be randomised into making the jump either with, or without, a parachute. The only people willing to be randomised in the study, unsurprisingly, were those on stationary aircraft on the ground. This limits the external validity of their sample a little, but does allow them to conclude that:
...although we can confidently recommend that individuals jumping from small stationary aircraft on the ground do not require parachutes, individual judgment should be exercised when applying these findings at higher altitudes.
This study was, of course, a response to an early BMJ article on parachutes from 2003, which concluded that:
...the effectiveness of parachutes has not been subjected to rigorous evaluation by using randomised controlled trials.
Well, now the effectiveness of parachutes has been evaluated, and found wanting. Read both papers (they're open access); they're hilarious (as has been the case with many past papers in the Christmas issue of the British Medical Journal, such as this one I blogged about in 2017).

[HT: Thomas Lumley at StatsChat, whose pet hate is journalists quoting uncritically from press releases or abstracts of non-peer-reviewed papers]