Monday, 29 May 2017

Return migrants to Vietnam prefer areas with higher-quality institutions

One of the enduring theories of migration is the push-pull theory of Everett Lee (see here for the original research paper from 1966). In this theory, there are factors in the origin (where the migrants are coming from) that push them away, and factors in the destination (where the migrants go to) that pull them there. Many factors might be push or pull factors, including high (or low) wages, or good (or bad) amenities. As I discussed in a previous post, climate is one factor that appears to affect migration, but only in a very limited way.

In a new working paper, Ngoc Tran, Jacques Poot and I look at return migration to Vietnam (this is where Vietnamese migrants have first migrated overseas, then return home to Vietnam), and specifically whether the location that return migrants return to is influenced by the quality of political and economic institutions (in economics, the term 'institutions' is used to refer to social and legal norms and rules). This question is important because there are generally few factors that policy makers can use to influence people's migration decisions, but the quality of institutions is generally something that is within their control. So, if they want to attract return migrants (or potentially other migrants), then having high quality institutions is important.

We used a database of the return migration choices of 654 Vietnamese return migrants to the south of Vietnam in 2014, including the province that they eventually settled in. We found that, holding other variables constant, older return migrants and male migrants were less likely to settle in Ho Chi Minh City (and more likely to return to other regions). Once we introduce the 'provincial competitiveness index' (a measure of local institutional quality in Vietnam) into the model, we find that return migrants are more likely to return to a region with higher-quality institutions.

Digging a bit deeper into the results, we find that this preference for higher-quality institutions depends on the age of the return migrant, with younger return migrants displaying a greater preference for higher-quality institutions than older return migrants. Also, migrants who returned from a country that itself has higher-quality institutions revealed a greater preference for higher-quality institutions when they returned to Vietnam (though this result was not nearly as statistically significant). These results are interesting, especially the latter result, which suggests that there are spillover effects of developing country migrants adopting expectations of high-quality institutions back home, that are similar to those they experienced in the host (usually developed) country. The results also suggest that better institutional quality may attract return migrants, especially those who are younger (and have greater remaining productivity and reproductive potential). Perhaps there might be some lessons to be learned in this for declining regions in other countries?

Finally, this paper is also the first research paper from Ngoc's PhD thesis, so congratulations to her on that achievement, and I look forward to reporting on her future work in later posts.

Saturday, 27 May 2017

Free trade agreements, or international commerce agreements

Last week in ECON100, we covered the gains from trade. One of the points I made was the misnaming of free trade agreements, which these days are mostly not about free trade. This was a point made recently by Bill Rosenberg (economist for the Council of Trade Unions) in the New Zealand Herald:
But these agreements are no longer mainly about trade. It is misleading to talk about them as Free Trade Agreements. I'll call them international commerce agreements, and it is misleading to label public concerns as protectionism.
These agreements are now mainly about services, regulation (including so-called non-tariff measures), foreign investment, intellectual property, government procurement, commercialisation of public agencies, and other matters that are "behind the border" and cut deeply into people's daily lives. That is why people protest at restrictions on the ability of future Governments to make and change rules in the public interest, to adapt to new circumstances and repair poor policy of the past.
I like Rosenberg's characterisation of these agreements as 'international commerce agreements', and might start using that terminology interchangeably with 'free trade agreements' in my classes. Not everyone gets this, as this response to Rosenberg from Mike Hosking demonstrated.

It's hard to argue against free trade in itself (though such arguments continue to be made - see my earlier post on this), especially if genuine attempts are made to compensate the losers from free trade (such as those who lose jobs in industries in which we have a comparative disadvantage). There are certainly enough gains for the winners from free trade to compensate the losers, and has some extra left over. However, whether an international commerce agreement (or free trade agreement, if you prefer) has a net positive effect depends on how you evaluate the costs (or benefits) to the economy from all of the other non-free-trade-related clauses in the agreement. And that cost-benefit evaluation is enormously tricky - the more elements you include, the harder the evaluation is going to be.

The economic evaluation of the Trans-Pacific Partnership agreement was conducted by my colleague Anna Strutt and others (you can read the full report here). That economic evaluation estimated gains for New Zealand of $624 billion by 2030 from tariff liberalisation alone, and $4.16 billion if liberalisation of non-tariff trade barriers and customs delays were included. But note that this is trade-related gains only, and doesn't consider all of the other parts of the agreement, such as intellectual property, changes to Pharmac, etc. And now that the US is not included, you can expect the trade-related gains to be somewhat less.

Overall, I'll remain pro-free-trade, but agnostic on free trade agreements.

Wednesday, 24 May 2017

Three reasons why tipping is a bad idea

Tipping has been in the news this week. Matt Heath started it with this article on Sunday, but then Deputy Prime Minister (and former waitress) Paula Bennett chimed in, saying "Overall I think the service in New Zealand is good, I always tip for excellent service and encourage others to too if we want standards to continue to improve" (at least, according to this article - I didn't read her letter to the Herald myself). Bennett's comments have stirred a lot of media interest (see here and here and here, for example). Now, as the voice of reason, I give you three reasons why tipping is a bad idea.

First, it's not rational if it's not already a social convention. To see why, we need to go through a little bit of game theory (which is good revision for my ECON100 students, since we did game theory in class last week). Consider a sequential game with two players: (1) the server, who can choose to give average service, or good service; and (2) the customer, who can choose to tip, or not, and makes their choice after the service decision of the server has already been revealed. Let's say that the basic outcome (average service and no tip) leads to a zero payoff for both players. Let's also assume that if the server gives good service, that increases the payoff to the customer by +6 (units of utility, or satisfaction), but comes at a cost to the server of -2 (units of utility). Finally, let's assume that if the customer chooses to tip, that reduces their payoff by 5, and increases the server's payoff by 5. The game is laid out in tree form (extensive form) below.

To find the subgame perfect Nash equilibrium here, we can use backward induction (similar to the best response method we use in a simultaneous game). Essentially, we work out what the second player (the customer) will do first, and then use that to work out what the first player (the server) will do. In this case, if the server gives good service, then we are moving down the left branch of the tree. The best option for the customer in that case is not to tip (since a payoff of +6 is better than a payoff of +1). So, the server knows that if they give good service, the customer is better off not tipping. Now, if the server gives average service, then we are moving down the right branch of the tree. The best option for the customer in that case is not to tip (since a payoff of 0 is better than a payoff of -5). So, the server knows that if they give average service, the customer is better off not tipping. Notice that the customer is better off not tipping no matter what the server does - not tipping is a dominant strategy for the customer. So, the choice for the server is to give good service (and receive a payoff of -2) or to give average service (and receive a payoff of 0). Of course, they will give average service. The subgame perfect Nash equilibrium here is that the server gives average service, and the customer doesn't leave a tip.

However, that analysis assumes that this is a non-repeated game. We know that if games are repeated, the outcome may be able to move away from the Nash equilibrium to an outcome that is better for all players (notice that the combination of good service and tipping is better for both players). How do we get to this alternative outcome? It relies on cooperation between the two players, and cooperation requires trust. The server has to trust that the customer will tip them, before they will agree to give good service. Can they trust the customer? Only if they have developed a relationship with that customer, and in most hospitality situations it is unlikely that a customer will encounter the same server again in the future (unless they are a regular). So, no trust. No cooperation. No tipping, and no good service.

Which brings me to social convention. One way to ensure cooperation from the customer is to make tipping a social convention, which has some social penalty attached to it. If it is frowned upon not to tip the server, to the extent that it becomes costly (in terms of moral costs or social costs, not financial costs) not to tip, then that changes the game. Say that the moral cost of not tipping is -6 units to the customer (since everyone who sees them not tipping the server then thinks the customer is a douchebag). This changes the game to this:

Now, where is the subgame perfect Nash equilibrium? If the server gives good service, the customer will tip (because +1 is better than 0). If the server gives average service, the customer will tip (because -5 is better than -6). Notice that tipping is now a dominant strategy for the customer. Knowing what the customer will do, the server will choose to give good service (since +3 is better than 0). The subgame perfect Nash equilibrium is now that the server gives good service, and the customer leaves a tip.

But it relies on a social convention, which is not the current convention in New Zealand. And developing new social conventions is not easy (although perhaps Paula Bennett is willing to give it a try in this case?).

The second reason why tipping is a bad idea is because of second-order effects. If customers have to tip the servers, this increases the cost of their meal. Since we know that demand curves are downward sloping, an increase in price will lead to lower quantity demanded - customers will demand fewer restaurant meals. If you doubt this point, then consider how many people you know (I'm sure there are at least some) who object to paying a surcharge for a meal on a public holiday, and so choose to either eat somewhere else (where there is no surcharge) or not to go out at all. Now, note that tipping is essentially the same as applying a surcharge to every restaurant meal.

Since the quantity of restaurant meals demanded will decrease, the number of servers required by restaurants also decreases. Tipping will make some servers better off (higher take-home pay), but will make others worse off (they no longer have a job). This has the same effect as raising the minimum wage, except the customers are paying the extra, rather than the employers. I'm not sure that's a trade-off that customers should be willing to accept.

The third reason why tipping is a bad idea is because it could be considered a form of corruption. If you doubt that, consider this example. Remember that the purpose of tipping is to reward the recipient for giving good service. Now, say that I'm pulled over by a police officer for driving through a stop sign, but the officer decides to let me off with a warning (seems unlikely, but let's run with it). The officer gave me good service - should I tip them?

The World Bank defines corruption as:
...the offering, giving, receiving or soliciting, directly or indirectly, anything of value to influence improperly the actions of another party.
Isn't tipping to reward good service providing something of value (money) to influence the actions of another party (to give you good service)? We could quibble over whether the influence is improper or not, I guess. But the general point is valid.

Anyway, now you have three reasons to use to explain why you shouldn't be tipping: (1) it's not rational (when there is no social convention for tipping); (2) it may make some servers worse off; and (3) it may be corrupt. You're welcome.

Tuesday, 23 May 2017

Update: Uber is starting to price discriminate

Last year I wrote a post about Uber and price discrimination. At the time, Uber was arguing that they don't adjust their surge pricing to take advantage of people whose phone battery is low. Here's what I wrote then:
So, should we believe that Uber is not price discriminating? Price discrimination increases profits when firms can do it effectively. This only requires three conditions to be met:
1. Different groups of customers (a group could be made up of one individual) who have different price elasticities of demand (different sensitivity to price changes);
 2. You need to be able to deduce which customers belong to which groups (so that they get charged the correct price); and
3. No transfers between the groups (since you don't want the low-price group re-selling to the high-price group).
The first condition is clearly met, and presumably Uber's app knows when the phone is low battery (it's probably buried in the terms and conditions for the app, which almost no one reads). Since customers don't know the battery status of other Uber customers, then the third condition is likely to be met too. So, if Uber isn't price discriminating on the basis of battery level, they are leaving potential profits on the table. Uber shareholders probably wouldn't be too happy to learn this. So, I think it's hard to believe that Uber don't take a lot of information about their passengers (including potentially the remaining battery life of their phone) into account at least at some level - perhaps they are not price discriminating via the surge price (i.e. the multiple by which they increase prices), but via the underlying base price?
Now, it seems that Uber is moving to use price discrimination more broadly. This New Zealand Herald story today notes:
Imagine you live in Sydney's lavish suburb of Bondi, while your friend lives in one the city's lower socio-economic regions.
You both order an Uber home at the same time, with each ride having identical demand, traffic and distance travelled.
Yet, you are charged significantly more for the service because of where you are travelling.
This could soon be a reality with Uber introducing "route-based pricing" — a new fixed rate fare system for its UberX service that charges customers based on what it predicts they would be willing to pay.
There is more on this story here, and here. In this case, those travelling to a richer area of the city may have less elastic demand for the ride (because the fare will take up a lower proportion of their income) compared with those travelling to a poorer area of the city. So, the optimal mark-up (of price over cost) is greater for fares to richer areas than to poorer areas, and the price discriminating firm will charge a higher price for those travelling to the richer areas.

Is it possible that this bit from the story might be both true and false at the same time?:
While this might sound like the service is separating its customers based on income, Uber's head of product Daniel Graf said this wasn't the case.
"This is not personalised. This has nothing to do with the individual," he told Business Insider.
Technically, Uber aren't separating customers based on income (because they don't know the customers' incomes). But they are separating based on route, and some routes are clearly more popular with higher-income customers (and that is why it is effective to price discriminate). The prices may not be personalised, in the sense that every person pays a difference price for the same route in the same market conditions, but it isn't a big step from third-degree price discrimination (group pricing, which is what they are currently doing) and first-degree price discrimination (personalised pricing, where every customer pays a different price, based on their own willingness-to-pay for the service). Uber can gather lots of information on their customers' past behaviour, including which fare prices they were willing to pay (or not) in the past, and use that for pricing in the future.

Price discrimination is not illegal or even unfair in many cases (this is a point I have made before). However, this is definitely an unfolding story that it would pay to keep an eye on.

[HT: Marginal Revolution, for the additional sources on this story]

Read more: