Why Tuvaluans aren't migrating due to climate change, yet

I've been doing a lot of reading on climate change and migration lately (mostly related to responding to reviewers' comments on the paper I discussed here). The latest issue of the journal CESifo Economic Studies has a bunch of papers on the topic. The first paper in the issue is a review of the literature by Michael Berlemann and Max Friedrich Steinhardt (both of Helmut Schmidt University in Germany). I've read a number of these reviews, but theirs is the clearest and least technical review I can recall reading, so if you want an excellent overview of the available data, methods, and results from the literature (on climate and migration, as well as natural disasters and migration), then it seems that would be a good place to start.

However, in this post I want to focus on a different paper from that same journal issue (ungated earlier version here), by Ilan Noy (Victoria University of Wellington). In this paper, Noy looks at out-migration (or rather, the lack of out-migration) from Tuvalu. Noy explains that Tuvalu is of interest, because it can:

...in many respects can serve as the canary in the mine for climate change research. If migration driven by climate change was indeed happening today, it should be found in Tuvalu, and if this migration is not happening yet, observing Tuvalu may provide us explanations for its absence. 

Noy notes that there is a distinct lack of out-migration from Tuvalu even though, as a low-lying atoll country, the population is extremely vulnerable to the effects of climate change:

To summarize, all the available evidence suggests that disaster risk in Tuvalu is likely to increase significantly in coming decades. It will increase as: (i) the hazard intensity (mostly cyclones and droughts) increase; (ii) as more people will be exposed because of population growth, urbanization and movement to the capital Funafuti, and sea-level rise; and (iii) as households will be increasingly more vulnerable, given their increasing reliance on manmade infrastructure and imported goods.

Tuvalu does have a large diaspora (relative to the size of the domestic population), but given the risks you would be right to expect that many more of them would be getting out of Funafuti than what is actually observed. Given that, something must be hampering that out-migration. Noy suggests that:

...one of the reasons for this lack of migration is the desire by Tuvaluans to Voice. ‘Voicing’, a concept borrowed from Hirschman’s (1970) Exit, Voice, and Loyalty, is the advocacy of expressing one’s wish for change, and that Voice often is a deliberate choice that in some circumstances may be preferred to Exit (migration).

Voicing in this context can be taken as protesting against climate change and its impacts and implications, and indeed we have seen a lot of evidence of this voicing protest (e.g. see here and here), not just from Tuvalu but from Maldives (e.g. see here and here) and the Marshall Islands (e.g. see here and here).

Why spend time and effort 'Voicing' instead of Exiting (migrating)? The third component of Hirschman's theory, Loyalty, is to blame:

The last component of this is Loyalty—the attachment of people to their communities and homelands. With strong Loyalty, the cost of exiting is substantially higher, exit is therefore less likely, and consequently a strategy of Voicing is more likely to be pursued. Loyalty makes Exit less likely, and therefore gives more scope and incentive for Voice. In part, it is this Loyalty that may explain why the Tuvaluan islanders have chosen to Voice, but it is probably only an imperfect explanation, given the high degrees of previous temporary migrations away from the islands.

It's an interesting theory, and seems to explain why we don't see large out-migrations from the Pacific Islands due to climate change. Yet. It also suggests that our models of international migration, which rely on past data, will be incomplete and inaccurate because they miss the point that migration will only occur when Voice is no longer a viable option. Indeed, Noy notes that when it becomes clear that Voicing is not working, Exiting is the last resort and at that point there is likely to be a sudden and large out-migration. When that occurs will be anyone's guess.

[Update]: The New Zealand government is considering introducing a special visa category for climate change refugees (which is Green Party policy). Although, at only 100 visas per year, I expect it wouldn't make a huge difference.

Tim Hazeldine on economic impact studies

Last week I wrote a post about economic impact studies, specifically the Americas' Cup economic impact study. In today's New Zealand Herald, Tim Hazeldine (University of Auckland) echoed some of the same points:

...the Ministry of Business, Innovation and Employment has commissioned a report from the same consulting company responsible for the Auckland Airport impact numbers cited above.

Using the same "multiplier analysis" that the NZIER and other independent economic consultancies have by now renounced, the report produced quite spectacular numbers for the impact of the Cup: up to $1billion injected into the NZ economy, thousands of jobs created, a return of more than seven dollars on every dollar invested in new wharf facilities.

Take the last number first. Reality check: a return on investment of over $7 per dollar invested is loosely equivalent to the "double your money in three years" promise on my hypothetical hoarding on the airport road. Believe that?

As for the value-added injection and the jobs created: to a first-order approximation, the net number of new jobs created in Auckland, with its already stretched construction and tourism industries, will be about zero. The workers needed will be bid away from other jobs, or imported as new immigrants. As a result, there will be no significant real output increases, the extra spending will be soaked up in higher prices.

Higher prices are harmful for domestic New Zealand customers and travellers but beneficial to the bottom lines of New Zealand and foreign owned businesses. It's a trade-off. My expectation is that, overall, there will be net economic benefits from holding the Cup in Auckland but that they will be quite small — below the costs to which national and local government are being asked to contribute.

In the article, Hazeldine is being a little unfair to the report. While it is true that it reports economic impact analysis based on a multiplier analysis (even though, curiously, the report notes that "we do not use multipliers that are derived from IO tables" - I guess the multipliers were derived from somewhere else?), the report also includes a cost-benefit analysis. Perhaps Hazeldine was so quick to pull the trigger on his article that he didn't read all the way through to Section 5 of the report.

As I noted last week, the cost-benefit analysis is the best of the three alternatives, and at least according to the authors, follows Treasury's Social Cost Benefit Manual (which Hazeldine advocates for, and which you can read for yourself here). The cost-benefit analysis shows benefits greater than costs under the base assumptions. However, it seems to me that, like virtually every event ever, costs will be greater than expected. In that case, costs are likely to be greater than benefits. Which isn't a good reason not to support the America's Cup, but is a good reason not to do so on the basis of economic impact.

Read more:

• Beware economists bearing impact studies of the America's Cup

CEO pay is not all about CEOs' performance, or company performance

While I was away overseas CEO pay was back in the news, mostly courtesy of the continuing fallout from Theo Spiering's $8.32 million salary-plus-benefits package announced back in September. In the New Zealand Herald, Helen Roberts (University of Otago) argues for greater transparency in CEO pay:

We are continually told seven figure sums are needed to retain top executives, without any substance or proof that it needs to be that high.

The reality is that it is the independent third-party remuneration advisers who set the expectations. Compensation consultants use median pay levels from the previous year to determine the median pay level for the current round of contracts; as pay levels increase the median pay level also goes up, driving all CEO pay levels up in that industry.

So the decisions are effectively being made based on the recommendations of only a few.

This becomes a never-ending cycle of artificially inflated salary packages, irrespective of company performance or any parity with pay for salaried workers- companies are effectively being held to ransom.

She then goes on to talk about how loosely CEO pay is related to actual company performance (read the whole article, it's interesting). However, there is a key point about CEO pay that is missed from Roberts's discussion, and also from arguments in favour of high CEO pay, such as this earlier article by Jim Rose, who focused more on superstar effects and essentially argues that if CEOs weren't earning their large salaries, they wouldn't keep their jobs.

That missing point is that the market for executives is a tournament (which I have written about earlier, also in the context of CEO pay). In tournaments the winner is not only paid for their own performance, but paid a high bonus as an incentive for those lower down (e.g. the next tier of executives, in the case of CEO pay) to work harder.

Tournament effects were first described by Sherwin Rosen and Ed Lazear in the early 1980s. In labour markets where there are significant tournament effects at play, workers are paid a 'prize' for their relative performance - maybe a raise or a promotion. The tournament 'winner' only needs to be a little bit better than the second best worker in order to 'win' the tournament, and claim the prize.

However, if winning the tournament is mostly about luck rather than good performance, then the prize needs to be very large in order to incentivise the workers to work hard to 'win' (otherwise, if the prize is small, why work hard if winning comes mostly down to luck?). The large role of luck in performance could be argued to be true of top executives (the tier below CEOs), where their performance can only be measured by metrics that they probably have only small positive influence over (and are more driven by economy-wide factors, especially in the case of large companies). [*] So, because companies want to incentivise their (non-CEO) top executives to work hard, ensuring that the CEO pay is a large step up is one way to do so. [**]

So, the focus on the lack of clear relationship between CEO pay and company performance, and calls for increasing transparency of CEO pay setting, are at least a little misplaced. Unless we first disentangle the incentive effects that are directed at other top executives.

*****

[*] I say positive influence here, because I'm sure that a really bad executive can have considerable negative influence on a company's performance, but it isn't at all clear to me that for a broad range of competent executives, there is much to choose between them.

[**] I do wonder how vulnerable this theory is to the extent of internal vs. external appointments as CEO, since it seems to rely on internal appointments being the norm. On the other hand, the threat of external appointments could increase the incentive effects for internal top executives, since they would have to compete on performance with potential hires from outside the company.

Read more:

• CEO pay and tournament effects

The value of exams as a signal

Exams have been in the news this week for all the wrong reasons. However, last week Michael Lee (University of Auckland) wrote an article in the New Zealand Herald on the real value of exams as a teaching tool rather than just an assessment:

We use exams as an encouragement tool to compel greater engagement with the material. That is actually where the real value of an exam is. When students feel the stakes are high and are unsure of what exactly will be asked, they are incentivised to take a look at everything seriously.

That's why teachers should never tell students exactly what will be examined, because 99 per cent of students will then focus only on that material, which defeats the true purpose of the exam.

In exams and in the real world, the first step to topic mastery is a general overview of key concepts and facts with as much detail as one can remember. Clearly, exams reward students that can do these things in a relevant way to answer a specific question.

A more advanced stage of mastery is the ability to creatively apply, integrate, and challenge the knowledge you have been taught. But it is difficult to get to that level if you haven't got enough base material to work with.

I have a slightly different take on the value of tests and exams. I agree with Lee that they are useful as learning exercises, especially if organised well. I disagree that we shouldn't tell students what will be examined (although I will admit that when asked what will be examined my usual answer is "everything we have covered", which is true!). However, I see tests and exams as having another important function for students, as an important signal that students can give to future teachers and employers. This relates to solving the employers' adverse selection problem that I have written about before:

Students are engaging in a sophisticated array of signals, on multiple levels. It's not possible to avoid signalling in this case, since trying not to provide a signal is itself a signal. The problem that this signalling is trying to avoid stems from private information about the quality of the student - students know whether they are high quality (intelligent, hard working, etc.), but employers don't. Employers want to hire high-quality applicants, but they can't easily tell them apart from the low-quality applicants. This presents a problem for the high-quality applicants too, since they want to distinguish themselves from the low-quality applicants, to ensure that they get the job. In theory, this could lead the market to fail, but in reality the market has developed ways for this private information to be revealed.

One way this problem has been overcome is through job applicants credibly revealing their quality to prospective employers - that is, by job applicants providing a signal of their quality. In order for a signal to be effective, it must be costly (otherwise everyone, even those who are lower quality applicants, would provide the signal), and it must be costly in a way that makes it unattractive for the lower quality applicants to do so (such as being more costly for them to engage in).

Qualifications are an effective signal (they are costly, and they are more costly for lower quality students, who face having to expend more time and effort to complete the qualification). Exams are also an effective signal for exactly the same reason (though not at the same level as the whole qualification). Because exam performance is an effective signal, high quality students can use their performance in exams to separate themselves from lower quality students, because it is very difficult for lower quality students to pass themselves off as higher quality students in the exam format. The quality of the signal is much lower for other types of assessment such as take-home tests, assignments, or group projects, where lower quality students can easily get additional help (often from the high quality students!) to boost their grades.

To me, that is one of the key reasons why we shouldn't eliminate high-stakes tests and exams from student assessment. Take-home or open-book tests, online tests, group projects, and the myriad of other assessment types that are used all have their place, and can all be valuable as learning exercises if used well. But they'll never be able to provide the same quality of signal of student quality as a test or exam.

Read more:

• Why all students need to understand adverse selection and signalling

[HT: David, one of my ECON100 tutors]

Beware economists bearing impact studies of the America's Cup

Auckland Council decides tomorrow about their preferred option for the location of the America's Cup bases. And right on cue, a new report has been released outlining the economic case for hosting the Cup. The New Zealand Herald reported today:

It will inject up to $1 billion into the economy; thousands of jobs will be created; it will revitalise Auckland's dilapidated downtown wharves and bring fleets of superyachts in need of multimillion-dollar repairs.

Or so has been widely reported in the frantic last few weeks of negotiations and protestations about where and how to host the 2021 America's Cup in Auckland, but some have questioned these expectations.

The Ministry of Business, Innovation and Employment (MBIE) yesterday released a glowing report about the economic benefits of hosting the regatta, concluding that every $1 invested would come back more than seven-fold by 2055.

Between $600 million and $1 billion would be injected New Zealand's economy between 2018 and 2021 - far outweighing the $200-odd-million it will cost to host the event, according to the report.

I've read the report, which can be found on the MBIE website here. Most studies of the economic impact of sports are subject to a number of severe limitations, which were usefully summarised by Andrew Zimbalist in his excellent book, Circus Maximus: The Economic Gamble behind Hosting the Olympics and the World Cup (which I reviewed here). One of the biggest problems is the lack of an appropriate counterfactual. These studies usually assume that visitors will come for the event (this assumption is of course reasonable). However, working out the economic impact of the event is not as simple as comparing the economy with the 'usual' number of visitors with the economy with the 'usual' visitors plus the additional visitors for the event ('event visitors'). This is because some of the event visitors would have come to Auckland anyway, even if the event hadn't happened. Other event visitors simply change the timing of their visit to coincide with the event, when they would have come earlier or later anyway. Including those two groups of visitors in the analysis would tend to overstate the economic impact of the event. On top of that, there will be some other visitors, who would have come to Auckland at the time of the event but, perhaps because they can't find a hotel because of the event, or because they don't want to deal with the crowds, they decide not to come at all. This latter effect is termed 'crowding out', and also leads the simple analysis to overstate the economic impact of the event. [*]

The economic impact report for the America's Cup, authored by Greg Akehurst and Lawrence McIlraith of Market Economics, adopts multiple approaches to the assessment and is to be commended for doing so. The report uses three different approaches: (1) the 'standard' economic impact assessment approach based on an input-output (IO) model; (2) a supplementary long-term assessment of impacts on the super-yacht sector, based on a computable general equilibrium (CGE) model; and (3) a cost-benefit analysis based on a comparison of the costs of infrastructure and the direct spending impacts. Each approach also looks at low, medium, and high scenarios.

The 'standard' approach shows an economic impact of $555 million (low scenario) to $977 million (high scenario). However, as we know that is subject to substantial problems and should be treated with a great deal of scepticism.

The CGE modelling approach shows a final realised impact of $123 million per year. However, one of the real problems with this analysis is that it assumes that hosting the America's Cup will have an enduring effect on the super-yacht industry (and in fact a growing impact over time in the high scenario). That assumption might be attractive, but it is unlikely to hold true. The super-yacht industry did get a boost in New Zealand when we last hosted the America's Cup, but that boost was not enduring and by 2014 super-yacht firms were shutting down (see here and here for example). If future America's Cups are not hosted in New Zealand, then at least some of the super-yacht industry is likely to move along with the Cup. So, I would take the CGE analysis with an enormous grain of salt (and it provides the greatest headline number of $7.50 of economic activity for every $1 of investment, which in spite of the authors explicitly noting that this is not a ratio of benefits to costs, the media is interpreting it as such).

The cost-benefit analysis is the best of the three alternatives. Here's the key table from the report, showing the cost-benefit ratios (CBRs) under the different scenarios, as well as some sensitivity analysis based on higher costs, or lower benefits:

Notice that the unadjusted CBRs are all over one (the benefits are greater than the costs). The medium scenario has a lower CBR than the low scenario because it assumes a higher cost (a larger event). Notice also that the cost only needs to increase by 20% (from $200 million to $240 million) in order to eliminate the net benefits of the event (the CBR falls to 1.0). If you think that any project the government is involved in is able to be completed without a serious budget blowout, then you haven't been paying attention over the past forever. A 20% cost overrun would be at the low end.

On the benefits side, it probably pays not to dig too deep into the spending assumptions as they appear to be on fairly shaky ground. For example, they make an adjustment for the proportion of international tourists who note that the America's Cup was one reason (that is, not the main reason) for coming to Auckland, but they don't make the same adjustment for domestic visitors. Domestic visitor spending is only a small proportion of the total, so this probably doesn't affect things too badly. However, the number of syndicates has the biggest effect on the estimates and the medium scenario assumes ten challenger syndicates, but the 2017 America's Cup only had seven syndicates (the low scenario assumes six, the high scenario assumes twelve). If you adjust the number of syndicates down in the medium scenario, then those CBRs are going to look a lot worse.

So, my takeaway from the report is that the benefits might outweigh the costs of hosting the America's Cup, but that relies on the costs being kept under control and the number of challenger syndicates increasing by nearly half over the previous Cup. As with most of these events, you could argue that the spending is good value for a big party, but arguing that it has an overall economic gain for the country (or for Auckland) is probably too strong a claim.

*****

[*] Of course, some of these 'crowded out' visitors might adjust the timing of their visit, coming earlier or later than during the event.

Raising the minimum wage to $20

The new New Zealand government has proposed raising the minimum wage from $15.75 to $16.50 next April, and eventually to $20 by 2021. Eric Crampton at Offsetting Behaviour covered the main points on this last month:

This isn't an end of the world bad idea, but it isn't a good idea.

The government has been targeting a minimum wage of about 66.7% of the median wage. That's already very high by international standards. If we assume median hourly wage growth continues at 3.4%, then the median wage in 2021 would be $27.43. A $20 minimum wage in 2021 would be 72.9% of the median wage...

That would put New Zealand way out in front in the OECD in terms of the ratio of minimum wage to median wage. Crampton argues that Working for Families is a better option as it is better targeted at those in need (to which I would add that there are a whole lot of middle class teen hospitality workers who will benefit from the higher minimum wage, but I don't think that's who the government really wants to benefit), and it is better supported. On the latter point, Crampton explains:

The burden of minimum wage increases is shared among disemployed workers, purchasers of the goods and services produced by minimum wage workers, and owners of firms employing minimum wage workers. The burden of WFF falls heavily on households in the 8th, 9th and 10th deciles. Both versions will have negative effects on the overall economy, but spreading it through the tax system at least tries to minimise the overall deadweight costs of raising that next dollar of wage subsidy.

A higher minimum wage isn't going to result in Armageddon (but equally, in contrast to Branko Marcetic's take, it won't be all unicorns and rainbows either). I'll be interested to see how it plays out. However, I will reiterate that the latest international research (including research on youth minimum wages in Denmark, and the recent increase in the minimum wage in Seattle) suggests that minimum wages do lead to decreases in employment (see here and here). That contrasts a lot of earlier work that called into question the simple labour market supply-and-demand model.

At least though, there is some policy consistency. If you believe that higher minimum wages are a good thing (because presumably you believe that any resulting decrease in employment will be small), you should also be in favour of reducing immigration to boost the wages of unskilled or semi-skilled workers (see my post on that point here). And on that score, the new government is making the right noises (albeit with inconsistency between the Labour and New Zealand First party positions).

Read more:

• The latest evidence supports negative employment effects of the minimum wage
• Latest research suggests the minimum wage DOES reduce employment

Regal Cinemas to introduce dynamic pricing for movies

I've written a couple of times before about pricing at movie theatres (see here and here). On the surface, movie theatre pricing seems to defy basic economic theory. The price of movies doesn't differ between high-demand movies (where we would expect higher prices) and low-demand movies (where we would expect lower prices).

Although, as I wrote in both those earlier posts there probably is some element of this dynamic (or variable) pricing, it just isn't obvious. It is hidden by the choices the movie theatre makes, about which movies are "no complementaries" and the size and configuration of the theatre in which each movie plays (where some have a greater proportion of premium seating). These choices allow movie theatres to ensure that the average movie ticket price differs between high-demand and low-demand movies.

Now, Regal Cinemas in the U.S. is about to make the variable pricing more obvious, as Bloomberg reported last month:

Regal Entertainment Group is testing demand-based pricing for films, potentially leading to higher prices for top hits and low prices for flops, a big change for an industry that typically uses a one-size-fits-all approach.

Working with app maker Atom Tickets LLC, which has lobbied theaters to try dynamic pricing, Regal plans to test the concept in early 2018 and see if it boosts revenue and fills more seats at non-peak times...

Industry executives are debating whether dynamic pricing will increase attendance. Some object to a system that would involve charging higher prices for hit movies and lower prices for unpopular movies.

In that last paragraph, it might seem obvious that dynamic pricing will increase attendance for the low-demand movies. However, it isn't at all clear whether it will be offset by lower attendance at high-demand movies (because these consumers could go to a cheaper low-demand movie instead, and some of them may choose to do so). Total attendance is of course made up of the higher attendance at low-demand movies that will now be cheaper, and possibly somewhat lower attendance at high-demand movies that will now be relatively more expensive (even if the price remains the same as before). Industry executives shouldn't be focusing on the effect on attendance though. Instead they should be looking at total revenue. In this case, the effect on total revenue could be negative, since more tickets at a lower price might not offset fewer tickets at the original price (although that seems unlikely, since the high-demand movies tend to also have fairly inelastic demand, since they have few substitutes). That potential for lower revenue would be grounds for objection from the executives, and I guess we will see in due course whether Regal Cinemas benefits from this change - they movie consumer almost certainly will.

[Update]: David Sims in the Atlantic points out the negatives of Regal's dynamic pricing approach.

Read more:

• We probably are paying more for better movies, but it's not obvious
• Pricing at movie theatres still defies logic. Or does it?

The economic non-impact of malaria on African development

When I was completing my PhD, there were a number of studies based on macroeconomic models that showed significant negative impacts of HIV/AIDS on economic growth and yet econometric studies based on observed HIV prevalence of GDP showed virtually no effect. Some people put the difference down to surplus labour (since AIDS deaths are concentrated among prime age adults who make up the majority of the labour force, if there is surplus labour then losing adults from that age group would have little effect on GDP), but even macroeconomic models with surplus labour tended to show some modest negative impact. So much for macroeconomic models (as we later learned during the Global Financial Crisis)?

So, I was interested to read this forthcoming paper in The Economic Journal (ungated earlier version here) by Emilio Depetris-Chauvin (Pontificia Universidad Católica de Chile) and David Weil (Brown University). In the paper, the authors do a number of really interesting things to evaluate the historical and recent economic (non-)impact of malaria. First, they construct an ingenious and deceptively simple model of malaria prevalence, which is based on the prevalence of the gene that causes sickle cell disease. The sickle cell gene provides protection against malaria deaths in childhood for those who have one copy of the gene, but is fatal for those who have two copies of the gene. So the overall prevalence of sickle cell genes can be used to evaluate the overall burden of malaria in the population. The authors estimate that malaria burden is high:

In areas of high malaria transmission, 20% of the population carry the sickle cell trait. Our estimate is that this implies that historically between 10% and 11% of children died from malaria or sickle cell disease before reaching adulthood. Such a death rate is roughly twice the current burden of malaria in such regions. Comparing the most affected to least affected areas, malaria may have been responsible for a ten percentage point difference in the probability of surviving to adulthood. In areas of high malaria transmission, our estimate is that life expectancy at birth was reduced by approximately five years. In terms of its burden relative to other causes of mortality, malaria appears to have been perhaps about as important historically as it is today.

They then use their measure of malaria burden to evaluate the impact of malaria on African development historically. Strikingly, their measure is positively associated with the log of population density (as a measure of development) at the ethnic group level (for 398 ethnic groups across Africa), even after controlling for geography, access to waterways, climate, cultural clustering, suitability for agriculture, and suitability for tsetse flies. Other measures of development, such as having a large (more than 20,000 population) town in the ethnic group's homeland, complexity of the ethnic group's settlement pattern, and centralisation of power, also have a positive or no relationship with malaria burden. Even after adopting an instrumental variables approach (with malaria suitability as the instrument), they still don't find statistically significant negative effects of malaria burden on African development (see here for more on instrumental variables models), though the effects are sometimes negative and not statistically significant.

Why is there no discernible negative economic impact of malaria on African development, given the high malaria burden and the high resulting mortality? One section of the working paper version of the paper that hasn't made it into the final paper is quite interesting. [*] In that section, the authors note that:

The reason that our estimate of the effect of malaria is so small is two-fold. First, malaria deaths are concentrated at young ages, and second, consumption of young children is low relative to consumption of adults. Putting these together, most deaths from malaria do not, in this model, represent a significant loss of resources to society. In our calculation, deaths beyond age five account for only 1/3 of the reduction in life expectancy due to malaria, but for 2/3 of the economic cost of the disease.

So, because malaria mainly kills young children, society wastes relatively few resources investing in children who die from malaria (and can instead expend those resources on surviving children). So, the economic cost of malaria is relatively slight. I don't know why that part of the analysis didn't make it into the final version of the paper, but I think it is one of the more important insights from this work, as it usefully explains why we might not find any economic impact of malaria in Africa.

*****

[*] Actually, there are a lot of substantial differences between the NBER Working Paper version of the paper and the final accepted publication, which might explain why there was a four-year time delay between the two versions of the paper. I'm glad I read the working paper version first, since otherwise I would have missed some of the greater detail.

What's in a (porn star) name, for identifying survey respondents?

In social science research, we usually want to maintain the confidentiality and anonymity of the respondents to our surveys and interviews. However, there are times when we will want to follow up with respondents at some later date, and if the first round of surveys was anonymous it is impossible to match up the first round respondents' responses with the later responses. So, I was interested to read this short 2011 article (open access) by Megan Lim, Anna Bowring, Judy Gold, and Margaret Hellard (all from the Burnet Institute in Melbourne), published in the journal Sexually Transmitted Diseases.

In the article, the authors discuss asking each survey respondent what their "porn star" name is. They explain:

"We trialed the uniqueness and reliability of a novel identifying characteristic: first pet's name and first street - colloquially known as a "porn star name".

The authors provide a table of examples of porn star names, of which 'Honey Scotsburn' and 'Precious Duckholes' were two (I'm not making this up - check the paper). They then go on to test whether they could match respondents from a baseline and follow-up survey based on the porn star name. Porn star names were unique to 99% of their 1281 respondents to the baseline survey, and adding month/year of birth was enough to provide 100% uniqueness. When re-contacted later, they were able to match 76% of respondents between the two surveys using only the porn star name, and using month/year of birth they could further match 96% of those who provided a partially-consistent porn star name.

It seems this is a pretty unique way of matching respondents between waves of a survey while maintaining plausible anonymity for those respondents. However, the authors note that "calling the identifier a PSN... might also have made the question seem trivial to some participants and resulted in false responses". Of course, this could all be a joke - Lim and Hellard were also two co-authors on research about the survival of teaspoons. Even if this paper was taken seriously (and it could be, since it addresses a real issue), it seems the research community isn't interested - this paper has only been cited twice since it was published in 2011.

School uniform monopolies

I recall many years ago having an argument with a school administrator about uniform requirements (if I recall correctly, this was about school shorts that were the correct colour, but were not allowed because they didn't have the school logo embossed on them). My side of the argument was that the school was using its market power over uniforms to create a monopoly (there was only one uniform provider who sold the school shorts with that particular logo) and unfairly price gouge parents. So, I was interested to read this story in the New Zealand Herald last week:

The new Education Minister has planned action to stamp out "covert" fundraising by schools such as marking up uniforms to make a profit.

Chris Hipkins told the Herald the new Government's overall objective was to make sure a state school education in New Zealand was free...

"At the moment, particularly around things like the big mark-ups on uniforms, schools are finding ways of getting around the rules that they shouldn't be asking parents to pay. We are going to be taking a much firmer line on that..."

A Weekend Herald price comparison carried out earlier this year found parents with a boy and girl at secondary school could pay $700 for just the uniform basics.

The Commerce Commission has received complaints about the costs of uniforms and stationery and issued procurement guidelines, recommending schools make the supplier-selection process transparent and tell parents why deals were entered into. It is illegal to enter an agreement that substantially lessens competition in a market.

With school uniforms, there are few substitutes. If your child is going to School A, you need the appropriate uniform for School A. This gives the school considerable market power (the ability for the seller to set a price above the marginal cost of the uniform). Since most schools are not uniform producers or sellers themselves, they instead transfer that market power to a uniform provider. Usually this takes the form of an exclusive deal with the uniform provider, where that provider is the only one that can sell the school's uniforms, and in exchange the school receives some share of the profits. This creates a monopoly seller of the uniforms, and the monopoly maximises its uniform profits by raising the price. The result is that parents must pay higher prices for uniforms, which must be purchased from the exclusive uniform provider.

One might argue (as the Herald article does) that this is a covert way of increasing school fundraising, in the absence of the ability for schools to do so through higher school fees. A rational school would want to maximise this source of revenue, and they can do that by ensuring that there are few substitutes for the uniform (because, when a firm has market power, the mark-up over marginal cost can be greater if there are fewer substitutes for what they are selling). When I was at school, any shorts of the correct colour were acceptable for my school uniform. However, one way that rational schools can ensure that there are few substitutes for uniform items is to require each item to have the school logo printed or embossed on it. So now, every child must wear not just the correct colour item, but the correct colour item endorsed by the school (and sold by the exclusive monopoly uniform provider).

However, you might not be concerned with high uniform costs if you believe that the additional money you pay is going to the school. But this is probably not the case at all, because schools probably cannot capture all of the excess profits that they create through this market power. If there are many potential uniform providers, then ultimately the school can probably receive the entire profits from the market power, since they could play uniform providers off against each other until they get the best offer (equal to the entire profits from selling uniforms). But if there are few potential providers, this is not the case, and the successful bidder will capture at least some of the profits. And that is what my argument with the school administrator was about, all those years ago. I had no problem with giving the school extra money, but objected to enriching the exclusive monopoly uniform provider.

An idealistic solution to this problem would be to 'adequately' fund schools, so that they don't feel the need to create market power in the uniform market in the first place. However, that would ignore the fact that any school would be better off with a little bit more funding, and so a rational school would always engage in this practice regardless of the level of government funding they receive. The only way to prevent this practice then is to regulate against it. Labour has pledged to draw up 'guidelines' for schools. If they are enforceable, then that might be the best we can hope for, unless school uniforms were abolished entirely.

Female student performance in high-stakes biology exams

Phys.org reported on a new study a couple of weeks ago:

A new study of students in introductory biology courses finds that women overall performed worse than men on high-stakes exams but better on other types of assessments, such as lab work and written assignments. The study also shows that the anxiety of taking an exam has a more significant impact on women's grades than it does for men.

 "It was striking," said Shima Salehi, a doctoral student at Stanford Graduate School of Education and one of the study's two lead authors. "We found that these types of exams disadvantage women because of the stronger effect that test anxiety has on women's performance."

The original study is available here (open access), published in the online journal PLoS ONE. The authors were Cissy Ballen (University of Minnesota), Shima Salehi (Stanford), and Sehoya Cotner (University of Minnesota). The results are based partly on data from 1205 first-year biology students over ten sections, with the results on test anxiety (and 'interest in course content') based on survey data from 372 students over three sections. In the paper, the key research questions were:

1) What is the extent of the gender gap in incoming academic preparation among students? 2) What is the extent of the gender gap in exam grades and non-exam grades? 3) Do women and men report different levels of test anxiety and interest in science? 4) Do these two affective factors influence performance outcomes in undergraduate biology courses?

The authors found that there was a significant gender gap in academic preparation among students, with ACT (American College Test) scores on average about 0.28 standard deviations lower for female than for male students. There was also a difference in exam grades between female and male students, of 0.15 standard deviations. However, to me the key result is:

When we included incoming ACT score in the model as a fixed effect, the gender gap in exam performance disappeared...

In other words, the performance gap in exams between female and male students was almost entirely explained by differences in student quality (as measured by the ACT score). There was no need for the authors to dig into text anxiety or interest in course content, especially given that the results they present based on their mediation analysis actually don't show anything because the combined paths are not statistically significant. Female students did worse because they were worse students, not because of some gender bias or because of test anxiety.

Or maybe not. I noticed that at one point in the paper, the authors note that the exam grades were "multiple-choice exam grades", which implies (to me) that the exams were wholly multiple choice. And we know based on past research that female students have a disadvantage in multiple choice questions. In the Phys.org article, one of the authors is quoted as saying:

We want to figure out what kind of instructional methods will ensure that everyone can navigate successfully through these courses and have a wider range of career options.

Worry less about the instructional methods. Ditch the multiple choice in your exams, or replace them with a mixture of multiple choice and constructed response. Your female students will appreciate it.

Book Review: The Knockoff Economy

Intellectual property rights face a significant trade off, identified by the economist William Nordhaus. The trade-off is between having weaker (or shorter) intellectual property rights, which would lead to under-investment in intellectual property development, or having stronger (or longer) intellectual property rights, which would lead to under-consumption of intellectual property. For instance, if the government strongly protects intellectual property (through longer periods of copyright or patent protection), then that increases the incentives for inventors or artists to invest the time and effort necessary to create new inventions, write new books, create new artworks and so on. This is because the strong intellectual property rights create limited natural monopolies for the rights holders, allowing them to raise the price and increase their profits. However, those higher prices reduce the consumption of the intellectual property relative to the case where intellectual property rights were weaker (or less long-lasting).

However, is it always the case that stronger intellectual property rights foster innovation, and weaker intellectual property rights deter inventors or creators from inventing or creating? This is the question that is addressed in a 2012 book by Kal Raustiala and Christopher Sprigman, entitled The Knockoff Economy: How Imitation Sparks Innovation. In the book, the authors look mainly at three industries (fashion, cuisine, and stand-up comedy) and show that substantial innovation occurs in each case in spite of a lack of strong enforcement of intellectual property rights. Indeed, in the examples discussed in the book, copyright and patents are either not used, or are not available. And yet, in all cases there is a great deal of ongoing innovation. This narrative provides a strong counter-argument to the seemingly-constant increases in the strength and length of intellectual property rights protection being granted in many western countries, especially the U.S.

As I was reading through the book, I made a large number of notes of things I wanted to discuss in my review, but there is really no way I could address them all and keep this post manageable. Because in each of the three cases that make up the first three chapters of the book (fashion, cuisine, and stand-up comedy), the reasons why innovation remains high are quite different. On fashion, the authors note that:

...the apparel industry is not just surviving - it is thriving. Extensive and legal copying accelerates the fashion cycle, banishing once-desired designs to the dustbin of apparel history (perhaps later to the dusted off and reintroduced) and sending the fashion-conscious off in search of the new, new thing.

In the fashion industry, the act of copying drives innovation because there are customers who really want something new, but they are only driven to something new once many others have started wearing the old, new fashions. Cuisine, though, is different. It is robust to copying because you aren't really buying just the meal but an experience, which is difficult to copy:

The dish you crave must be purchased as part of a larger, multifaceted transaction, replete with various courses, beverages, and side dishes. There are ambience, service, energy, and other intangibles in the mix. All of these factors work together. Copying one aspect - the main dish - may be easy. Copying the experience in full is virtually impossible. The experience is less one of buying a product and more that of enjoying a performance.

Chefs may copy each others' dishes, but they also care about their reputation, which is even more the case for stand-up comics. It is social norms that keeps copying of stand-up jokes in check. The authors write that:

...comedians' norm system includes informal but powerful punishments. These start with simple bad-mouthing and ostracism. If that doesn't work, punishments may escalate to a refusal to work with the offending comedian. Occasionally, comedians threaten joke thieves and even beat them up. None of these sanctions depend on legal rules - indeed, when comedians resort to threatening or beating up other comics, that's obviously against the law. Yet these tactics work.

That last point reminded me of Elinor Ostrom's work on informal agreements to deal with common resource problems, and it would have been good if the authors had also noted this parallel. The idea of the fashion cycle made me think about viral smartphone apps - could a case be made for removing copyright protection from smartphone apps, in order to drive more innovation (if indeed, we want more innovation in that space)?

The book looks also in less detail at a number of other areas of innovation including football (of the American variety), fonts, finance, and databases. In these cases, the authors draw the important distinction between 'pioneers' (those who first invent something) and 'tweakers' (those who take the original invention and improve it). This process of pioneer innovation followed by tweaking has been a driver of improved quality in many cases, and the authors essentially argue that this is likely to be true in many more domains. It is an attractive argument, particularly when you consider an area like pharmaceuticals, where monopoly pricing is problematic.

Overall, I really enjoyed this book. If you're interested in intellectual property or innovation, then this is definitely a good read.

Why Pharmac might be better not to fund next-generation drugs

As reported by the New Zealand Herald earlier this week, the government is to investigate a new fund to give New Zealanders access to costly new-generation medicines:

The Cancer Society has called for an early-access scheme, and Labour's previous health spokeswoman Annette King repeatedly called for one, saying that when in Government Labour would look at what funding was needed.

New Health Minister David Clark told the Herald the Government wanted to explore how such a scheme could operate.

The United States and Britain have versions of early-access schemes to let certain patients access ground-breaking drugs.

There is a real problem with funding of these schemes for very expensive treatments. While these treatments may be effective and have highly positive outcomes for the patients that receive them, focusing on the patients who will receive the treatment ignores the opportunity costs (this is a point I have made before about Pharmac funding, here and here). The appropriate way to decide on which treatments are funded is by considering their cost-effectiveness, not by considering which treatments generate the most negative media attention for the government.

A focus on cost-effectiveness ensures that scarce healthcare resources are being used where they will generate the greatest benefit for society. A treatment is cost-effective if it increases a person's health at a lower cost than alternative treatments. Since not all treatments provide the same health benefits (and many have negative side effects, etc.), we need some way of consistently measuring the health gains from a treatment, and measuring the cost per unit of health gain. To do this, we could use Quality-Adjusted Life Years (QALYs - a measure that combines length of life and quality of life) as our measure of health gain, [*] and cost-per-QALY-gained as a measure of which treatments are most cost-effective. A treatment that provides the same increase in QALYs for lower cost, or more QALYs for the same cost, should be preferred for funding.

That might sound unfair (especially to patients who miss out on funding, or their family or friends), but the alternative is even more unfair. If we ignore cost-effectiveness and simply fund any treatment that generates negative media attention (within the same fixed budget), then the healthcare budget will generate a lower total improvement in health. Funding expensive and less-cost-effective treatments has serious costs in terms of decreases in overall health and wellbeing of the population.

Even if the government increases funding for Pharmac, that increased funding should not necessarily go to these next-generation treatments, as there may be other currently-unfunded treatments that are most cost-effective and those should be funded first. Indeed, funds for next-generation treatments are not necessarily a good thing, as the Herald article notes:

The Cancer Drugs Fund in the UK has been overspending despite budget increases, resulting in a number of treatments being taken off its list.

An analysis in the leading cancer journal Annals of Oncology found the medicine funded through the British scheme was not worth the money, as only 18 of the 47 treatments prolonged the patient's life.

One of the paper's authors, Professor Richard Sullivan of King's College London, said the fund had been a "massive health error", and the populism that drives public policy has no place in health.

We need to be careful that our healthcare decision-making is made on the basis of what will generate the greatest gains in health for the budgeted amount, rather than making populist decisions that will make us worse off.

Read more:

• Pharmac vs. Keytruda - The sequel
• Keytruda, and why Pharmac looks for the best value treatments 

[*] An alternative is to measure health using the number of Disability-Adjusted Life Years (DALYs) averted. DALYs are a measure of health lost due to illness or injury, which can be used in place of QALYs (you can read more about QALYs and DALYs here).

Students vs. representative samples in experimental economics

Experimental economics is an excellent tool for testing economic theories, and the effects of economic institutions, in an environment where other factors can be carefully controlled by the experimenter. In lab experiments, where the environment and the choices being made by participants are mostly artificial, most of the conditions related to the decision can be controlled (in contrast with field experiments), which eliminates most sources of bias that can affect people's decision-making. However, most of the samples used in lab experiments are convenience samples made up of university students, or even university economics students. One might rightly question whether the results obtained from lab experiments are sensitive to this selective sample, and whether the results are really generalisable to the population.

That is why I found this 2015 paper by Alexander Cappelen (Norwegian School of Economics), Knut Nygaard (Oslo and Akershus University College of Applied Sciences, Erik Sorensen, and Bertil Tungodden (both Norwegian School of Economics), and published in the Scandinavian Journal of Economics (ungated earlier version here), of great interest. In the paper, the authors compare the results of two commonly used experiments (the dictator game; and a generalised trust game), for three samples:

1. 120 economics students;
2. 119 humanities, science, or social science (excluding economics) students; and
3. 136 participants recruited from a sampling frame representative of the whole population of Norway.

Because of the nature of the two experiments the authors run, it allows them to tease out some of the underlying moral motives for peoples decisions. That is, they could infer whether people made decisions based on efficiency (maximising the gains from the experiment for everyone), equity (everyone receiving the same gains from the experiment), or reciprocity (if the other person helps you in the experiment, you help them). They found that:

...students differ fundamentally from a representative sample, both in the relative importance assigned to different moral motives and in the level of pro-sociality. Moreover, we show that one needs to be careful when generalizing about gender effects on the basis of selected student samples. Both for the dictator game and the trust game, the role of gender in the student samples does not carry over to the representative sample. Finally, we show that economics students behave less pro-socially compared to non-economics students, but the two student groups are similar in the relative importance they assign to different moral motives.

We find that both equality and efficiency are important motivational forces among male representatives, whereas female representatives seem to move from a concern for equality in non-strategic environments to a focus on reciprocity in strategic environments.

So perhaps there is good reason to be a little skeptical of experimental results based on student-only samples. And in case you think that it isn't that big and issue, the authors point out in the introduction:

Among the papers published on social preferences in the top five economics journals from 2000 to 2010, only four out of 24 papers report from experiments on non-student samples, and only two of the papers report from experiments performed outside the lab...

Eight of the 24 papers published in the top five economics journals from 2000 to 2010 report from experiments on economics students, whereas nine papers rely on other student populations or do not report detailed background information on the students.

So it's clearly possible that this could be a big problem for generalising from these results. Which actually relates to a point I have made before about experimental results from student samples.