Coronavirus border controls are raising the price of illegal goods and services

InSight Crime reports on an unexpected effect of the coronavirus border controls:

Contacts in China provide Mexican criminal groups with everything from counterfeit luxury goods to chemical precursors for making fentanyl. But with the spread of the coronavirus, shipments from China have dried up and the cartels are feeling the pinch...

And this is not the only possible consequence for Mexico’s cartels. The Jalisco Cartel New Generation (Cartel Jalisco Nueva Generación — CJNG) is reportedly also struggling to source chemical precursors from China to make fentanyl, the synthetic opioid which has caused thousands of deaths in the United States and Mexico alike...

The global lockdown due to the coronavirus appears to be hitting legal and illegal economies equally hard, but it is likely the supply chain troubles of La Unión de Tepito and the CJNG are only the beginning.

Criminal groups across the region will feel the squeeze.

Countries across Latin America are shutting down borders and preventing air travel, which is likely to significantly disrupt criminal economies like drug trafficking, contraband smuggling and human trafficking.

With most aircraft grounded, illicit drug flights that have become a mainstay of drug trafficking in the region may become easier to track.

There are a lot of things going on here, but they all add up to a decrease in supply of illegal drugs. Difficulty in finding precursors to manufacture drugs reduces supply of drugs, as does a higher likelihood of shipments being intercepted. The diagram below illustrates the effect of these changes on the market for illegal drugs. The market was previously in equilibrium, where the price was P0 and the quantity of drugs traded was Q0. The decrease in supply (from S0 to S1) moves the market to a new equilibrium, where the price of drugs has increased to P1, and the quantity of drugs traded has decreased to Q1.

The drug market isn't the only one affected of course (although the effects are similar in terms of the market diagram above). The market for counterfeit goods is mentioned in the quote at the start of this post, but the article also notes:

Yet criminal groups are nothing if not able to find opportunities in a crisis. In Honduras, after the government locked down the borders due to the virus, human traffickers, known as “coyotes,” raised their prices to help people and contraband get in or out of the country illegally, El Diario de Hoy reported.

When goods (or people) become more difficult (more costly) to transport, the equilibrium price of those goods and services will rise. That is the case even when those goods and services are illegal.

[HT: Marginal Revolution]

Blonds have more fun (or rather, they get paid more)

There's a lot of evidence that a beauty premium exists in the labour market. That is, more attractive people earn more (see here and here, as well as here for my review of Daniel Hamermesh's excellent book Beauty Pays). Taller people also earn more (see here), so beauty is not the only physical attribute that attracts a labour market premium. What about hair colour?

In a short 2012 article published in the Journal of Socio-Economics (sorry I don't see an ungated version), Nicolas Guéguen (Université de Bretagne-Sud) reported the results of an experiment he ran to find out. Guéguen used wigs to randomise the hair colour of waitresses at several restaurants in Brittany, and measured the effect on whether the customers gave a tip, and how much they tipped. He found that:

Men gave tips more often to a waitress with blond hair and, when they did, they gave her a larger amount of money. No hair color effect was found with female patrons. In this experiment, we found that the average rate of customers who left a tip to a blond waitress is 25.2% higher when compared with the three other combined hair color condition. The systematic use of this technique could increase their income from 1173.73€ to 1244.97€ a month (from 8.38€ to 8.89€ per hour).

Blond waitresses earned statistically significantly more than waitresses with black, brown, or red hair (there were no differences between the other three hair colours). You might worry that the waitresses acted differently when wearing the blond wig, but if that were the case, then there would have been differences in the tips earned from female customers (and there weren't). The experimental setting and the randomisation of wig colours across different days also solves much of the problem of correlation here. These results are plausibly causal.

You might be willing to call this out as discrimination. However, as Daniel Hamermesh notes in his book, customers may be willing to pay more for the amenity of dealing with an attractive person (although, Hamermesh doesn't put it in quite those terms). Customer preferences matter, and that is one explanation for the higher wages for more attractive people. Employers pay attractive people more because they attract more customers. However, that argument doesn't really extend to the tipping behaviour of customers. So, it is an important finding that customer willingness-to-pay for physical attributes is also picked up by what they actually pay (as a tip), which is a more direct measure. It would be interesting to see if this extended to other physical attributes (attractiveness, height), although the challenges of designing an experiment for those attributes are much greater!

Read more:

• The beauty premium in undergraduate study is small, and more attractive women major in economics
• The beauty premium in the LPGA
• The beauty and height premiums in the labour market

The marginal benefit of peer review

I engage in a lot of peer review. Last year, I reviewed 24 papers submitted to 18 different journals. The year before was similar. And some of those article went through multiple rounds of peer review. I typically avoid asking for anything new from authors in the second or subsequent rounds of peer review, but I have heard horror stories from colleagues of papers sitting in peer review for years, while reviewers ask for revision after revision, all the time with new analyses or robustness checks being appended to the paper. A legitimate question is, does all of that extra peer review time add value?

A recent IZA Discussion Paper by Aboozar Hadavand (Johns Hopkins University), Daniel Hamermesh (Columbia University), and Wesley Wilson (University of Oregon), provides us with an initial answer. They collated data from the journal Economic Inquiry over the period from 2009 to 2018. Interesting, Economic Inquiry offers submitting authors two tracks:

Submitting authors could choose between a fast track, in which the article receives a simple yes or no; or a regular track, which might lead to acceptance with minor revisions, to a revise/re-submit response with subsequent additional refereeing, or to rejection...

Hadavand et al. then compare articles that were published through the fast track (which didn't suffer multiple rounds of peer review) with articles that were published through the regular track (which could have). Of course, authors self-select into the track they submit to, so the authors use a two-stage selection model to deal with that. When looking at the subsequent citation performance of articles (which is an indicator of article quality), they find that:

...no matter what vectors of covariates are included in this second stage, those regular-track articles that go through multiple rounds of refereeing have no greater scholarly impact than those that obtain only one set of referee reports... Compared to regular-track articles that go through only one round of refereeing, multiple rounds of refereeing never enhance an article’s subsequent scholarly impact in any of the econometric formulations that we have constructed.

In other words, the additional rounds of peer review seem to add no value (in terms of the article quality). To some extent, this makes sense. Economists recognise that marginal benefit is diminishing. So, each additional round of peer review should add less benefit than earlier rounds. However, I think many people would be surprised to know that the marginal benefit basically immediately falls to zero, and may even be zero for the first round of peer review.

This calls into question the whole cost-benefit calculation of peer review overall. Hadavand provide a rough estimate that the time cost of peer review in economics is US$50 million per year, and US$1 billion in total across all disciplines. How much of that cost is essentially a waste? It would be good to get a sense of whether this study is an outlier, or whether it can be replicated for other journals, and perhaps more importantly, in other disciplines.

[HT: Marginal Revolution and Development Impact]

The prisoners' dilemma, and why we all have to be kept in lockdown

The prisoners' dilemma is probably the most famous example of game theory in action. I've written about it many times, in many different contexts (for example here, here, here, and here). In the prisoners' dilemma, all players have a dominant strategy, which is a strategy that is always better for the player, no matter what any of the other players choose to do. However, if each player acts in their own self-interest, the outcome leads to payoffs that are worse for everyone, than if they had cooperated. Robert Frank has described these games as leading to behaviour that is 'smart for one, dumb for all'.

And you can see this sort of behaviour all the time (once you know what to look for). Consider the current lockdown situation in New Zealand. If the lockdown was in any way voluntary (as it effectively was until Wednesday night), then each person has two options: (1) stay home; or (2) act normally. For most people, acting normally is a dominant strategy, at least in the early stages of the coronavirus spreading. They are better off acting normally if everyone else stays home (because they mostly get to go on with their lives as normal, and have low risk of catching the coronavirus; whereas staying home they would be giving up on things they like to do), and they are better off acting normally if everyone else is acting normally (because life goes on as normal, rather than giving up on things they like to do). So, individually people are better off acting normally. And so we saw things like this:

Hundreds of partygoers ignored the Government's advice and crowded into Wellington bars on Saturday night with no social distancing in sight.

Just hours after prime minister Jacinda Ardern confirmed the country was on a level two alert and urged people to work from home and keep a safe two metre distance from each other, young revellers took to bars around the country...

There were also reports of bars in other main cities including Auckland and Hamilton teeming with people.

And around the world:

Young German adults hold "corona parties" and cough towards older people.

A Spanish man leashes a goat to go for a walk to skirt confinement orders.

From France to Florida to Australia, kitesurfers, university students and others crowd the beaches...

"Some consider they're little heroes when they break the rules," French Interior Minister Christophe Castaner said. "Well, no. You're an imbecile, and especially a threat to yourself." 

These people aren't stupid. They are selfish, and acting in their own self-interest. Which is why we needed to go into full lockdown, and early, if we wanted to curtail the spread of coronavirus. Any voluntary or partial measures would simply be subject to the prisoners' dilemma. As I've noted before, in a repeated prisoners' dilemma (which this is, because we are essentially repeating it every day for the next four weeks), cooperation requires trust. And collectively, our behaviour up to this point hasn't earned that trust. We need to be locked down, so that the dominant strategy was no longer available to us.

Finally, an interesting research project for later would be to look at the difference in response, and the effectiveness of response, between countries that are more authoritarian and those that are more democratic, and between countries where the average 'respect for authority' (for want of a better term) is high or low. Even looking at the early data on the countries where the spread has been curtailed relatively quickly (China, South Korea) and those where it hasn't (Italy, Spain), I think we can see a pattern forming.