Book review: Rockonomics

When Alan Krueger passed away in 2019, the economics profession lost one of its top labour economists. Krueger was known for his famous research with David Card on the minimum wage, as well as work on the economics of education and on inequality. However, he was also an active researcher on the economics of popular music (see this earlier post), and much of his work is collected in the book Rockonomics (published in 2019). Krueger explains his interest in this topic on page 2 of the book, where he writes that:

...music is all about telling stories.

Economics is also about telling stories...

I like the representation of economics as telling stories, and that is how I explain the art of answering exam questions to students - it is like telling a story. Krueger's book tells an interesting story as well, of the economics of the music industry. It is full of insightful explanations, such as this point on why there has been increasing collaboration in music over time:

"Despacito," the most streamed song in 2017, is a good example: it is by Luis Fonsi and Daddy Yankee and features Justin Bieber. If you listen carefully to songs that feature other singers, you will notice that the star normally appears early in the song, within the first thirty seconds. This is logical because streaming services only pay royalties for music that is streamed for at least thirty seconds. In other words, economic incentives of streaming are directly affecting the way songs are written, composed, and performed.

Or this on price discrimination in ticket prices:

Charging a higher price for a seat that is closer to the stage, just like an airline charging a higher price for a first-class seat, is a natural way to price-discriminate and extract the greatest revenue from concert attendees. When the prices vary across good and bad seats, fans self-sort into price tiers (or, equivalently, sections of the venue) based on their willingness to pay.

Krueger and I will have to agree to disagree on whether higher prices for first-class airline tickets are price discrimination (because first-class seats are more expensive, the difference in price is not purely explained by differences in consumers' willingness to pay). Krueger also explains some things about the music industry that have come in for criticism, such as:

The infamous Ticketmaster service fee, which seems out of proportion to the service actually provided, is a way to channel revenue back to venues or promoters, and indirectly to artists, for tickets that are underpriced... Part of Ticketmaster's business model is to act as a heat shield to protect artists from the reputational fallout from charging a higher price.

Clearly, there is more to the economics of the music industry than meets the eye. The effect of music streaming comes in for particular attention. Krueger clearly explains the economics here (see the quote above as an example), along with debunking three misconceptions about the economics of streaming: (1) that streaming is not a zero-sum game, where one additional stream for Artist A reduces income for Artist B; (2) that the amount an artist earns per stream is not a meaningful measure of the contribution of the streaming service to artists' incomes, because it is based on a share of the total streaming service's revenue; and (3) that there is not a simple way of converting the number of streams into 'album equivalents' to measure the overall popularity of artists.

Finally, it is not often that a book will convince me to change my behaviour. However, Krueger convincingly points out that artists earn more from streaming services when consumers are paid subscribers rather than using the ad-supported version. That convinced me to switch my Spotify premium subscription (which I allowed to lapse earlier this year) back on.

Overall, this is a really interesting book, both for those with an interest in the music industry, and for those with an interest in economics. For readers in the intersection between those two groups, this book is a must-read.

The economists' fantasy league

RePEc (Research Papers in Economics) has a new feature: The IDEAS Fantasy League:

The IDEAS fantasy league allows you to pretend you are at the helm of an economics department. Your goal is to improve its ranking relative to other departments in the league. You can do this by trading economists and by choosing which ones to activate in your roster.

Yes, it is fantasy football, but played with economists. I gave up on fantasy football some years ago, after I was spending way too much time on my roster. But I couldn't resist setting up a team of economists. I even drafted quite well, getting Guido Imbens (who ranks #23 in the world on RePEc's 10-year ranking, which is what is used for determining the fantasy league standings) and Justin Wolfers (he's only ranked in the top 8% of economists, but as one of my favourite economists, I still think it is cool that he is in my roster).

On the transfer market, I notice that someone has already put up James Heckman for auction. Could be a steal for someone willing to bid enough to get him (Heckman is ranked #55 overall).

Sadly, the league is only open to economists who have a RePEc profile. Some of the rules are kind of amusing, like not being able to short an economist, and not being able to have yourself on your roster. However, I wonder whether there are incentives to start citing the economists on your roster, or co-authoring with them, in order to boost their ranking?

It will be interesting to see how it plays out. I'll update you on my roster's progress.

[Update: Apparently, this is not a new feature - it's been around since about 2013, and I've only just become aware of it!]

[HT: Marginal Revolution]

How students respond to academic probation

For a wide variety of reasons, some first-year university students fail to perform to the expected standard. Many universities deal with these students by placing them on some form of academic probation - for example, the student on probation might be required to pass a certain proportion of their papers successfully, or they will be denied re-entry into their programme of study. The purpose of academic probation is to provide an incentive for students to increase their study effort, or to deal with whatever other issues are getting in the way of their academic success.

How do students respond to being placed on academic probation? That is the research question addressed in this 2018 article by Marcus Casey, Jeffrey Cline, Ben Ost, and Javaeira Qureshi (all University of Illinois at Chicago), published in the journal Economic Inquiry (ungated earlier version here). In regard to the US, they note that:

...most universities maintain standards that are sufficiently high that nearly 25% of U.S. undergraduates will be placed on academic probation at some point during their tenure...

That strikes me as fairly high, relative to my experience here in New Zealand. Perhaps we are a little more permissive with re-entry than the US? Moving on, Casey et al. use data from a large (about 17,000 students) urban public university, with a sample comprised of:

...nine cohorts of freshmen undergraduates who entered the university during the fall semester between 2004 and 2013...

In total, Casey et al. observe outcomes for over 29,000 students. Students at the university are placed on academic probation at the end of any term where their GPA falls below 2.0 (on the typical US grade scale). To be removed from probation, a student needs to raise their cumulative GPA above 2.0.

Casey et al. use a regression discontinuity research design, where they compare the outcomes of students just below the cutoff for academic probation, with students just above the cutoff. To avoid issues related to students with a GPA of exactly 2.0 (those students turn out to be meaningfully different from students on either side of the boundary), they exclude students at exactly 2.0 (in what is termed a 'donut' strategy). The outcome variables they investigate include four-year and six-year graduation rates, as well as a range of student course-taking behaviours in future terms.

Before we get to their results, it is worth thinking for a moment about what a student might do when placed on academic probation. If the student is keen on remaining a student, they will want to get off probation, raising their cumulative GPA back above 2.0. In theory, they could achieve this by working harder, spending less time partying or working for income. Alternatively, they could reduce their course workload, giving them more time to devote to their remaining courses. Or, they could choose their courses strategically, ensuring that they are taking more 'easy' courses that offer higher grades, or dropping out of courses where it becomes clear that they might 'achieve' a failing grade. It is these sorts of strategic course-taking behaviours that Casey et al. are looking for in their data. And that is what they find, with some added wrinkles:

Our main finding is that probation causes students to engage in a variety of strategic behaviors that help to increase GPA without increased effort. This strategic behavior, however, does not appear for all groups. In particular, underrepresented minorities - black and Hispanic students - show relatively little evidence of strategic behavior whereas probation causes non-minorities to attempt fewer credits, fewer higher level courses, and substantially increases the probability of withdrawing from a course... Course withdrawal is a particularly important dimension of strategic behavior because it allows students to avoid very low grades that would drag down their GPA substantially.

The heterogeneity here is important. Underrepresented minorities were less likely to undertake the strategic behaviours that would result in their coming out of academic probation than other students. It would have been interesting to see if the results were similar when comparing students who are first-in-family at university with other students. Casey et al. suggest that underrepresented minorities may be "less aware of institutional policies and supports". Students who have parents (or siblings) who have previously been to university have greater 'social capital', since their parents (or siblings) can advise them on how to negotiate their way through university successfully. A similar lack of social capital exists for underrepresented minorities (almost by definition, given that they are underrepresented). On the surface, the difference in strategic behaviours between underrepresented minorities and other students in response to academic probation might suggest that academic probation contributes to inequality in graduation outcomes between underrepresented minorities and others. However, that assumes that academic probation actually makes a difference to students' graduation rates, and yet Casey et al. find that:

Probation has little impact on 4- and 6-year graduation rates for any group, suggesting that students who drop out or are expelled as a result of academic probation may have eventually dropped out anyway.

Yikes. Is academic probation really just an exercise in institutional virtue signalling, with no real impact on student graduation outcomes at all? Fortunately, this is just one result from a single (albeit large and public) university in the US. However, it does suggest that we need to look closer at what sorts of activities are associated with academic probation. In the university that Casey et al. looked at:

Students placed on academic probation are also required to have an additional meeting with the academic advising office in the following term.

That seems like a minimalist approach to probation, and unlikely to really change any of the underlying drivers that resulted in the student being put on academic probation in the first place. Other universities take a much more holistic approach to ensuring student success. It would be interesting to repeat this study in a university with a more student-centred approach to academic probation. At such an institution, students probably would still respond to the academic probation incentive in strategic ways,. However, if a more student-centred academic probation does a better job of addressing the underlying drivers of academic under-performance, students might also persist beyond their academic probation period, and the graduation outcome may well be different in those cases.

Taxes are fungible, so you can't really direct where your individual taxes are spent

Last month, there was an article in The Conversation by Jean-Paul Gagnon (University of Canberra) and co-authors, proposing a way of 'democratising taxation'. I meant to comment on it at the time, but was busy with teaching and assessment, and have only come back to it now. Anyway, here's what Gagnon et al. proposed:

Most of us accept tax, if grudgingly. But many aren’t happy with how it is spent.

Enter TaxTrack – our hypothetical proposal for democratising taxation, details of which are to be published in the Australasian Parliamentary Review.

Our idea is that Australians who want a greater say in where their taxes go could be given a TaxTrack number, which would trace those dollars and direct them only to places they wanted them to go.

If they wanted, they could view the invoices their contributions had helped pay, and they could specify which invoices their contributions should not pay – perhaps by prohibiting the spending of their money on things such as military ammunition, or specifying that a certain proportion was directed to healthcare.

Governments would have to work with those instructions, cutting spending in areas that lacked support and boosting it in areas for which there was overwhelming support.

On the surface, that proposal sounds interesting, perhaps attractive. However, there is a fundamental problem with the proposal, which means that it simply won't achieve what Gagnon et al. propose. That problem is that tax payments are fungible. That means that a dollar of tax paid by any taxpayer is exactly the same as a dollar of tax paid by any other taxpayer. Even if the government earmarked some individual taxpayers' tax payment for a particular purpose (or purposes), the government could simply reallocate other taxpayers' tax payments to the remaining purposes, leaving the overall effect unchanged.

A numerical example may suffice. Say that there are four taxpayers: (1) Taxpayer A pays $10,000 in tax; (2) Taxpayer B pays $20,000 in tax; (3) Taxpayer C pays $30,000 in tax; and (4) Taxpayer D pays $100,000 in tax. The total tax received by the government is $100,000, which goes into a big pool that the government uses to finance its spending. And say that there are two ways for the government to spend those tax receipts: (1) Social services (like health, education, and welfare), which receives a budget allocation of $50,000; and (2) Administration costs, which receives a budget allocation of $50,000. Total government spending is $100,000, and the budget is balanced (tax receipts is equal to government spending). Since all the spending is paid out of the pool, it doesn't matter which taxpayer contributed to exactly which spending.

Now, say that Taxpayer B decides that they don't want any of their tax payment to go towards administration costs. They only want to fund social services with their $20,000 tax payment. This is what Gagnon et al. are proposing. What does the government do? They make sure that Taxpayer B's $20,000 goes towards social services. They then take the remaining $80,000 of tax receipts, and allocate $30,000 to social services, and $50,000 to administration costs. The overall effect is no change in spending allocation, because total spending on each category of spending is the same as before. The only difference is that Taxpayer B can think to themselves, 'at least my tax payment isn't funding those worthless administration costs'. There is no other effect at all.

However, TaxTrack could have an impact on government spending, but only if a large proportion of taxpayers sign up for TaxTrack. Continuing with the example above, if both Taxpayer B and Taxpayer D decide that they only want their tax payments to go to social services, then the government would have to direct $60,000 towards social services. What does the government do in that case? Do they cut back on administration costs, spending only $40,000 in that area? Or do they continue to spend the budgeted $50,000 on administration costs, and run a deficit? TaxTrack doesn't provide an answer to that question.

And it should be a real concern. If every taxpayer wants their tax to be spent on sexy causes like climate change mitigation, or saving endangered frogs, or pre-school education, or large subsidies for tourism operators, how will the government fund courts, or police, or parliamentary services, or all of the other unsexy but necessary things that governments have to spend taxes on? They either have to increase the deficit, or cut that spending. Neither is likely to be an optimal solution.

Fortunately, I think TaxTrack would have the opposite problem. Instead of forcing the government into suboptimal allocations of spending, I think that not enough people would sign up for it for TaxTrack to make any difference at all to what the government does. I mean, how many people even engage in effective budgeting for their own household, let alone would be willing to allocate their tax dollars to various specific funding streams?

If taxpayers want to hold the government to account for its spending plans, the way to do that is through the political process. Adding another bureaucratic tool that would serve no purpose other than making a small proportion of taxpayers feel better about where their tax dollars were being spent is not going to achieve that. Arguably, it might even make taxpayers less likely to want to hold the government to account. Currently, if a taxpayer doesn't like the allocation of government spending, they can complain, or try to vote out the incumbent politicians at the next election. But, if the taxpayer feels like their tax dollars are being used in the way they intended, they are less likely to apply the same level of accountability to the government's overall spending allocation.

TaxTrack should be a non-starter for Australia. Thankfully, it hasn't been proposed for use in New Zealand.