jamesz

Cigarette prices and subjective well-being

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We’ve written a lot previously about cigarette taxes as a precommitment device that can increase welfare. However, while those models fit the stylised facts, it’s hard to know for sure if people are better off. For that you’d need to make a prediction about their increase in subjective wellbeing and test it. Now a couple of European researchers have done just that and the results are ‘mixed’. By which I mean that the evidence contradicts the theory!

They conclude:

…we find that smoking bans, on average, neither increase nor decrease people’s subjective well-being to a sizable and statistically significant degree. Higher cigarette prices are related to overall lower reported levels of satisfaction with life, ceteris paribus. The partial correlation is, however, measured with a large standard error. Still, the effect is economically meaningful (and corroborated by our differential analysis for people with different smoking propensities). For a fifty percent price increase, we estimate a reduction in average life satisfaction of 0.02 points (on a four point scale). This is about one tenth of the effect of being unemployed rather than employed or equivalent to the effect of a 2.4 percentage points higher rate of unemployment on the population at large. This finding does not lend support to the effectiveness of cigarette taxes as an internalization strategy. Higher cigarette prices at least have overall negative short-term effects.
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Additionally, smoking bans turn out to be beneficial to smokers who would like to stop smoking (or not start again). For those smokers who are most likely to find themselves in a situation where they have recently tried to give up smoking but have relapsed, life satisfaction increases between 0.03 to 0.08 points with smoking bans (depending on the specification). This is evidence that supports the idea that smoking bans can serve as a self-control device. Interestingly, the same group of people does not benefit from higher cigarette prices. Rather to the contrary, these people seem to suffer to the same extend as other smokers do who have not recently tried to stop in response to higher prices. The negative effect of higher cigarette prices on smokers, particularly those who are likely to have self-control problems, runs counter to the prominent finding by Gruber and Mullainathan (2005) for the United States where positive effects of higher cigarette taxes on the well-being of smokers are identified.

Update: Eric comments.

jamesz

More on slippery slopes and nudges

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In a follow up post about nudges and shoves Eric recommends a piece by David Friedman on slippery slopes that argues:

An optional charge where the default choice is to pay it is the sort of thing Sunstein and Thaler propose, a nudge in the direction of doing what those responsible believe, possibly correctly, that most of those nudged would want to do if they took the time to think about it. But the people constructing the choice architecture know what result they want to get, they believe they are doing good and so not constrained by what they themselves would consider proper principles of morality and honesty in a commercial context, so it is very easy to make the “wrong” choice more and more difficult and obscure until what is optional in theory becomes mandatory in practice.

Essentially, the argument is that once you start meddling with people’s choices it’s very hard to avoid imposing your own views of the world. The idea behind nudges is that you help people to make the best choice from their own perspective, not yours, but that’s very hard to do in practice.

As far as it goes, that sounds very sensible and Friedman is probably right that people trying to nudge others are likely to stray in paternalistic territory. However, what the argument is missing is a plausible counterfactual. The choice architects will still need to frame people’s choices in some way. If they use nudges as their guiding principle then they will attempt to frame the choice to maximise the expected benefit to the person making the choice. As Friedman cautions, the architect may not be very good at divining the preferences of others and may end up being more paternalistic than they intended. But the alternative is not that the choice disappears, or that it is not framed in some way. The alternative must be some other guiding principle for framing the choice.

One possibility is randomisation, but there are many instances in which that will result in terrible choices for most people becoming the default. It seems hard to justify that position. A more likely alternative is that the framer will use their own preferences to guide the framing of the choice. The outcome is likely to be rather paternalistic and not at all to Friedman’s liking! It’s all very well to suggest imperfections in the mechanism for framing choices but imperfection doesn’t mean it’s not the best of the bunch.

jamesz

Politics and cost-benefit analysis

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Brian Rudman in the Herald, discusses the cost-benefit analyses of major infrastructure investment that are required by Treasury guidelines:

I’ve come to the conclusion that the main beneficiaries of the big events politicians subsidise at our expense are the cost-benefit analysts hired to justify the expenditure in the first place.
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The cynical take on the process is that the whole cost-benefit palaver was introduced by politicians to put a veneer of neutrality on the decision-making on pet projects.
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That doesn’t worry me that much [but if] politicians … are going to support certain events and projects, despite the evidence of the cost-benefit analyses, why is so much public money wasted commissioning these expensive reports?

I’m a bit torn on the subject of CBAs of major projects. On the one hand, I think they should be extremely useful for informing political decisions. On the other hand, there’s plenty of evidence that politicians don’t pay any attention to them.
Read more

jamesz

Parking fees enrage locals. Again.

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Wellington City Council is considering lifting parking fees again because it thinks people are holding on to the spaces too long. The local paper disapproves, as does David Farrar. Now, I’m no expert on the local politics and they may be quite right that this is just a revenue raising measure, despite the council’s position that it’s about turning over parks more quickly. But let’s take the council seriously for a minute and consider whether it is so obviously stupid.

First, there’s nothing wrong with a local government body raising funds for the services it provides. It needs to do that but the question is how it does it. Rates are the most common revenue raising tool, but are not a particularly efficient one since they don’t correct any market problems. Now, parking obviously has an implicit price so it makes sense to raise some revenue from parking fees by setting the price optimally. That allows either lower rates or more service provision, depending upon electors’/ratepayers’/councillors’ (delete as you like) preferences.

DPF and the Dom Post contend that parking times are already optimal because they’re controlled by time limits in addition to the charges. However, there’s no reason to believe that the upper time limit is the optimal stay from a social viewpoint. Read more

Will Taylor

Ban transfer fees in professional soccer (football)?

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A very interesting piece in the telegraph today where Rory Smith argues that it is time to abolish the transfer fee. This passage of the article had particular resonance, mainly because it smelled like there was some economics present:

In what other sphere do companies have to pay other companies to recruit their staff?

There would be some logic to it if it was a figure reflective of the time left on a player’s contract, the wages they were due to earn, the potential loss to the club, that sort of thing. But an arbitrary sum plucked from an oligarch’s imagination? An amount a local baker decides he desires for a teenager with a season’s mediocrity under his belt? Nonsense. Victorian nonsense. It’s people trafficking in Baby Bentleys. It’s a Roman slave market.

He seems to be saying that transfer fees represent some form of barrier to switching. While transfer fees are higher for better players, and lower when contracts have less time to run (i.e. Liverpool paying  more for Stuart Downing then Manchester United paid for Ashley Young, primarily because Ashley Young only had a year remaining on his contract), I can see some logic to what Rory is getting at. If we abolished transfer fees, then players would presumably still move to where they are most valued by virtue of the wages they would be offered?

What are your thoughts…are transfer fees a historical relic or is there an efficiency justification hiding in there somewhere?

jamesz

Just because there’s a reason doesn’t mean you should

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There was an interesting comment from Andrew Coleman on a recent post of ours in which he laid out the reasons he sees for government intervention in saving behaviour. As I read it he put forward four reasons:

  1. People are time inconsistent
  2. People are poor at choosing good investment options
  3. People underinsure against catastrophe
  4. People take advantage of government intervention

The first three pertain to cognitive biases that may justify intervention to correct. There is widespread debate about whether such biases warrant intervention and, if so, what sort. However, what I want to draw attention to here is the fourth point: when governments intervene they often give people perverse incentives to take advantage of the system that then require further, costly intervention to remedy. Even if the intervention seems justified it may be that the mechanism implementing it is so costly to administer or enforce that the intervention ends up being costly to society. Read more