jamesz

Impact of file sharing on film industry

/in , , /by

Interesting that movie downloads haven’t had a significant impact on video rentals. That will probably change as video streaming services like Netflix become more common.

Abstract:

The music industry has struggled during the past decade due to file sharing and movie business executives fear the same fate. This paper seeks to provide measurements of the effects of peer-to-peer file sharing on the movie industry. We use a long panel of data at the country level containing information on theatrical, video rental, and video retail movie commercial performances, as well as Internet and broadband penetration. We compare the impacts of increased high-speed online connectedness replacing slow-speed Internet connectedness before and after the introduction of the second-generation file sharing technology that has made movie file sharing feasible. This empirical strategy allows us to isolate the effects of file sharing from any other possible Internet impacts on the commercial performance of movies unrelated to file sharing. Our results indicate that the effect of peer-to-peer file sharing is negative and large on video sales, but we do not have confidence regarding the impacts of file sharing on either the theatrical commercial performance of movies or video rentals.

Matt Nolan

Why revisions matter

/8 Comments/in , /by

Via James I saw this excellent post by Lars Christensen on why data revisions don’t matter for NGDP targeting.  I think it shows how much traction that the NGDP people are getting, when critiques like this start to appear – and it is good they are making a concerted effort to answer them.

Now I’m not actually someone who thinks that NGDP targeting isn’t what should be done (at this point, I’m still in agreement with the 2011 version of myself) – I don’t think it is terribly far off, and it provides a rule which is the main thing, so if it was to become core policy I wouldn’t be terribly concerned.

Now data revisions.  I think Christensen overstates how little they matter – even more than those who criticise NGDP targeting overstate how important it is.  In truth, the revisions issue is an important one because we are LEVEL targeting, and LEVEL targeting makes policy history dependent.  There are three real differences between flexible inflation targeting and NGDP targeting for a large economy, one of which is that point that NGDP targeting is level targeting and inflation targeting is growth rate targeting (for a small open economy, changes in tradeable good prices cause further issues – and I think NGDP doesn’t do this appropriately) … note, one other is the fact that NGDP targeting allows less discretion around the rule and an easier way to “judge” policy, something every economist outside of a central bank sees as a good thing 😉 … note the third is that one is anchoring expectations of price growth unrelated to the market place, one is ahchoring expectations of the level of nominal income unrelated to the market place – here we can ask “which one is more important for business and household decisions”.

So through the arguments:

We target a forecast in both cases, but forecasts are poor for both NGDP and inflation

This is true.  However, just before Christmas I was reading a paper about how inflation is the variable economic models have some of the most success at forecasting – as compared to GDP forecasts which are significantly worse.  I was going to write on this, and probably will at some point.  But in the interim, here is the RBA 😀

We should be targeting off a market, as that provides expectations

This is just the forecast story again – and we can do that with inflation targeting as well.

The potential problem

“Furthermore, arguing that NGDP data can be revised might point to a potential (!) problem with NGDP, but at the same time if one argues that national account data in general is unreliable then it is also a problem for an inflation targeting central bank. The reason is that most inflation targeting central banks historical have use a so-called Taylor rule (or something similar) to guide monetary policy – to see whether interest rates should be increased or lowered.”

Indeed this is a problem for inflation targeting as well.  But lets think a bit.

CPI, business surveys, and the unemployment rate are virtually never revised (apart from methodology changes), NGDP is revised constantly.  Central banks target a certain measure of core CPI and they use a Taylor rule which relies on deviations from potential output.  What they estimate is the OUTPUT GAP not potential itself.  Oft times, this estimate of potential will use data from business surveys and the unemployment rate as well as the oft revised GDP numbers – and as a result the size of any revisions and any potential error are a lot smaller.

Inflation is dubious

All data is dubious – CPI has had more time spent on it for the fact it is used for policy setting.  If we are worried about whether CPI is systematically biased (which is level terms it likely is, but in growth terms it is not) then the issue is far far worse for the GDP stats!

Conclusion

“However, the important point is that present and historical data is not important, but rather the expectation of the future NGDP, which an NGDP futures market (or a bookmaker for that matter) could provide a good forecast of (including possible data revisions). Contrary to this inflation targeting central banks also face challenges of data revisions and particularly a challenge to separate demand shocks from supply shocks and estimating potential GDP.”

It is exactly right that the point is to set expectations – central bankers know that.  With expectations of inflation anchored, they can then just walk around changing their policy stance to respond to the evolution of demand in the economy – this is what central bank policy should do, aims to do (ignoring the ECB of course 😉 ), and what the NGDP targeters want!  In this way data revisions are pretty irrelevant in so far as both sides are asking each other to do the same thing.

But there is the kicker, the flexible inflation targeters are targeting GROWTH in demand and anchoring expectations of PRICE growth.  NGDP targeters are targeting the LEVEL of demand and anchoring expectations of NOMINAL INCOME.  As soon as we target a level instead of a growth rate we make history relevant – this very history that is filled with data revisions and changes.  As a result, this is definitely a more important issue for NGDP targeting than for flexible inflation or NGDP growth targeting – which is why it is being raised!

It is a cost of level targeting, those in favour of level targeting have to point out the counterveiling benefits of said targeting (outside of a liquidity trap, where the gains are widely accepted but can be done through commitments rather than a change in the rule) that will swamp this and other costs.

jamesz

Get out and shout about it

/in , , /by

Another study where the main question is whether you believe in their identification strategy.

Abstract:

Can protests cause political change, or are they merely symptoms of underlying shifts in policy preferences? We address this question by studying the Tea Party movement in the United States, which rose to prominence through coordinated rallies across the country on Tax Day, April 15, 2009. We exploit variation in rainfall on the day of these rallies as an exogenous source of variation in attendance. We show that good weather at this initial, coordinating event had significant consequences for the subsequent local strength of the movement, increased public support for Tea Party positions, and led to more Republican votes in the 2010 midterm elections. Policymaking was also affected, as incumbents responded to large protests in their district by voting more conservatively in Congress. Our estimates suggest significant multiplier effects: an additional protester increased the number of Republican votes by a factor well above one. Together our results show that protests can build political movements that ultimately affect policymaking, and that these effects arise from influencing political views rather than solely through the revelation of existing political preferences.

jamesz

Academies manipulate their intake

/in , , /by

The Guardian reports that

Some academy schools have been accused of manipulating admissions to improve results and using covert selection methods… A number of academy chains are seemingly more focused on expanding their empires than improving their existing schools.

Should we be surprised, and is it a major problem? On the first question, no, it is exactly what we’d expect. Through manipulating admissions and expanding their empires schools gain prestige and wealth. We may prefer them to do that through improving the attainment of students, but many will naturally attempt to use all possible means. The scope for doing so revolves around how closely the Government can contract for the outcomes it wants. As Hart, Shleifer, and Vishny say in their classic paper

…the case for in-house provision is generally stronger when non-contractible cost reductions have large deleterious effects on quality, when quality innovations are unimportant, and when corruption in government procurement is a severe problem. In contrast, the case for privatization is stronger when quality-reducing cost reductions can be controlled through contract or competition, when quality innovations are important, and when patronage and powerful unions are a severe problem inside the government.

So the trade-off when allowing more autonomy to schools is between the benefits of innovation–through either cost reduction or observable quality improvements–and the costs of unobservable reductions in the quality or equity of service delivery. We can never eliminate the costs, although the Academies Commission’s report suggests ways to improve the current monitoring; nonetheless the cost-benefit analysis may still be positive. What the Commission’s report doesn’t address is the other side of the equation: the gains from innovation in education and the benefits to students. Weighing those against the costs to equity will be the real test of the academies. If most of their innovations turn out to be new ways to game the system then they will have failed. If, on the other hand, there are significant increases in the quality or cost-effectiveness of education then the gaming detected in this report may be a side-show. On the second question, the report doesn’t give us answers.

A related point, made by Shleifer, is that we need to be careful about understanding the counterfactual. It may be that some academies are always able to select better students by some means. However, the locally funded school system usually exhibits obvious segregation, too. Even if there is some selection in academies, that needs to be compared to the current system’s level of segregation rather than looking at it in isolation.

jamesz

Cigarette prices and subjective well-being

/in , , , /by

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.
…
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

Externalities and the changing nature of the internet

/in , , /by

Cory Doctorow has written a thoughtful and interesting article for the Guardian, which argues that pricing externalities will inhibit the creation of public value.

…the infectious idea of internalising externalities turns its victims into grasping, would-be rentiers. You translate a document because you need it in two languages. I come along and use those translations to teach a computer something about context. You tell me I owe you a slice of all the revenue my software generates. That’s just crazy. It’s like saying that someone who figures out how to recycle the rubbish you set out at the kerb should give you a piece of their earnings.
…
If every shred needs to be accounted for and paid for, then the harvest won’t happen. Paying for every link you make, or every link you count, or every document you analyse is a losing game. Forget payment: the process of figuring out who to pay and how much is owed would totally swamp the expected return from whatever it is you’re planning on making out of all those unloved scraps.

It would be easy to nitpick at the way Doctorow uses concepts like externality rather freely, but that would miss the point of the essay. Underneath those semantics I think there’s a big idea he’s trying to get at, which isn’t really about externalities at all: it is the complaint that things previously available for free are now priced. It is about the intrusion of money into a creative community.

Think back to Dan Ariely’s discussion of social and market norms. The idea is that we act differently in situations where we perceive as market situations, relative to social situations. In particular, we are less generous towards others and less likely to feel guilty about our breaches of social etiquette when we’re in a market situation. Importantly, once a market norm is introduced into a situation it can destroy the social norms very quickly. Social norms are all about trust and once people feel taken advantage of that trust breaks down and turns into a feeling of betrayal. For example, people may enjoy sharing on Facebook but, once they feel that Facebook is trying to take advantage of their personal information for monetary gain, they feel betrayed and no longer trust it. Social and market norms don’t mix well.*

What Doctorow has identified is a social norm of generosity without expectations that previously pervaded web communities. There are companies, such as Instagram, who took advantage of that to build up a large stock of specific investment and then attempted to monetize it. Whereas we expect our bank to try taking advantage of us (market norm), we feel personally offended if Instagram attempts it (social norm). Consequently, there was a huge outcry about Instagram’s attempted change in their ToS, and that loss of trust could damage the firm permanently.

As attempts to monetize online activities continue it is likely that these conflicts between profit motives and social norms will become more common. Companies recognise how valuable it can be to create social norms in their interaction with users. However, that generates tensions with their quest for profits, which can ultimately end up destroying the social goodwill that is the backbone of their success.

* It occurs to me that this may not hold for economists who are trained to think of everything as a market. Perhaps they will just have to believe the experimental work on the matter rather than looking to their intuition!