Wednesday, 29 March 2017

Publication bias and the file drawer

Economists have known about file drawer problems for rather a while; DeLong and Lang was on the syllabus when I was in grad school in the late '90s. 

My Canterbury colleague Andrea Menclova's wished to do something about it. If papers with insignificant results get put in file drawers for want of suitable publication outlets, why not start a journal of insignificant results? She's been thinking about this one for a while; it was a not infrequent lunchroom conversation topic.

She's now blogged on it, which I'm taking as an optimistic sign that her proposed journal might actually get going. She writes:
Series of Unsurprising Results in Economics (SURE)Is the topic of your paper interesting, your analysis carefully done, but your results are not “sexy”? If so, please consider submitting your paper to SURE. An e-journal of high-quality research with “unsurprising” findings.
How does it work:
  • We accept papers from all fields of Economics…
  • Which have been rejected at a journal indexed in EconLit…
  • With the ONLY important reason being that their results are statistically insignificant or otherwise “unsurprising”.
To document that your paper meets the above eligibility criteria, please send us all referee reports and letters from the editor from the journal where your paper has been rejected.  Two independent referees will read these reports along with your paper and evaluate whether they indicate that:
  1. the paper is of high quality and
  2. the only important reason for rejection was the insignificant/unsurprising nature of the result
Submission implies that you (the authors) give permission to the SURE editor to contact the editor of the rejecting journal regarding your manuscript.
SURE benefits writers by:
  • Providing an outlet for interesting, high-quality, but “risky” (in terms of uncertain results) research projects;
  • Decreasing incentives to data-mine, change theories and hypotheses ex post, exclusively focus on provocative topics.
SURE benefits readers by:
  • Mitigating the publication bias and thus complementing other journals in an effort to provide a complete account of the state of affairs;
  • Serving as a repository of potential (and tentative) “dead ends” in Economics research.
Feedback is definitely invited! Please submit your comments here or email me at andrea.menclova@canterbury.ac.nz.

Monday, 27 March 2017

Water pricing

And here we go for another edition of "Because you've misspecified the problem, your proposed solution might make things worse."

The past couple of weeks have had renewed anger about water bottling plants. If you buy land with water drawing rights attached to it, you don't get charged for drawing that water. The value of the water is baked into the selling price of the land. And so whoever owns the land with the drawing rights gets to appropriate any unexpected increase in the value of water drawing rights, and anybody buying land at market with those rights would, expectationally, only wind up earning a normal rate of return on that investment.

So far so good. But when people buy land to irrigate paddocks, run cows, milk the cows, dry the water out of the milk, and export the milk powder to China, nobody gets too upset. When they just bottle the water directly and export it to China, nationalists get mad and anti-corporate people see it as a big giveaway.

Labour's proposing charging water exporters. I expect it's feasible to do it, or at least for new plants. But the underlying problems are all still there: nobody really knows whether the highest valued use of water is in spraying it onto paddocks, or in bottling it for export, or leaving it in the river. If you put a charge on one type of water drawing, but not on the others, and if it turns out that the water really is more valuable being bottled directly, then you could be doing harm.

So the underlying problem is getting the right allocation of water across potential users, within constraints imposed by existing use rights and likely iwi ownership claims if drawing rights ever turned into more formal property rights.

Charging water exporters for drawing solves a political problem, but otherwise doesn't do much good. Land with water drawing rights already attracts a premium reflecting the value of the water. Any charge on bottling plants then requires that bottlers put a higher value on water than do irrigators: the bottler not only has to outbid an irrigator for the land, but also has to pay some premium on top. Since there aren't a ton of these things showing up, the value of water to bottlers can't be *that* much higher than the value to irrigators.

What's a potential solution then?

Fritz Raffensperger proposed a pretty innovative water trading system for the Canterbury plains, where the underlying hydrology was mapped well enough. It recognised the flow-on effects of drawing from a pile of different node-points on a pile of other node-points, and set node-pricing accordingly. Then, holders of drawing rights could trade: buying the right to draw more, or selling back their existing allocations, with water flowing to its highest valued use.

But what about the environment and rivers? His system allowed a minimum flow constraint that would automatically scale back drawing rights in dry years to maintain a minimum flow rate.

So how do you manage the politics around all of it and incipient iwi claims? I don't know if the sketch below would work, but I think it's a starting point.

First, define the minimum flow of a river for it still to really be that river. Maybe the flow rate that's at, say, the 25th percentile of unencumbered flow in a typical year. I don't know what the right number is there, but there will be one. That can be the minimum flow rate in the Raffensperger trading setup.

Next declare that the river owns itself, but that the local iwi is its guardian and acts on its behalf. Grant the iwi rights to another margin on top of the river's minimum flow rate. They can leave it in the river, or they can sell it to other users; they could also buy back drawing rights from other users to achieve higher river flow. And so too could folks like Fish & Game for rivers where they'd want higher flow for trout fishing.

Finally, existing drawing rights have to be respected. If the catchment is already over-allocated relative to sustainable extraction rates, then you have to scale things. We already have that kind of setup in the fishing quota management system where quota landings are a fraction of the year's declared total allowable catch, with the TAC varying as sustainable harvest rates vary. The government might have to buy back drawing rights if the catchment is over-allocated once the minimum river flow and iwi allotments are sorted. On the other side, though, the government would earn money through selling drawing rights in under-allocated catchments.

Then run the Raffensperger water trading model. There would need to be a bit of fiddling because irrigation has some water flow back into the rivers/aquifer and bottling plants don't, but it could be sorted. The government would buy back drawing rights through that setup to get over-allocated catchments into line.

That's just a first cut sketch at a solution: it would need a fair bit of working up yet. And there are plausibly other better solutions. But this one at least is trying to get at the real underlying problems. And of course it would all be better if partnered with a market in effluent built on the kind of model Taupo's running for nutrient management.

Advantages:
  • Respects existing use rights;
  • New drawing requires buying the right to do so;
  • Water flows to its most highly valued use.
Disadvantages and things to be worked out:
  • Setting initial minimum flow constraints would be very contentious and risk locking in too high a level (note that it's easier to buy water back into the river if the flow constraint is too low than it is to get agreement to ease a too-high constraint later).
  • The politics could still be a disaster. I've specified here what seems to me a reasonable outcome of a negotiation process, but iwi would likely open by claiming that all water is theirs and the Crown claiming none of it is and farmers objecting to minimum flow constraints in dry years. And assigning ownership of residual drawing rights in under-allocated catchments to Council, iwi, or Crown would be contentious. As an economist, I just invoke Coase and note that I don't care who owns it so long as they can then trade it. Maybe they could each get some of the unallocated parts. 
  • How to handle dry years is still a problem. If you set the drawing rights like fishing quota, as part-shares of the available water that year, then farmers needing set water volumes for stock on hand would face very high costs in buying that water - while the river maintained normal flow. If it's instead a quantity right that doesn't scale, the government would need to buy back allocation to maintain minimum river flow - and that would be expensive. Ultimately the thing likely needs to scale the minimum flow constraint to the shadow price that drops out of the optimisation. 

Wednesday, 22 March 2017

Economic Impact Assessments and the value of fishing

The New Zealand Marine Research Foundation’s commissioned economic impact assessment of recreational fishing in New Zealand says that fishing generates $1.7b in economic activity. Legasea argues “We now have a handle on the value of recreational fishing” and that the results provide “enough evidence to support a recalibration” from commercial fishing to high-value recreational fishing.

But there are two problems. First, even if the economic impact assessment figures were correct, that still provides no basis for deciding whether the next fish caught would be more valuable in a commercial boat or on a recreational hook. And, second, the numbers come from an economic impact assessment. Let’s deal with the second one first.
Enjoy! I also got to quote from one of my favourite Stephen Gordon tweets.

Our Research Fellow Dr Randall Bess provided the numbers I used at the end of the piece. Keep an eye out for his coming report on recreational fishing....

Age-restricted fast foods?

Doug Sellman's latest prescription for reducing obesity:
Does the fast food industry need to be regulated?

Prof Sellman believes only New Zealand's law makers can forcibly change and control the booming fast food industry.

"Government regulation is the answer. It is the tobacco and alcohol industry story all over again.

"The price of freedom from government regulation is enslavement of large numbers of the population to these profit, rather than health-driven industries."

But Prof Sellman isn't optimistic the Government will do anything to effect meaningful change in the fast food industry.

"Unfortunately, we live in intense neo-liberal economic times when public health is given less value by governments to the GDP contribution of big business, while the harms are relatively discounted."

What can be done to combat the booming fast food industry?

Prof Sellman suggests the following measures:
  • Dismantle the marketing
  • Increase the price
  • Reduce accessibility (density of outlets and hours of sale)
  • Increase the age of purchase
  • More incentives for people to leave their cars at home
Yup. Total neoliberal conspiracy that we don't have minimum purchase ages for food.

But remember, there are no slippery slopes from tobacco regulation to every other damned thing that Doug Sellman doesn't like.

Tuesday, 21 March 2017

Myopia and Discounting

Gotta love any technical paper that opens with a Böhm Bawerk cite. 

Gabaix and Laibson have a new framework up in which patient Bayesian imperfectly informed agents display behaviour observationally equivalent to hyperbolic discounting.

The intuition of the model is pretty simple. Agents get noisy signals about the future state of the world, and so there's option value in deferring some decisions until you get more certainty. You consequently get things that look like preference reversals, but they're really just information updating by patient agents.

Their summary here is rather nice:
We provide an illustrative example of our framework in Section 2, where we study a binary choice problem: an actor chooses between an early reward and a mutually exclusive later reward. We show that when the variance of forecasting noise rises linearly with the event horizon, Bayesian agents will act as if they are hyperbolic discounters, even though their deep time preferences are perfectly patient.

In Section 3, we describe the broader implications of our framework, and identify predictions that distinguish our framework from time preference models. First, we show that our (perfectly patient) agents exhibit preference reversals of the same kind that are exhibited by agents with hyperbolic discount functions. However, these preference reversals do not reáect a self-control problem. The preference reversals arise because the agents obtain less noisy information with the passage of time. Accordingly, our agents do not wish to commit themselves; they act as-if they are naive hyperbolic discounters (Strotz 1957, Akerlof 1992, OíDonoghue and Rabin 1999) rather than sophisticated ones (Laibson 1997).

In the cross-section, our framework implies that agents with greater intelligence exhibit less as-if discounting - their superior forecasting ability enables them to make choices that are more responsive to future utility flows.

In addition, our agents exhibit as-if discounting that is domain specific. They exhibit less as-if discounting (i) when they have more overall life experience, (ii) when they are more experienced in the specific choice domain, (iii) when they have more time to think about an intertemporal choice (e.g., Imas, Khun, and Mironova, 2016), and (iv) when they have more cognitive bandwidth to think about their choice (e.g., Benjamin and Shapiro, 2015).

In Section 4, we generalize our example by making the action set continuous. We provide sufficient conditions that imply that perfectly patient agents who are imperfect forecasters will act as if they are naive hyperbolic discounters.
And the Böhm Bawerk quip:
Diminishing sensitivity to future utils is also explained by imperfect information. For example, Böhm-Bawerk (1889) wrote that "we possess inadequate power to imagine and to abstract, or that we are not willing to put forth the necessary effort, but in any event we limn a more or less incomplete picture of our future wants and especially of the remotely distant ones. And then, there are all of those wants that never come to mind at all."
Hyperbolicy behaviour is a reasonably common justification for behavioural economics type interventions. Where the problem is information rather than self-control, providing information may well be the better solution.

Getting out of transitional gains traps

The only way I'd ever seen of getting out of transitional gains traps efficiently was by compensating the losers by taxing the winners.

Is that what's going on in Australia with Uber?

Let's recap.

Recall that Tullock's transitional gains trap obtains whenever the excess profit from a regulatory rent gets capitalised into the price of the asset in regulatory fixed supply. In the taxicab case, that's the medallion that gives you the right to drive a cab in supply-regulated markets. Once that capitalisation happens, the owners of the asset will have enjoyed a capital gain, but future buyers only should earn normal rates of return on investment. And there's the trap: the rule no longer conveys excess profits to anybody, but any changes will be fought because they'd impose capital losses.

Tullock thought that Pareto solutions were impossible in that kind of case, but I proposed something close to one anyway. Buy out existing licence holders at the value of their permits and abolish the permit regime (obviously use a price from before wind of the announcement got out). Issue bonds to cover the buy-out cost. Implement a tax on taxicab usage that pays off the bonds, and retire the tax when the bonds are paid off.

Advantage: the winners compensate the losers, and we get to move to the more efficient state of the world. It is not a Pareto move, because plenty of owners would prefer not to have had their permits taken at yesterday's price, but it's not far.

Now what does all of that miss? Technological change always affects equilibrium regulatory outcomes. That's the standard Peltzman work on regulation. We haven't had disruptive technological change in Canadian dairy as yet (another great transitional gains trap), but we have in taxicabs.

Uber makes maintaining the taxicab cartel more expensive. Cartel enforcement requires political will, and Uber makes the costs of the cartel more obvious to voters. And Uber also enables cartel driver defection: they can drive Uber on the side. Equilibrium stringency then should fall.

And we've seen that in New York. Medallion prices are way down. I used to lecture on this stuff, and noted the successes of Medallion Financial, a specialised lender that provided capital for folks to buy taxicab medallions. Their website once bragged* about how medallions provided above market returns for decades and were highly secure. Here's their stock ticker:

Meanwhile, the price of medallions has dropped from about a million dollars in 2014 down to $250,000 again.

So what does this have to do with paying off the losers? The main point of paying off the losers to get out of a transitional gains trap is to enable the switch to the more efficient outcome. If you're going to get to the more efficient outcome regardless, then paying the medallion owners is just a transfer that might have potential equity justification. 

And so we come to Australia, where they're looking to tax Uber riders to compensate owners of cab licences. 


If the change were going to happen anyway, should the existing cab owners be paid? I hadn't before caught this excellent piece by Richard Holden

He works out which licence holders already earned back the price of their licences on a normal rate of return and argues there's no need to compensate those who've already earned back the value of their licenses. Most require no bailout on those grounds alone. Excess returns on these things are due to their inherent political risk anyway. Licence-holders in New South Wales who bought prior to 2012 had already earned back their investment, as had those in Victoria who bought before 2006. 

For those who haven't yet earned a fair return on their investment, because they bought their licenses too recently, there could be hardship grounds for providing assistance, but he argues that it's little different than other cases where risky investments have not paid out. Do we bail out everyone who invested in IPOs of companies that fizzle? People who bought late bought knowing that the tech was changing. And if the case for payment is on hardship grounds, it should be means-tested and funded out of general government revenues rather than by cab riders. 

Holdin also points out pernicious incentive effects if innovators have to pay off affected industries all the time. I've seen compensation as a last resort way out of horrible political equilbria, like Canadian dairy - not as something that should be the default. 


* This was on their website circa 2000. I saved it and used it in my lecture notes on rent-seeking and transitional gains traps. 
My grandfather got to this country from Europe, via Argentina, in 1923. He had $150 in his pocket, and soon after he got here, New York City issued 11,787 taxi medallions - the same number as there were until just a few years ago. Back then, they cost $10 apiece. My grandfather bought one, and he started driving a cab. In his mind, it was one of the few jobs in which success depended only on how hard you worked.

Soon, he had saved up enough to buy his second medallion, and by the 1960's, he had 150. They were terrific investments - better than stocks. We recently figured out that since the 1930's, the Dow Jones industrial average has gone up 11 percent a year on average, and taxi medallions 17 percent. Today, they sell for $250,000 each. In the 1970's, my father started selling off some of the medallions to diversify. But no bank would lend money to the buyers - immigrants from the Soviet Union, Haiti and India - because they didn't have any bank statements. So he started a loan business. We've lent over $1 billion and never had to possess a single loan even though the interest rates are higher than on bank loans.

Monday, 20 March 2017

A regulatory flexibility act?

The law focuses on “small entities” -- not only small businesses but also small nonprofits and small governmental units such as towns and school districts. It recognizes that small entities often bear no responsibility for health and safety problems that give rise to regulation; that regulation deters potential entrepreneurs from innovating; that treating small entities the same as large ones impairs productivity; that regulation is often a barrier to entry; and that it can be easy for big companies, and tough for small ones, to comply with expensive federal mandates.

To reduce the problem, the Regulatory Flexibility Act directs federal agencies to identify and reassess existing rules that have “a significant economic impact upon a substantial number of small entities.” The legal requirement is simple: Ten years after rules are finalized, agencies have to determine whether they are having such an impact, and must decide whether they should be amended or rescinded.
Sunstein notes that the law hasn't had much effect as yet, but provides some recommendations for President Trump in order to make it more effective:
With a memorandum issued in 2011, President Barack Obama explicitly drew attention to the requirements of the law, directing agencies to offer flexibility to small entities unless they justified their failure to do so.

That was a start, but the Trump administration could go further. For example, it could make explicit provision for public outreach to small entities whenever it appears that they will be adversely affected by an expensive regulation. It might require agencies to respond, in writing, to serious objections from the Office of Advocacy (and thus give greater power to that occasionally important office). It might state that the Office of Information and Regulatory Affairs will not approve significant rules unless the most adverse effects on small entities have been eliminated, reduced or justified.

To be sure, small entities are not entitled to automatic exemptions from regulations. Whether large or small, companies should not be allowed to impose serious health risks on their workers. But it always makes sense to ask whether the arguments that justify regulation – for example, those in favor of increased energy efficiency – really apply to small companies, or whether the costs of burdening them outweigh the benefits.
It's fun to imagine consequences of this kind of rule in New Zealand. Maybe somebody in the system would have been forced to stop and think about the compliance costs they were layering on tiny iPredict in pursuit of money launderers.