Tag Archives: incentives

Homeowners and Civil Engagement

According to The Wall Street Journal, the home buyers’ tax credit initiative (U.S.) was “intended to help spur housing sales” by offering financial incentives to first time home-buyers and certain repeat buyers.

However the initiative encourages “excess mobility”, suggests Edward Glaeser, a professor of economics at Harvard, and this is something we should not be promoting. Why? Less-mobile homeowners are good citizens due to their greater civic engagement than those who move residence often.

One of the reasons for subsidizing homeownership is the widely held belief that homeowners are good citizens. Ten years ago, Denise DiPasquale and I wrote a paper investigating the links between ownership and civic behavior. Controlling for income, education, age and other variables, we found that homeowners were 16 percent more likely to vote in local elections, 11 percent more likely to know the name of their member of Congress and 10 percent more likely to say that they have recently worked to help “solve local problems.”

But we also found that almost one-half of the effect of homeownership disappeared when we controlled for the time that the person had lived in the home. Owners are typically much less mobile then renters, and people who stay put are more likely to become civically engaged.

If you think that civic engagement is important enough to justify homeownership subsidies, then we certainly shouldn’t be encouraging excess mobility.

Rewards Corrupt Altruistic Tendencies

It has been known for decades that infants up to 14 months old will act on altruistic impulses without reward.

Recent research, following on from a similar 1973 study, is starting to show that rewards could be responsible for the inhibition of this natural desire to help others—an innate altruism.

48 German toddlers averaging 20 months of age [were placed] in a room (one at a time) with a parent and an experimenter who sat at a table in the corner, apparently doing an unrelated task like placing balls in a basket or clipping napkins together. The experimenter pretended to accidentally drop one of the objects on the floor, and reached for it while looking at the toddler, waiting up to 30 seconds for the toddler to help her by picking it up. Eight of the children refused to leave their parent, and ten didn’t complete the task, but 36 became reliable helpers, returning the object to the experimenter 5 times.

The second phase of the experiment—conducted on these 36 children, each split into various reward/non-reward groups—discovered that those receiving rewards “helped the experimenter significantly less often than either the group that received only praise or the group that received no praise” if the reward was withdrawn.

As Dave Munger asks, Was it the reward, or the betrayal that caused the child’s behavior to change?

Can Technology Solve Our Climate Problems?

After reading Cambridge physicist David MacKay’s much lauded Sustainable Energy (free download available), the FT Economist Tim Harford worries that we are “too complacent about technological fixes for the twin problems of climate change and finite oil and gas reserves”.

Harford suggests that if we contemplate the idea that technological progress may not solve these problems, we must therefore start thinking realistically about behaviour shifting incentives—specifically, higher carbon ‘taxes’.

Technological progress and economic growth loosen the corset of cost-benefit analysis, but not the laws of physics. No matter how cheap and efficient solar collectors become, there is only so much solar power available per square metre of land. Hydroelectric energy is constrained by the quantity of rainfall and the height of reservoirs above sea level. The most perfectly designed windmill is limited by the energy of the wind. It would barely be possible to make the numbers add up even if renewable energy generators were free.

To power a modern country through renewable energy requires country-scale facilities. […] Technological progress will be essential but, barring a breakthrough in nuclear fusion, it will not set us on a path to an energy system purged of fossil fuels.

[…] The challenge is to encourage the right behaviour. Centrally mandated efforts will not do the trick, in part because “the right behaviour” is not a universal constant. […]

Dealing with climate change will need many small decisions to be made differently. The government cannot micromanage these. This is why a carbon price, whether set through taxes or emissions permits, is needed. It is not so much a nudge as a shove in the right direction.

The full article requires (free) registration to the FT site.

Unlikely Events Influenced by Financial Incentives

With the UK’s Chief Medical Officer, Sir Liam Donaldson, proposing that alcohol should cost a minimum of 50p per unit, many opposers are arguing that the increase would “punish ordinary drinkers without deterring the winos, brawlers and wife-beaters”. However, as Tim Harford notes, it may well work as the unlikeliest of events are influenced by financial incentives.

Economists Joshua Gans and Andrew Leigh have discovered that after the Australian government announced that it would abolish inheritance tax, effective 1 July 1979, the death rate fell in late June of that year before surging in early July. Gans and Leigh reckon that half the likely taxpayers managed to escape death long enough to escape the tax too.

More cheeringly, when the Australian government announced (with six weeks notice) a “baby bonus” of about £1,250 for families of children born on or after 1 July 2004, something very strange happened in the labour wards. The number of happy events on 1 July was an all-time record, and twice as many births as on 30 June.

Whether entering this world or leaving it, people respond to financial incentives.

For a primer on incentives, you can do worse than reading Russell Roberts’ Incentives Matter article—one of the Ten Key Ideas from the Library of Economics and Liberty.

via The Undercover Economist