Torture Supply Curves Slope Up

I suppose, when all things are considered, that is good news. From Wired:

But in FeldmanHall’s study, things actually happened. “There are real shocks and real money on the table,” she said. Subjects lying in an MRI scanner were given a choice: Either administer a painful electric shock to a person in another room and make one British pound (a little over a dollar and a half), or spare the other person the shock and forgo the money. Shocks were priced in a graded manner, so that the subject would earn less money for a light shock, and earn the whole pound for a severe shock. This same choice was given 20 times, and the person in the brain scanner could see a video of either the shockee’s hand jerk or both the hand jerk and the face grimace. (Although these shocks were real, they were pre-recorded.)

The article is actually about how this result differs from cases where subjects are given similar hypothetical scenarios. To me, this is evidence in favor of relying on revealed preference approaches over surveys in social science.

Broken Window Fallacy?

Recent events in Japan have prompted discussions of the broken window fallacy. The typical chain of events goes something like this:

1. Natural disaster
2. Reporter (or, reporter citing an economist) notes GDP might increase because of disaster.
3. Economist (probably not the one cited by the reporter) yells "BROKEN WINDOW FALLACY!" And, presumably, scores points for being reasonable.

Today, I will venture into the land of heresy by suggesting those who point out that natural disasters might make people better off are not necessarily committing a fallacy.

A fallacy is a chain of reasoning whereby the premises do not support the conclusion. But consider the following chain of reasoning.

1. Individuals may have a bias whereby they do not upgrade appliances when doing so would make them better off by their own assessment.
2. Natural disasters force them to buy new appliances.
3. The net effect of natural disasters is ambiguous (i.e., it might be positive, negative, or zero)

Where's the fallacy? Note: I am not saying that natural disasters make us better off. I am saying they might make us better off if the behavioral problem identified is significant. I think it is unlikely that the benefits from upgrading our refrigerators would be so great that they would offset the buildings destroyed by the natural disaster. (Of course, if the underlying behavioral problem is significant, it might apply to more than just household appliances.) But this is an empirical question.

My suggestion: stop calling such claims a logical fallacy. Point out that an increase in measured GDP does not necessarily imply an increase in welfare and then move on. There is no need to paint those we disagree with as unreasonable, illogical, or stupid.

Behavioral Public Choice

Robin Hanson writes:

When folks expect to be able to evade a norm, they don’t mind making that norm stronger. This lets them sound more pro-social, while actually giving themselves an advantage over folks who can’t evade as easily.

I think this is a very attractive argument for those interested in behavioral public choice. Anecdotal evidence abounds. And it provides a mechanism for the Baptists and Bootleggers claim (i.e., asymmetric evasion costs). What do you think?

When Should the Government Exploit the Salience Bias in Taxation?

This paper is provocative enough for it to automatically appear on my reading list for doctoral public finance. By Deborah Schenk, of NYU, and titled "Exploiting the Salience Bias in Designing Taxes" but the theme is closer to the title of this post. Here is the abstract:

In making decisions, individuals rely on certain heuristics or cognitive biases. One of these is salience, which generally refers to visibility or prominence. Individuals are likely to focus on items or information that are prominent or salient and ignore those that are less visible. This paper develops an argument for exploiting this cognitive bias in designing or changing taxes. Most commentary assumes that the intentional use of low-salience taxes by the government is undesirable and that increased salience is always required; to do otherwise is to take advantage of the cognitive bias that causes individuals to ignore taxes that are not prominent or salient. Although increasing salience is often desirable, there is a political economy argument for intentionally exploiting this bias by incorporating low-salience provisions into tax design. In developing the argument that utilizing this bias may be an appropriate fiscal tool, the paper begins by setting out the differences between transparency, complexity, and salience, which are often confused in the literature. The paper then makes a normative case that it is appropriate for legislators to design a tax by intentionally exploiting the cognitive bias that causes individuals to ignore information that is not prominent. The paper differs in two ways from past literature discussing salience. First it considers salience with respect to federal income taxes. Most commentators have explored salience in connection with consumption or commodity taxes. Second it considers the salience of discrete provisions, rather than merely the salience of the tax itself. It concludes with a case study where the use of low-salience tax provisions are justified and effective, i.e. where Congress finds it necessary to minimize the prominence of the tax because politically it cannot increase marginal tax rates.