How incentives backfire

How incentives backfire

Incentives

Recently I had a post about what might go wrong with Saudi Arabia bribing people not to riot against the government. Well, here is a strange example of how such bribes can be counterproductive.

And although Paris Hilton told us in 2009 that she would never get breast implants out of a fear of needles, a decade before that Strauss claims to have met the then18-year-old party princess (prior to her days in the limelight) and she allegedly told him quite a different story.
“I had a breast job when I was 14, but my mother made me take them out,” Hilton apparently told Strauss, according to the book. “I’m thinking about posing for Playboy. They love famous people’s kids. And the only reason I’d do it is because when my dad finds out, he’ll pay me double the money not to do it.” . . .

Under the title of a jobs bill Democrats propose Giant increase in tax on venture capitalists

Under the title of a jobs bill Democrats propose Giant increase in tax on venture capitalists

Incentives Taxes

Venture capitalists provide the seed money for new corporations. So Dems have an idea: let's raise their Federal tax rate from 15 percent to about 35 percent. This tax was already set to increase to 20 percent next year with the sun setting of the Bush tax cuts, but Dems decided that wasn't enough of an increase. With a straight face Dems are arguing that this won't impact investments. At best, Dems don't understand that who pays the tax is not the same as who bears the burden of the tax.

The House of Representatives passed a bill today that would raise the taxes that venture capitalists and other investment managers pay on carried interest — their share of the profits from a successful start-up investment.

The Senate will vote on the bill after the Memorial Day recess.

The bill, which is called the American Jobs and Closing Tax Loopholes Act of 2010, would extend unemployment benefits and lending and tax relief for small businesses. But venture capitalists are upset about the provision that would raise taxes on their carried interest.

A typical venture capital firm collects carried interest of 20 percent of the profits when a start-up company goes public or is acquired. Today, that is taxed at the capital gains rate of 15 percent. But the bill would require that 75 percent of investors’ carried interest be taxed as ordinary income.

Opponents of the change in taxation say that the capital gains tax rate rewards taking big, long-term risks on young companies. Proponents of the change say that because venture capitalists mostly invest other people’s money, they do not need to be rewarded for taking investment risks. . . .

A little more of a discussion is available here.

Some predictions on whether this change will raise any money.

UK Surgeons to have pay based on how patients do after surgery

UK Surgeons to have pay based on how patients do after surgery

Economics Incentives

Paying surgeons based upon how good of a job they do seems to have generated all sorts of concerns in the UK. The most bizarre response though is this:

Patients' groups said those facing surgery would be "horrified" by the proposals and questioned why doctors should be paid a premium for fulfilling their basic duty. . . .

Why should patients mind this? After all, they don't have to pay directly for the service and if it generated higher quality care, they are better off. Of more concern is this:

Leading surgeons said that this could deter doctors from taking on higher-risk patients, such as the frail and elderly, and from carrying out complex operations. . . .

But the simple way to deal with this is to figure out what the right yardstick is to measure the job that the surgeons are doing. If they save a high risk life, they could get paid more. Indeed, if the pay was enough, you would have the opposite of what the surgeons here fear -- everyone would want to do the high risk patients. Yet, it sounds from the discussion that the payment schemes are not going to differentiate the risks involved.

Cuba to scrap salary equality

Cuba to scrap salary equality

Economics Incentives

Cuba has finally acknowledged that incentives matter. Here is an article from the BBC.

Cuba is to abolish its system of equal pay for all and allow workers and managers to earn performance bonuses, a senior official has announced.

Vice-Minister for Labour Carlos Mateu said the current system - in place since the communist revolution in 1959 - was no longer "convenient".

He said wage differentiation should improve production and services.

President Raul Castro has introduced a series of reforms since succeeding his ailing brother Fidel in February.
Writing in the communist party newspaper Granma Mr Mateu said workers would receive a minimum 5% bonus for meeting targets but with no ceiling on salaries.

Managers could earn a 30% bonus if the team working under them increased production, he said.

The minister pointed out that the current wage system sapped employees' incentives to excel since everyone earned the same regardless of performance.

"It's harmful to give a worker less than he deserves, it's also harmful to give him what he doesn't deserve," the newspaper article said. . . .

Incentives matter, an example of where students want to work

Incentives matter, an example of where students want to work

Economics Incentives

Higher salaries do attract people to study for those jobs.

It was these gender differences that Katz and Goldin set out to study with their survey, dubbed “Harvard and Beyond,” conducted in 2006 and 2007. Men still command higher salaries, on average, than women with the same educational attainment, and even in some cases with the same type of job; this appears to be due to women’s preference for family-friendly jobs and employers (see “Girl Power: What’s Changed for Women and What Hasn’t,” January-February, page 34). Goldin is the author of Understanding the Gender Gap: An Economic History of American Women, and the two previously collaborated on a study of the role of the birth-control pill vis-à-vis women’s decisions regarding career and marriage.

But the new survey also turned up plenty of other things, including the size of the shift into finance, and the reason for that shift. For the entire respondent pool, across all occupations, the median income for men was $162,000, and for women $90,000; graduates working in finance earned nearly three times that median, in a pool of people already paid far more than average. (Among the general U.S. population in 2006, men’s median income was just over $42,000, and women’s was under $33,000.)

Finance’s extremely high compensation has lured Harvard graduates who might otherwise have pursued law or medicine: the prevalence of those fields, combined, declined from 39 percent to 30 percent between the two cohorts. Although some of those employed in finance have M.B.A.s, many of the jobs, unlike those in law and medicine, require no advanced degree.

This pattern among Harvard graduates reflects a similar pattern in the wider society. The finance sector’s contribution to the U.S. gross domestic product swelled from 4.4 percent in 1977 to 7.7 percent, or roughly $950 billion, in 2005, according to a report on the survey by Wall Street Journal columnist David Wessel. One of every 13 dollars of employee compensation in the United States today goes to people working in finance, the column noted, and in 2004, the combined income of the top 25 hedge-fund managers exceeded the combined income of the CEOs of all Standard & Poor’s 500 companies. . . .

Hat tip to Craig Newmark on this.

Another example that incentives matter

Another example that incentives matter

Economics Incentives

Dixville Notch, NH sure gets a lot of news attention for a town that has only 17 voters. Perhaps it is then not too surprising that the town also gets a lot of attention from the presidential candidates:

Neil Tillotson Jr.’s dad started the Dixville Notch tradition in 1960, after he ran into an Associated Press reporter who saw the humor in letting a small town “way up in the middle of nowhere be a part of the voting process.”

“Because of the publicity we get a disproportionate number of candidates coming by,” Tillotson said, noting that he’s met every president – when they were candidates – except Richard Nixon, dating back to 1972 when he took over the role as elections supervisor.

Incentives matter even in a socialist workers paradise

Incentives matter even in a socialist workers paradise

Economics Incentives

As the gap between the official exchange rate and the black market rate has increased, so has the incentive to exploit rules, like a regulation that allows people to spend $5,000 a year on their credit cards while traveling abroad.

Some Venezuelans travel to nearby Curaçao, where they buy $5,000 of casino poker chips with their credit cards, exchange the chips for cash and then sell the dollars on the black market back in Caracas. . . .

The article also provides a nice example of the shortages created by price controls.

University Cancels Final Exams Because of Bomb Threats

University Cancels Final Exams Because of Bomb Threats

Economics Incentives

The University of California, Riverside, canceled final exams and a graduation ceremony Friday evening after finding a homemade firebomb on campus and receiving two threatening letters. . . .

School officials decided to take action after groundskeepers found two plastic bottles that possibly contained flammable liquid near a burning palm tree outside the Life Sciences building around 5:25 a.m., said campus Police Chief Mike Lane. . . .

Putting partially aside the fact that this bomb was pretty trivial, do you really want to give people an incentive to get final exams canceled by threatening to set off a bomb.