Pollution has an impact on worker productivity

Pollution regulation is typically cast as a game between citizens and firms, the first suffering the consequences of pollution while the second are the origin of the pollution. In such a case, there is no incentive for firms to abate pollution, and the government has to mediate. But could a case be made that firms should be willing, individually or collectively, to reduce pollution. One way can be green labeling, which could increase the demand for their products. Another would be if firms realize pollution has an impact on their on productivity or on the labor supply.

Joshua Graff Zivin and Matthew Neidell take the worker productivity angle by using a dataset of dairy farm workers from a large farm in the Central Valley of California. In particular, they look how ozone levels impact the output of piece rate workers. At it is substantial. For example, a 10 ppb reduction of ozone increases productivity by 4.2%, noting that the standard deviation of ozone levels is 13 ppb. And if you object that some of the workers fall under minimum wage law and may not exert the right effort, be reassured, the authors took that into account. In addition, this impact happens even when the ozone level is well below the current national standards. Realizing this, industry should be more willing to accept the suggested tightening of pollution standards for ozone, and for nitrogen oxides and volatile organic chemicals that are the source of ground-level ozone.

Seat belts lead to safer driving

A classic example of the law of unintended consequences is how seat belt laws gave reasons to drive more dangerously, as car drivers feel more secure. This idea has been popularized by Sam Peltzman and several follow-up studies.

Yong-Kyun Bae puts some serious doubts in this results by pointing out that all these studies were based on aggregate data. Using individual data, which allows to exploit individual characteristics, as well as the circumstances of accidents. And once you control for these factors and exploit cross-state variations of how seat-belt laws became more or less stringent in the last decade, it appears more stringent laws make people drive more carefully. Indeed, pedestrians are getting safer. If this result stands, the challenge is to explain it: do tougher seat-belt laws signal stronger enforcement of other traffic laws? In particular, as Bae suggests, these laws may come in tandem with cell-phone and texting-while-driving laws.

Why are Europe and the US so different in terms of regulation?

Europe and the United States have a different attitude towards many things, and one in particular is regulation. Think, for example, how Europe is adverse to genetically modified agricultural goods, while nobody really cares about that in the United States. Other examples abound, like the little checks there are in the American meat industry or the fact that helmets are not required for motorcycles in most US states. How can such drastic differences arise in countries that after all have a similar standard of living?

Johan F.M. Swinnen and Thijs Vandemoortele show that tiny differences in preferences can lead to large differences in regulation. To prove this, they develop a dynamic model with households, producers and political decisions on whether to allow a potentially objectionable technology. It implies that no regulation is imposed below some threshold level of preferences, and the technology is not allowed above that. This results is, I believe, mostly the consequence of the discrete nature of regulation here: either you allow or you do not. With intermediate levels of regulation, the story may be different. More interesting is the result that there is substantial hysteresis: once a decision is taken one way, it is very difficult to revert it even if preferences or the negative consequences of the technology change. This result is reinforced by the discreteness of regulation, but would most likely be present even without it. In other words, it is possible that tiny initial differences in preferences between countries can lead to large regulatory differences that cannot be overturned.

PS: As in much of this kind of literature, quadratic costs are imposed. I always wonder whether this functional form has implications on results, but nobody seems to care.

You want to restrict bankers' pay

There has been and there still is much outrage about the large bonus payments bankers get. What the public does not understand is that bonus pay is a very large part of total pay, and it is so to encourage bankers to perform really well. And they certainly put in the hours. For example, bonus pay has been criticized because there is most often no "malus," but given that base pay is relatively low, this should capture it. The main criticism is aimed at the disparity of these bonus payments with respect to the average pay of a worker. This is, however, not something that should be regulated at the level of bonus pay, but through redistribution with income taxes. In this regard, whether it is regular pay or bonus pay makes no difference. So, should then bonus pay in banking be left unregulated?

John Thanassoulis does not think so. He argues that as bank compete for top bankers and try to shift the risk on them, they end up paying them too much and all in bonuses. This is optimal for the bank as it lowers its costs right when things get critical. But as a consequence, the bank gets too much into risky activities, as competition for bankers drives bonuses up higher than socially optimal, especially if there is a contagion risk of default for other banks. So you want a regulator to limit bonuses, but in a flexible way, or the benefit of having bonuses in the first place gets eroded. Indeed, it is the top brass that sets the bank level risk, whereas other employees all the way down to secretaries (who also get bonuses) are less influential, even collectively, on the aggregate risk. Thus the idea is not to cap bonuses individually, but at the bank level as a proportion of the balance sheet (which is what matters in terms of default). The pay structure would then presumably be readjusted by the bank, relying more on bonuses where it matters the most. Taxing bonuses has no risk impact, though, except for reducing bankers' pay.

Another possibility could be the dynamic incentive accounts I mentioned before.