GETTING AND SPENDING, BETTING AND VOTING: THE ECONOMICS OF HOUSEHOLD DECISION-MAKING
BOOMING
UK HOUSE PRICES BOOST CONSUMER SPENDING
The real appreciation in UK
house prices in the second half of the 1990s had a quantitatively significant
impact on the economy in terms of reduced household saving and higher spending,
according to a new research report by Professor Richard Disney, Professor Andrew
Henley and David Jevons. The
study, which will be presented at the Royal Economic Society’s Annual
Conference today, shows that the improvement in the housing market between 1995
and 1999 led to additional consumer spending across the whole economy of at
least £1.4 billion.
Do
capital gains and losses made by owner-occupiers on their housing wealth
influence their saving and spending behaviour?, Professor Henley and his
colleagues ask. Their research addresses this question using data on over 2,000
owner-occupier households in the British Household Panel Survey between 1993 and
1999, through the end of the early 1990s housing market recession into the
recovery of the second half of the decade. The detailed findings of the research
are:
·
An average of 46% of households engage in some form of
‘active’ saving, whether through putting money into a savings account each
month, or through monthly contributions to a personal pension scheme. The
average amount of monthly saving for those households that save is £180; across
all households (savers and non-savers), the average is £83.
·
Between 1993 and 1995, an estimated 88% of owner-occupiers
were living in counties that experienced a fall in average real house values.
The average real loss was £2,400. But from 1995 to 1999, only 2% of households
were living in counties where average real house values fell, and nearly a third
were in counties where real values appreciated by over £30,000. The average
real gain was £23,000.
·
By examining the relationship between changes in ‘active’
saving and real house price shocks, the research results suggest that for each
£1,000 gain in real housing wealth over the period in question, saving falls
and consumer spending therefore rises by between £10 and £30 for the median
household. This estimate is of a comparable magnitude to estimates obtained for
the United States.
·
Households that are initially in a position of negative
equity make significantly higher adjustments to saving in response to real
housing wealth gains. As real improvements in house values lift them out of
negative equity, the savings reduction/spending increase is of the order of £40
to £60 for each £1,000 of real house price appreciation.
·
Grossing up to the whole economy, and using the lowest of
these estimates suggests that between 1995 and 1999, the improvement in the
housing market generated a ‘wealth effect’ on consumption of the order of £1.4
billion.
ENDS
Notes for Editors: ‘House Price Shocks, Negative Equity and Household Consumption in
the UK in the 1990s’ by Richard Disney, Andrew Henley and David Jevons will be
presented at the Royal Economic Society’s 2002 Annual Conference at the
University of Warwick on Monday 25 March.
Disney is
at the University of Nottingham and the Institute for Fiscal Studies; Professor
Henley is at the School of Management and Business, University of Wales
Aberystwyth, Penglais, Aberystwyth, SY23 3DD; and Jevons is at Oxford Economic
Research Associates.
For Further Information: contact Professor Andrew Henley
on 01970-622504 (fax. 01970-622740; email: andrew.henley@aber.ac.uk;
website: http://users.aber.ac.uk/arh);
or RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095
(email: romesh@compuserve.com).
ECONOMISTS
PINPOINT SYSTEM FOR WINNING AT SPREAD BETTING
Economists at Nottingham
University Business School and Nottingham Trent University claim to have found a
way to beat the bookies and make money out of spread betting.
In a paper presented at the
Royal Economic Society’s Annual Conference on Wednesday 27 March, Dr David
Paton and Dr Leighton Vaughan Williams show that punters can take advantage of
different odds quoted by spread betting companies.
The two economists
investigated returns to spread bets on one of the most popular markets, the
number of bookings ‘points’ in Premier League football matches. Dr Vaughan
Williams explained:
‘Punters
using the system pinpointed by our research would have won in more than 60% of
matches examined over the last two seasons. The key to the system is identifying
those cases where one bookmaker is offering prices out of line with their
competitors.’
The possibility of betting
arbitrages - buying high with one company and selling low with another to make a
sure profit - has long been well known to punters. But such cases are
increasingly difficult to find and spread bookmakers are known to restrict the
amount of money that can be bet when an arbitrage position is open.
The two economists describe
cases where companies offer prices that are different but not necessarily far
enough apart for an arbitrage as ‘Quasi-arbitrages’ or ‘Quarbs’. Dr
Paton commented:
‘Quarbs
are more common than true arbitrages, and spread bookmakers are much less likely
to restrict the number of bets on them. Although betting on a Quarb does not
guarantee you a profit, we found 140 cases during the last two Premier League
seasons. Of these, 86 would have been winning bets and only 50 would have lost.
A punter staking a modest £5 per point in each case would have won almost £5,000
over the two years.’
Despite the good news for
punters, Dr Vaughan Williams adds a cautionary note:
‘Our
research shows that, by betting sensibly, punters really can turn the odds in
their favour. But they should remember that spread betting is notoriously
volatile and it is possible to lose a lot of money in a short period of time.’
ENDS
Notes for Editors: ‘”Quarbs”
and Efficiency in Spread Betting Markets: Can You Beat the Book?’
by Dr David Paton and Dr
Leighton Vaughan Williams was presented at the Royal Economic Society’s 2002
Annual Conference at the University of Warwick.
Paton is Senior Lecturer in
Industrial Economics, Nottingham University Business School, Jubilee Campus,
Wollaton Road, Nottingham; Vaughan Williams is Head of Economics Research,
Department of Economics and Politics, Nottingham Trent University, Burton
Street.
For Further Information: contact Dr David Paton on
0115-846-6601 (fax: 0115-846-6667; email: David.Paton@nottingham.ac.uk);
Dr Leighton Vaughan Williams on 0115-982-6177 or 0115-848-5516 (mobile:
07968-582987; fax: 0115-848-6829; email: Leighton.Vaughan-Williams@ntu.ac.uk);
or RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095
(email: romesh@compuserve.com).
What is the likely impact of a cordon toll to ease
traffic congestion, as Ken Livingstone is proposing for London? Professor David
Newbery and Georgina Santos of the University of Cambridge have investigated
possible cordon tolls in 8 medium-sized English towns.
The research, which they presented at the Royal
Economic Society’s Annual Conference on Monday 25 March, suggests a traffic
reduction of between 5% and 6% for the optimal toll. But these benefits are
sensitive to both the level of charges and the location of the toll. For
Cambridge, a second outer cordon could further increase benefits. And an optimal
single toll would typically be below £3 and between £1 and £2 with two
cordons.
The idea behind a congestion
charge is to confront the trip-maker with the full social cost of his or her
journey, to ensure that only cost-justified journeys are made and the scarce
road space is allocated to those for whom the value is highest.
This raises a number of
important and challenging questions for designers of road charging schemes: How
do we value the additional social cost? Do we introduce a charge equal to those
additional social costs? Will a charge improve travel times? What proportion of
road users will be made worse off by the charge?
Higher
traffic flows lead to lower average speeds and higher travel times and costs per
km. Additional traffic imposes an external cost on all other road users. Under
congested conditions, particularly in urban areas, and in the absence of
efficient road pricing, traffic will be undercharged as drivers do not pay for
the extra costs they cause to other road users. Demand for road space and the
resulting congestion will be excessive.
One
way of correcting this is to levy a charge equal to the external cost(s) they
impose on others. Perfect charging is impractical, and feasible solutions are
likely to be simpler, and cheaper, even if cruder. One such is a cordon toll,
and that approach has been suggested for London, where a £5 daily charge may
reduce traffic by between 10% to 15%. Although Newbery and Santos have not
examined the London scheme, they have investigated possible cordon tolls in 8
medium-sized English towns.
The
researchers find a traffic reduction of between 5% and 6% for the optimal toll.
The benefits are sensitive to both the level of charges and the location of the
toll. For Cambridge, a second outer cordon could further increase benefits. An
optimal single toll would typically be below £3 and between £1 and £2 with
two cordons.
Road users made worse
off by the charge will be those who cross the cordon when the charge operates.
Depending on the social and geographical characteristics of the town in
question, the final impact may be regressive or progressive, and the research
finds evidence in both directions.
ENDS
Notes
for Editors: ‘Estimating Urban Road Congestion Costs’ by David M
Newbery and Georgina Santos was presented at the Royal Economic Society’s 2002
Annual Conference at the University of Warwick.
The authors are in the Department of Applied Economics
at Cambridge University.
For
Further Information: contact David Newbery on 01223-335247 (away from the UK
23-30 March); Georgina Santos on 01223-335284 or 07984-927115 (away from the UK
26 March till 3 April); or RES Media Consultant Romesh Vaitilingam on
0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).
Travellers
have little reason to be enthusiastic about schemes intended to encourage
customer loyalty such as frequent flyer programmes. Those who fly infrequently
pay higher prices and never qualify for the perks of the programmes. And even
those who do receive the discount may find themselves worse off. These are the
main conclusions of new research by Pedro
Fernandes, which he presented at the Royal Economic Society’s Annual
Conference on Tuesday 26 March. His findings are a contribution to those voices
asking that such ‘loyalty programmes’ be prohibited.
Previous studies have shown
that loyalty programmes will have undesirable effects when they succeed in
creating a set of loyal customers. But this study provides an even more powerful
reason for competition authorities to look suspiciously at such programmes. Even
if they fail in creating loyal customers, they will lead to prices above what
they would otherwise be, as they reduce competitive aggressiveness.
For example, frequent flyer
programmes may fail in terms of creating a set of captive buyers, but airlines
might still find it profitable to launch them. The cost associated with such
programmes, and the knowledge that these costs will be incurred by rival
airlines, induces all airlines to compete less aggressively than they otherwise
would.
Both academics and
competition authorities have been concerned with the anti-competitive effects of
loyalty programmes. These effects are seen to stem from the ability of these
schemes to lock in consumers. Once locked in, consumers are less sensitive to
price differences and airlines will exploit this.
But there is no empirical
evidence to support the view that frequent flyer programmes do in fact succeed
in locking in travellers. Today, all the main airlines offer their own loyalty
schemes and, passengers flying frequently will belong to more than one such
programmes – a recent survey found that passengers belonged on average to
three separate programmes and suggested this figure was rising. Such a finding
contradicts the premise that these programmes are successful in providing the
airline with a set of loyal passengers.
But if loyalty programmes do
not succeed in inducing passengers to become loyal, will airlines still find it
in their interest to launch them? Fernandes’ study addresses this question and
suggests that the answer is ‘yes’. The study also looks at how the
introduction of such a scheme affects the welfare of travellers.
The study develops a simple
analysis where two symmetrical airlines compete over three periods. Travellers
purchase a ticket in each period and airlines are allowed to reward a customer
that patronises it for the second time. The structure of this simple loyalty
programme is such that travellers do not get locked in as it allows travellers
to collect a discount from an airline even if they have used the rival in the
past. The population of travellers is made up of frequent travellers - those who
take part in the market in every period - and of occasional travellers - who are
present in the market for only one period.
Although consumers will not
be locked in by the airlines’ scheme, airlines will nevertheless find it in
their interest to offer repeat buyers a discount. Doing so allows airlines to
set prices above the level that would otherwise prevail. The reasoning for this
is intuitively straightforward. The promise of paying out a discount puts a cost
on an airline and induces it to compete less aggressively than it otherwise
would. The rival airline will behave similarly.
The mix of frequent and
occasional travellers affects the prices and the discount set by airlines: both
prices and discounts increase with the share of frequent travellers, as in fact
do airlines’ profits. Consumers, on the other hand, typically fare badly from
the arrangement. Occasional travellers pay a higher price and, not benefiting
from the discount, they invariably lose out. Frequent travellers, who do qualify
for the discount at some point, may end up better off, but only if there are
relatively few other frequent travellers around.
ENDS
Notes for Editors: ‘A Study into
Loyalty-inducing Programmes Which Do Not Induce Loyalty’ by Pedro Fernandes
was presented at the Royal Economic Society’s 2002 Annual Conference at the
University of Warwick.
For
Further Information: contact RES Media Consultant Romesh Vaitilingam on
0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).
YOUNG CHILDREN
MAKE DIVORCE LESS LIKELY
Having children makes it less
likely that a marriage will break down, according to new research by Daniela
Vuri presented at the Royal Economic Society’s Annual Conference on
Tuesday 26 March. But her analysis of almost 26,000 American women shows that
parents do not divorce less in the presence of children. Rather, they postpone
the decision to divorce until their children are older.
Vuri notes that many studies
have reported significant empirical associations between fertility and marital
dissolution in recent years. But whether this is a causal effect or only a
correlation is unclear. The goal of her empirical analysis is to find out
whether there is a true causal effect of fertility on marital dissolution. In
particular, she explores what would have been the marital outcome for a woman
with children had she not had them.
Economic theory predicts that
the probability of a marriage continuing increases as a couple has children
because they represent the most important marital-specific ‘investment’ of a
couple during their marriage. At the same time, the potential stability of a
marriage may affect the arrival of children: a woman's inclination to divorce
may affect her decision to begin a family and her willingness to add children to
an existing family.
Hence,
it might be that the presence of young children in a household discourages
marital dissolution, but also that some other factor jointly determines family
structure and fertility. For example, women who are less committed to their
families may be more likely to divorce and less willing to have children.
Similarly, more educated women may tend to postpone childbearing (if any) and
may be more likely to dissolve a marriage (because they are often economically
independent)
Vuri
analyses a sample of 25,914 American women interviewed in 1995, to whom
retrospective questions about their marital and fertility history are asked.
Only those women still married in 1995 or divorced (or separated) in 1995 (or
before) are selected. These women differ systematically in their observable
characteristics by fertility, that is, characteristics like age, age at
marriage, level of education, origin and race differ between women with children
and childless women. This result implies that those women with children might
behave differently from those women with no children, independently of any true
causal effect of fertility on divorce.
To examine what would have
been the marital outcome for women with children if they had not had children,
Vuri chooses a comparison group from all the childless women that is as similar
as possible to the women with children in terms of their characteristics. This
gives her a proxy for the behaviour of women with children had they not had
children.
The analysis shows that there
is a significant negative effect of having young children on the likelihood of
marital dissolution. In particular, having young children reduces the
probability of a woman’s marital dissolution by 15 percentage points. Since
the fraction of divorcing couples is 18% in the sample, the result suggests that
by having young children, a woman in the sample would reduce her probability of
divorcing from 18% to 3%. Instead, the presence of older children aged 6-18
years does not seem to have a clear effect on marital dissolution and the
estimates are much smaller in size (almost close to zero).
Vuri
extends the analysis by considering the effect of the number of children on
marital dissolution. The estimates show that, on average, having an additional
child increases the probability of marital dissolution but only by a small
amount.
Overall,
the results suggest that the presence of young children seems to enforce the
marriage while the number of children does not seem to have a relevant impact on
marital dissolution.
ENDS
Notes for Editors: ‘Propensity Score Estimates of the Effect of
Fertility on Marital Dissolution’ by Daniela Vuri was presented at the Royal
Economic Society’s 2002 Annual Conference at the University of Warwick.
Vuri is at the
Department of Economics, European University Institute, Via dei Roccettini 9,
50016 San Domenico di Fiesole (FI), Italy.
For Further Information: contact Daniela Vuri on
00-39-328-8524310 (office: 00-39-055-4685337; email: vuri@iue.it); or RES Media Consultant Romesh
Vaitilingam on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).
The consumption habits of
consumers with a university degree differ from those of consumers without a
degree, according to Marco Leonardi.
His research, which he presented at the Royal Economic Society’s Annual
Conference on Tuesday 26 March, shows that university-educated consumers demand
more goods that require skills in their production. And this is a key
explanation of rising wage inequality in the UK.
Leonardi’s
study shows that consumers with a university degree in the UK consume more goods
produced by their peers with a university degree rather than goods produced by
workers without a university degree. Skill-intensive goods are the goods
produced in sectors where more than 10% of workers hold a university degree.
When income goes up by one percentage point, consumption of skill-intensive
goods goes up by 1.2 percentage points.
These results are important
in explaining the rising wage inequality in the UK. The UK has experienced
rising wage inequality and rising employment of educated workers since the
1980s. The most popular explanations of the rise in wage inequality rely on
technological change or changes in international trade patterns in favour of
educated workers. If more educated workers demand more skill-intensive goods,
then an increase in their number will also induce a shift in demand towards
skill-intensive goods and educated labour. This explanation is based on a
mechanism by which supply of educated workers creates its own demand. This
channel reduces the need to rely on technology and trade to explain the patterns
in the data.
Leonardi illustrates this
mechanism using both theory and empirical analysis. The empirical part of the
study demonstrates that more educated and richer workers indeed demand more
skill-intensive goods in the UK. This result is robust to the introduction of
intermediate goods, the retail sector and imported goods. Estimation of a simple
economic model suggests that this simple mechanism can explain 12% of the
increase in wage inequality in the UK between 1981 and 1993.
The basic theory explain
shifts in employment of educated workers and the rise of wage inequality between
different industries: when a country becomes richer or more educated, the final
demand for products shifts from low skill-intensive to high skill-intensive
goods. Empirically, most of these changes took place within industries: all
industries have been replacing workers without a university degree with workers
with a university degree and wage inequality has been rising within industries
too. An extension of the theory to goods of different qualities and labour of
different skills can explain some of the within industry changes.
ENDS
Notes for Editors: ‘Product Demand Shifts and Wage Inequality’ by
Marco Leonardi was presented at the Royal Economic Society’s 2002 Annual
Conference at the University of Warwick.
Leonardi is a Doctoral
Researcher at the London School of Economics.
For Further Information: contact Marco Leonardi on
07990-522462 (email: m.leonardi@lse.ac.uk);
or RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095
(email: romesh@compuserve.com).
DIRECT
DEMOCRACY IMPROVES THE QUALITY OF PUBLIC GOODS
Direct democratic
institutions – like referendums and citizens’ initiatives - are an effective
way to increase the quality of public goods. That is the conclusion of new
research by Iwan Barankay, presented
at the Royal Economic Society’s Annual Conference on Wednesday 27 March. His
study of infant mortality rates and an index of fatal traffic accidents (proxies
for the quality of the health sector and of infrastructure respectively) in
Swiss cantons reveals the significance of institutional design for growth,
social cohesion and the quality of public goods.
Why is the quality of public
goods better in some democracies than in others? Does the design of the
decision-making process determine how diligent legislators are? Barankay
addresses this question by looking at institutions that have not been widely
tested in the real world: citizens’ initiatives and referendums.
In a citizens’ initiative,
voters themselves can originate legislation: when a group of voters has a
particular concern, they must collect a certain number of signatures within a
time limit to support it. If successful, there is then a vote in which the
majority of voters must approve the proposed policy for it to be enacted. In a
referendum, the people can challenge a policy passed by the government. In both
institutions, voters can therefore become directly involved in democratic
deliberations.
Barankay’s study asks first
how incentives to improve the quality of their work change for politicians when
these direct democratic measures are present. It then takes the analytical
predictions to the data, testing them on the experience of the Swiss cantons.
Policy design can often be
separated into two key aspects. One dimension, call it quantity, can be
specified very clearly: a law can be easily written specifying how many
hospitals with how many beds to build. But there is another dimension in the
policy process, call it quality, whose production is impossible to specify but
relies exclusively on the effort and diligence of the policy-maker even if the
final product can be measured. Think of the problem of telling a teacher what
you want him to say to his pupils but how crucial it is in the end how well
prepared and alert the teacher is.
In Barankay’s analysis,
there are three political parties elected via proportional representation. A
coalition has to be formed to determine policy, which agrees on the quantity but
also on the effort they will put into it, which determines quality.
Citizens cannot observe the
effort of politicians. But they do receive a piece of information that gives
them a hint if the politician is more likely to be diligent or rather lazy.
Think of voters reading the newspapers, watching a news feature on TV or even
reading media briefings from academic conferences. Voters use this information
when they decide to re-elect the candidates that are good and vote out those
that aren’t.
How does the presence of
direct democratic institutions change this story? With a citizens’ initiative,
the freedom to set the quantity of the policy is taken away from the
legislators. To keep this freedom, politicians may choose to increase the
quality of the public good. Surprisingly, this result holds even if voters
cannot do anything about the quality themselves in their initiative. Also the
fact that voters may be incompetent to design policy can turn out to be a good
thing: when politicians have a professional advantage in influencing quality,
they can actually avert the threat of a citizens’ initiative by increasing
quality. But there are also real costs to launching an initiative and the higher
they are, the lower is the effort of the policy-maker.
Barankay
tests these results empirically by looking at the experience of Swiss cantons
that used such institutions extensively. He takes infant mortality rates and an
index of fatal traffic accidents as proxies for the quality of the health sector
and of infrastructure respectively. He finds that when direct democratic
institutions are available and when they are easy to launch, the quality of
public goods is higher. In that sense, direct democratic institutions are an
effective way to increase the quality of public goods.
ENDS
Notes for Editors: ‘Referendums, Citizens' Initiatives and the
Quality of Public Goods: Theory and Evidence’ by Iwan Barankay was presented
at the Royal Economic Society’s 2002 Annual Conference at the University of
Warwick.
Barankay is in the Economics
Dept, University of Warwick, Coventry CV4 7AL.
For Further Information: contact Iwan Barankay on
024-7652-4930 (mobile: 07967-144131; email: i.barankay@warwick.ac.uk;
website: http://www.warwick.ac.uk/~ecrhc/);
or RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095
(email: romesh@compuserve.com).
WHY
DEALERS OFTEN OFFER BETTER TERMS FOR CONSUMER CREDIT THAN BANKS
Why do car dealers and department stores offer
instalment-payment terms for durable good purchases that are often quite
attractive from a financial point of view? New research by Giuseppe Bertola, Stefan
Hochgürtel and Winfried Koeniger
presented at the Royal Economic Society’s Annual Conference on Wednesday 27
March, explains this phenomenon in terms of ‘monopolistic price discrimination’ by dealers.
They explain that the groups of consumers attracted by
cash and credit purchases are distinctly different when, as is generally the
case, borrowing rates are higher than lending rates on the financial market.
Hence, sellers can set cash and credit terms so as to offer different prices to
cash-rich and liquidity-constrained customers, in much the same way as lower
prices are sometimes charged to consumers who own particularly old trade-ins, or
take the time to clip coupons.
The study is motivated by the
widespread real-world phenomena that Interest rates on consumer lending are
lower when funds are tied to the purchase of a durable good than when they are
made available on an unconditional basis. Even though the ‘zero’ annual
percentage rates (APR) routinely advertised by car dealers and department stores
do not include processing fees and other transaction costs, credit is generally
cheaper when explicitly tied to the purchase of a good or service than in the
case of a general consumption loan.
Moreover, dealers often
choose to bear the financial cost of their customers' credit purchases:
favourable credit terms are often extended by the sellers of durable goods
rather than by lending institutions (banks). When dealers find it profitable to
offer, for example, ‘zero APR’ financing, the amount credited by the bank to
the seller's account is less than the cash price, because the customer's flow of
instalment payments is also lower than what would be required by the bank's cost
of funds, transaction costs, and assessment of repayment probabilities.
The paper interprets this
empirical phenomenon in terms of ‘monopolistic price discrimination’. The
research characterises consumers’ intertemporal consumption decisions when
their borrowing and lending rates are different not only from each other, but
also from the internal rate of return of financing terms for a specific durable
good purchase. It examines theoretical and empirical relationships between the
structure of financial markets, the distribution of potential customers' current
and future income, and incentives for durable-good dealers to price-discriminate
by subsidising their liquidity-constrained customers' instalment-payment terms.
The empirical analysis takes
advantage of a rich set of instalment-credit and personal-loan data, which offer
considerable support for the assumptions and implications of the theoretical
perspective.
ENDS
Notes for Editors: ‘Dealer Pricing of Consumer Credit’ by Giuseppe
Bertola, Stefan Hochgürtel and Winfried Koeniger was presented at the Royal
Economic Society’s 2002 Annual Conference at the University of Warwick.
The study was presented by
Koeniger, who is a Research Associate, IZA, P.O. Box 7240, D-53072 Bonn,
Germany.
For Further Information: contact Winfried Koeniger on +49-228-3894-512 (fax: +49-228-3894-510; email: koeniger@iza.org; website: http://www.iza.org/); or RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).
Last updated
12th April 2002