Tim Harford The Undercover Economist

Articles published in September, 2012

The unpalatable business of spam

A new article provides a fascinating overview on the dynamics of unsolicited email and the fight to keep it at bay

A couple try to get cooked breakfasts at a greasy spoon, but their attempts to order are frustrated. The menu largely consists of Spam, and in any case the conversation – and indeed, the following sketch – is swamped by a crowd of Vikings singing “Spam, Spam, Spam, Spam”. A typical Monty Python skit, really.

Unsolicited email, often selling fake pills or watches, has a similar ability to drown out sensible communication, which may be why the name “spam” stuck, despite the initial protestations of the trademark owners, Hormel Foods.

Spam email rarely reaches my inbox these days, but this isn’t because spam itself is a thing of the past. Most emails “out there” are spam, but the vast majority are intercepted at some point.

So where do these emails come from? How? Who pays for them? And who pays for our defences against them? A new article by Justin Rao and David Reiley in the Journal of Economic Perspectives provides a fascinating overview.

It would be easy to block spam sent from a single fixed source, so spam emails are sent by “botnets”, swarms of home computers that have fallen prey to viruses and been co-opted by the spammers. These botnets are rented by merchants, who use a bewildering variety of aliases. One group of researchers identified 30 pharmaceutical merchants who, between them, were using almost 1,000 different “store front” web-page styles, more than 50,000 domain names and almost 350 million distinct URLs.

But who buys these products, typically shipping from China or India, from such obviously shady sources? Almost nobody. Rao and Reiley estimate that the hit rate is about one sale per 10 million emails sent – but then sending 10 million emails might only cost $50 or $60, so the spam continues.

If it’s clear who benefits from sending spam, it’s less clear who pays to block it. One case is instructive: when the vast Rustock botnet was shut down last spring, Microsoft and Pfizer (manufacturer of the genuine Viagra) took leading roles and Microsoft offered a $250,000 reward. This single episode reduced the proportion of spam email from almost 90 per cent to 75 per cent, creating large spillover benefits.

This seems typical: the big beasts of the internet have the incentive to fight spam, and it’s striking that the big three webmail providers with the resources to keep spam at bay – Google, Microsoft and Yahoo – have seen their market share rise from under 60 per cent to over 80 per cent since 2006. (Rao and Reiley wrote their working paper at Yahoo before moving to Microsoft and Google respectively.)

Economists often talk about “negative externalities” – private activities that produce public costs. Driving a car might produce a social cost of about 10 pence for every pound of private benefit, which is why economists advocate fuel duty and congestion charges. But the externality ratio for spam is about a thousand times higher – perhaps £100 per pound of private benefit. Vast resources are devoted to blocking spam, or deleting it when it gets through, but the actual benefit to the spammers is relatively tiny. Rao and Reiley reckon that even car theft has a lower externality ratio – at least the thief gets a car.

All this put me in mind of two immigration lawyers, Laurence Canter and Martha Siegel, often credited with being the first spammers back in 1994. Canter and Siegel defended their unsolicited bulletin board advertising: it was a matter of free speech, they said, and then published a book called How to Make a Fortune on the Information Superhighway. In the end, the real fortunes are being made by the likes of Amazon and Google. Spam is a small industry; annual revenues are about what Apple makes in a single day. Alas, it is a small industry with a long shadow.

Also published at ft.com.

Time for Dad to move to the garden shed

“Parents in work should be able to use pension savings to help their children buy a first property, according to proposals from Nick Clegg.”

– Financial Times

Dad?

Yes, darling?

Do you love me?

Of course I do; why do you ask such a thing?

Do you love me enough to use your pension to guarantee my mortgage with Barry?

[There is an awkward cough and a rustling of a newspaper.]

Dad, Nick Clegg says that you should be able to help me get on the housing ladder.

Nick Clegg should be old enough to remember that sometimes it’s more of a housing snake.

You’re always warning of a house price crash, Dad – but we’ve had the crisis and prices have fallen. Isn’t it time to buy?

Possibly, possibly not. For first-time buyers I seem to recall that prices relative to income are still well above the levels of the last bubble, at the end of the 1980s. I wouldn’t be so sure that a house is a one-way bet.

It may not be a one-way bet but it’s a bet I can’t take without your help.

What do you want me to do again?

I need you to guarantee my mortgage using the lump sum from your pension.

I see. That’s nice, darling. Isn’t that a bit risky for me?

No, it’s just to tick the boxes for the bank. I’ll pay the mortgage and you won’t have to pay anything.

I seem to remember that’s what everybody told AIG before it blew up. You basically want me to write a credit default swap on your mortgage and you’re assuring me there’s no risk. I’m afraid Barry has always seemed distinctly subprime to me.

That’s so rude, Daddy! Barry has a good steady job.

I wasn’t talking about his creditworthiness, my dear, but since we’re on the subject: there’s no such thing as a steady job in this day and age. There is always a risk that something will go wrong, and you, Nick Clegg and your bank would prefer that the risk landed on me.

But Dad, it’s such an imaginative policy: the older generation, who’ve benefited from rising house prices, have an opportunity to help out their kids, who have been shut out of the market by the same trend.

Nonsense. For a start, it’s not the older generation. It’s a very particular subset of people: people who aren’t old enough legally to draw money from their pension pot but are just about to be; who also have pension pots well above the national average; and who despite this don’t have spare cash to help out their children. I’d be surprised if more than a few thousand people take this up.

That’s a shame.

No, that’s a relief. The more people get involved in this the more instances we’ll have of parental pensions being poleaxed by their children’s financial misfortunes, which is hardly going to spread domestic peace and love. And it won’t help any more people get on the housing ladder, as you so strangely put it.

Why won’t it?

Because the only thing that will get more people on the housing ladder is more houses, something which this country has had a great deal of trouble accepting for some reason. If you don’t do anything to boost the rate of housebuilding, but you give financial help to one segment of the population – whether it’s key workers, or the children of moderately prosperous 54-year-olds – then you will simply pump up the price of houses until somebody else who would have been able to afford a house now cannot. This financial engineering can redistribute money and housing but it won’t create new houses. I realise higher prices might encourage more housebuilding but even that seems rather doubtful these days.

How can the older generation help the younger generation buy houses, then?

The main thing they could do is sell the houses they currently own and move somewhere smaller. Why on earth that would be preferable to simply building some more houses – in a recession, with the construction industry dragging down economic growth – is beyond me. But it would at least free up some housing stock.

Daddy, you’re an angel. I’ll get the garden shed all pimped out for you, and Barry and I should be able to help you move there by the end of next week.

Also published at ft.com.

Don’t take growth for granted

One economist believes modern inventions are puny compared to earlier innovations. Does this mean that human progress has hit a dead end?

The summer’s most talked about working paper in economics is by Robert Gordon, and it is simply titled “Is US Economic Growth Over?” And well he might ask: GDP per capita, the most obvious measure of economic growth, is lower today than it was when the financial crisis began in 2007.

The western world’s failure to recover from the crisis surely explains why Gordon’s gloomy thesis is getting so much attention, but, in fact, he takes great pains to avoid drawing conclusions from any short-term difficulties – even if the short term has now lasted more than half a decade.

Gordon has been arguing since the days of the dotcom mania that the information revolution looks rather puny compared with earlier waves of innovation, such as the internal combustion engine, indoor plumbing, electrification and the telephone – all of which took hold from about 1850 to 1900. This claim was plausible then and it’s plausible now. (Would you rather give up the smartphone, Facebook and broadband – or hot running water and your flush toilet?)

Let’s take this line of argument further. Economic growth is a modern invention: 20th-century growth rates were far higher than those in the 19th century, and pre-1750 growth rates were almost imperceptible by modern standards. Many have seen this as an encouraging trend, but Gordon draws a different lesson: growth is a recent phenomenon, so why assume that it will last?

If Gordon is right to claim that modern inventions are less impressive than those of the late 19th century, we would expect to see slow growth in US real GDP per capita. And, indeed, growth has been slowing since the 1960s, even setting the current recession to one side. (World GDP per capita growth, by contrast, has been just fine, as others close the gap on the US.)

All these observations raise uncomfortable questions. But for some answers, we need to ponder the likely forces at play. Both Gordon and Tyler Cowen, author of The Great Stagnation, point out that some easy gains – such as sending children to secondary school or allowing women to have careers – can only be enjoyed once. Important inventions, too – such as the car, the washing machine and the lavatory – admit only gradual improvement after the first few decades.

Demographics and debt accumulation have both speeded up growth in the past and, as the pendulum swings back, demographics and debt repayment will reduce it in the future.

Then there are pure resource constraints. Even assuming that climate change can be managed, there are limits to the rate at which we can burn fossil fuels, grow food and mine metals. Renewable energy sources are available, but less plentifully than we might hope. If economic growth is to continue unabated, it will have to be of a more ethereal kind, with energy and resource consumption becoming ever less significant.

Despite all this, I remain an optimist. The economist Michael Kremer pointed out two decades ago that with more people around, there are simply more possible sources of new ideas, and that high populations have tended to enjoy higher economic growth per person, despite resource constraints.

My inner contrarian also tells me to ignore Robert Gordon. During the dotcom boom I cited his work to anyone who would listen, but we are all stagnationists now. And yet: innovation won’t happen by magic. I argued in my last book, Adapt, that scientific and technical progress now seem to require larger teams, more cross-disciplinary work, more money, and older, more specialised scientists. It has become an organisational challenge that we are yet to take as seriously as we should. We’ve lived with astonishing economic growth for 250 years; perhaps we are starting to take this exciting companion for granted.

Also published at ft.com.

Some public wages are more equal than others

‘Twenty-five economists have written to George Osborne, urging the chancellor not to give up on his attempts to end national pay bargaining.’

Financial Times, May 18

Beware economists writing letters, that’s what I say.

I know, but in this case they have a point. We have an odd system in this country under which people doing the same job in a different part of the country are paid very different wages. What’s stranger, this inequity isn’t the result of some unstructured, decentralised process: it’s agreed in national public sector pay negotiations.

Eh? I thought that national pay negotiations were designed to make sure that pay was the same across the country, except perhaps for London and the south-east?

I suppose it depends what you mean by “equal”. “Equal” by what measure?

“Equal” by receiving the same amount of money, of course.

Ah, I understand. By the way, I’m thinking of taking on a butler. I wondered if you might fancy doing the job for £1,000 a year.

£1000 a year? What sort of a salary is that?

It’s an excellent salary – for 1950. After all, you said that two salaries were equal if they involved payment of the same amount of money. What I’m offering you is equal to a very good salary: £1000.

But we’re not living in 1950.

I’m confused. I thought you said that two salaries were equal if they involved payment of the same amount of money. What I’m offering you is equal to a very good salary.

In 1950.

But you don’t care about such things. It’s the same amount of money: £1,000.

This is ludicrous. Things were a lot cheaper in 1950.

Of course they were, but you’ve told me that’s just not relevant to you. I disagree; I think that it makes no sense at all to talk about a salary in terms of pounds unless you take into account what those pounds can buy. You can’t eat money, after all – and you can’t live in it, either. £40,000 a year is a nice salary in Hull. It will buy very little in Chelsea. It seems to me we might want to take that into account when we consider what to pay public sector workers.

Are you saying that public sector workers are overpaid in Hull and underpaid in Chelsea?

Possibly, although an even more fundamental question is whether public services in either Hull or Chelsea are able to recruit enough good people to function properly. There’s more going on here than the cost of living – there are other factors that make a job attractive or unattractive. For instance, Hull has found it hard to recruit experienced teachers in recent years, regardless of whether a teacher’s salary goes a long way in Hull. This is yet another reason to negotiate salaries locally rather than nationally.

But if regional pay bargaining raises pay in places like Hull, won’t that merely raise the gap between the underpaid private sector and the overpaid public sector?

Hang on. “The public sector” is not a caste into which people are born. People will move in or out of public service depending on how well it is paid, among many other things. It’s not very meaningful to say that “statisticians are overpaid in Cardiff” or “nurses are underpaid in London”. Much more useful is to recognise that if nursing isn’t competitively remunerated in London then it will be hard to get good nurses. They’ll live elsewhere, or choose different careers.

That’s the theory. Is there any evidence?

There is some – for instance, a study by the economists Emma Hall, Carol Propper and John van Reenen showing that fatality rates in the NHS are higher in areas where staff are paid less relative to the private sector. That seems to be because a lot of staff in high-cost regions are either agency workers or overpromoted as a way of getting around pay constraints.

Wouldn’t cutting public sector pay in Hull merely drain money out of Hull?

Let’s assume that regional pay bargaining would mean lower public sector salaries
in Hull – which is a big assumption. In the short term this would be bad for Hull, but introducing regional pay variation won’t be a short-term project. In the longer term, inequalities in the housing market would probably increase. Services in Hull – restaurants, hairdressers and the like – would suffer because public sector workers would have less money to spend. But local firms competing in national or global markets would benefit because they would have access to smarter workers for lower salaries. In the long term I suspect this would be good for the regions but I don’t think anybody can be too sure of that.

Osborne is just going to use this as an excuse to pay people less in Hull.

Don’t be ridiculous. George Osborne doesn’t need an excuse.

Also published at ft.com.

Blow the whistle and reap a web of rewards

‘The Internal Revenue Service has awarded a former UBS banker $104m for revealing a tax evasion scheme that cost the US government billions of dollars in taxes and resulted in criminal charges against Swiss banks and top executives.’

Financial Times, September 12

This is “Tarantula”?

Yes, this is “Tarantula”.

Who calls him “Tarantula”?

Well, a chap called Bradley Birkenfeld phoned the Financial Times five years ago with the opening line, “My name is Tarantula. That is not my real name.”

No kidding. Did he also confirm that his real name was not Muppet, Loony or Blowhard?

You’re just grumpy because he’s sitting on $104m. Not bad for a guy who just got out of prison for helping a billionaire to evade tax. But that’s his reward for handing over information to the US authorities about how his former employer, UBS, helped US citizens avoid tax using Swiss bank accounts.

Very nice – but isn’t it a bit crass to give the guy more than $100m?

That’s a fascinating question. You could break it down into two parts. The first is whether we need whistleblowers. The second is whether whistleblowers need to score the equivalent of a lottery jackpot or three before they will speak up.

Whistleblowing feels antediluvian somehow; shouldn’t we be looking to auditors and regulators to spot wrongdoing?

There’s a study of this by Alexander Dyck, Adair Morse and Luigi Zingales. They looked at more than 200 alleged corporate frauds – stealing money from investors rather than tax evasion – and asked how the allegations initially came to light. It’s the job of auditors and financial regulators to spot this stuff, but they rarely do. And shareholders and bondholders have a big financial incentive to discover fraud, but again this doesn’t happen much. It turns out many frauds are uncovered by employees. That makes sense: regulators and auditors are presented with carefully cooked books, but employees are at the coal face and they see the messy details of what is happening. There is no single way in which frauds are uncovered, but whistleblowers are more important than most.

But do we need to pay them so much cash?

Prof Dyck and his colleagues also looked at this. At the time, by far the largest whistleblowing payments were in the healthcare industry, because that was the industry in which the US government was most likely to be the victim of fraud. Under so-called qui tam rules, whistleblowers are due a fat slice of any government money recovered. Whistleblowers were three times more likely to speak out in the health sector, and since the average payout to whistleblowers in successful qui tam cases was almost $50m, that is not surprising.

Why are such large incentives needed?

Perhaps there are cheaper ways to encourage whistleblowing, but it’s clear that it is a hazardous business. Many people who claim to be whistleblowers have had a rough ride.

Such as?

Mr Birkenfeld claimed his life was in danger and he went to jail. Paul Moore, risk manager at HBOS, was sacked. Cheryl Eckard, who identified manufacturing problems at GlaxoSmithKline, lost her job. Ray Dirks, an analyst who uncovered the Equity Funding fraud in the 1970s, was censured by the Securities and Exchange Commission for spreading inside information. Andrew Siemaszko was an engineer at the Davis-Besse reactor when serious corrosion was discovered. Defenders claim he was trying to blow the whistle on safety problems, but he was convicted of lying to the Nuclear Regulatory Commission.

But there are two sides to these stories, aren’t there? I mean, do whistleblowers lose their jobs because they speak out or do they speak out because they lose their jobs?

It’s true many whistleblowers are ambiguous figures. Some have a grudge, while others are culpable and simply trying to reduce their own punishment. But whatever the merits of individual cases, you can see why a potential whistleblower might ask whether the game is worth playing. The chance of $100m might well tip the balance.

Perhaps we should just rely on public-spiritedness.

Fat chance: thanks to the Dodd-Frank act, it should be much more lucrative to blow the whistle on Wall Street in future. That seems sensible. Whenever we’re dealing with complex, fast-moving systems, it’s vital to have early warning of trouble ahead – and that means rewarding whistleblowers.

Also published at ft.com.

The big problem with small risks

It seems some of the best economics lessons can be learnt by hiring a car

Here’s a puzzle. If it costs €500 to hire a €25,000 car, how much should you expect to pay to hire a €50 child’s car seat to go with it? Arithmetic says €1; experience suggests you will pay 50 times that.

This was just one of a series of economics posers that raised their heads during my summer vacation – indeed, within a few minutes of clearing customs in Milan. One explanation is that the apparently extortionate price reflects some unexpected cost of cleaning, fitting or insuring the seat – possible but implausible. Or perhaps parents with young families are less sensitive to price than other travellers. This, again, is possible but unconvincing. In other contexts, such as package holidays and restaurants, children with families are often given discounts on the assumption that money is tight and bargains keenly sought.

The third possibility is that the car seat is an invisible cost, inflicted on poor suckers after they have already completed their search for a bargain. This is no great news: as Tom Waits once wrote, “The large print giveth and the small print taketh away.” But it is still a puzzle: how is it possible to conceal such entirely expected extra costs? Why doesn’t some company advertise “no hidden extras”, for instance?

This kind of puzzle – call it the hotel mini-bar problem – was explored a few years ago by economists Xavier Gabaix and David Laibson. The question is, is there some more transparent pricing scheme that aims for the same level of profitability as the companies which prefer to spring surprises on their customers? The answer is: no.

The difficulty for the straight-dealing company is that it must necessarily charge higher headline rates than tricksy competitors if it wants to be equally profitable. And advertising its honest pricing may not be a great strategy: the implicit slogan of the honest company is, “if you can avoid their sneaky charges, you may get a bargain by outwitting our competitors”. A firm that blows the whistle on industry pricing scams may simply educate its rivals’ customers, rather than winning their business.

After paying through the nose for the car seat we were alerted to a risk. “If your car is damaged or stolen, you are liable for the first €1,000 of any loss.” Gosh. I hadn’t really given the matter any thought but the danger suddenly felt very real. And for just €20 a day, or something like that, I could make that danger vanish.

Normally when you buy car insurance you are protecting yourself against an almost unlimited potential loss. But here, the prospective loss was quite clear: it was €1,000. And €20 a day is an actuarially fair price to make a €1,000 loss go away only for a driver who trashes his car every 50 days. I can be a little ropey driving on the opposite side of the road, but if that really was the risk I would stay well away from the wheel.

What’s happening here? Behavioural economists have long known about “loss aversion”: we’re disproportionately anxious at the prospect of small but salient risks. The car hire clerk carefully created a very clear image of a loss, even though that loss was unlikely. I haven’t paid such fees for years and have saved enough cash to write off a couple of hire cars in future.

A final trick from the car hire company is to invite you to bring back your car with an empty fuel tank: you’ll be charged the regular pump price and you don’t need to bother filling up. Quite a bargain – assuming you feel confident driving to the airport in an unfamiliar car running on empty. But as you juggle passports, foreign currency and a map at the beginning of your holiday, you may not think this scenario through until it is too late.

This is the time of year when I receive emails from students about to begin a course in economics. Good luck to all of them – but some of the best economics lessons can be learnt outside the classroom.

Also published at ft.com.

Left at the gate when it comes to Heathrow

‘The removal of Justine Greening as transport secretary and the appointment of Patrick McLoughlin as her successor has been widely interpreted as paving the way for the Conservatives to perform a U-turn on Heathrow’
Financial Times, September 5

Let me get this straight: 12 cabinet positions have been reshuffled, but this is basically about Heathrow?
You’re not imagining it. The issue on the table is a third runway at the airport. Justine Greening was implacably opposed to the idea, so she had to be moved.
Over her dead body, and all that.
Indeed. And over her constituency in west London, more to the point. The new chap is afraid of flying but since his constituency is in Derbyshire he may feel less anxious about several hundred new flights a day over west London.
But why did Ms Greening have to go? Doesn’t the government share her implacable opposition?
The Liberal Democrats are implacably opposed; Tories such as Zac Goldsmith and Boris Johnson are implacably opposed. Others are more placably opposed, or perhaps not opposed at all – the prime minister seems to be manoeuvring to support a third runway in the next Conservative manifesto.
The Labour party must be rubbing its hands at the confusion.
It is no better. The party sucked its thumbs on the subject for half a decade before finally approving a third runway. Ed Miliband, a minister at the time, bravely considered resigning and didn’t. And now Labour has changed its mind and opposes the runway.
Can’t these clowns just make up their minds?
Well, a decision was due just before the Olympic Games but it was then postponed.
I don’t remember that.
Well, it was a while ago. I am thinking of the Beijing games. I am sure the British political classes can keep this business simmering away until Rio 2016 and beyond. They took 20 years to get Terminal 5 built, after all.
Why is this such a slippery issue?
Partly because any decision to act carries considerable short-term costs, regardless of any long-term benefits. Even a rapid decision would be too late for a construction boom to stimulate the economy, and some future government could cut the ribbon in 2020 or so.
Don’t be too sure that it would be too late to stimulate the economy. You might have said the same thing back in 2008, and if politicians had pulled their fingers out then we might have been pouring concrete by now.
You have a point. But this isn’t just about timing. It’s about sorting out competing priorities, and none of the options seem attractive.
What’s wrong with the third runway?
Heathrow is on a cramped site, so even with a third runway it could hardly compete with competitors in Europe: Frankfurt and Paris have four runways, for instance. The flight paths run over highly populated areas, meaning that out of all EU citizens suffering from airport noise pollution, almost 30 per cent have Heathrow to thank for their pains.
Then there’s this crazy plan to build an airport to the east of London.
Starting again from scratch sounds insane but actually there is a history of building big airports in unlikely places: air travel has grown so spectacularly that many older airports carry too heavy a legacy. I am fond of Osaka’s Kansai airport, built out at sea and reached by an artificial causeway. But the new airport would be expensive, probably not ready for decades, and would require huge infrastructure spending just to be convenient for London. How it might be made handy for the rest of south-east England is anyone’s guess. It might also disrupt bird life.
Can’t we just make Heathrow work better?
We could try. There’s a fundamental contradiction, though. The logic of air travel says the bigger a hub airport is, the better, because that gives the best choice of destination. But the logic of competition says London might benefit from a rivalry between two hub airports.
Perhaps we should just do nothing and let Heathrow grind to a halt.
That is a popular alternative with environmentalists, who rightly worry about the carbon emissions from air travel. But the truth is that choking Heathrow will just divert aeroplanes to Frankfurt or Paris. We need a sensible policy to contain the environmental costs of flying, but this isn’t it.
Gosh. It is a conundrum.
This is the sort of complex, multifaceted problem that exists to be solved by the, ahem, political process. Don’t hold your breath.

 

First published in the Financial Times.

One of the world’s largest ever randomised trials… the results are in

The Democratic Republic of Congo is the poorest country on earth. It suffered what was probably the deadliest war since 1945, and according to Margot Wallström, the UN’s representative on sexual violence, it is the “rape capital of the world”.

Nevertheless the worst of the conflict is over and there is hope for the future of the DRC. Development projects are under way, but in a near-landlocked country that is two-thirds the size of western Europe, such projects aren’t easy to run.
One of them is Tuungane (“Let’s Unite”), a programme funded by the UK’s Department for International Development to the tune of £90m. The first £30m, Tuungane I, funded classrooms, clinics and other investments in 1,250 villages with a total population of almost 1.8 million people.

If the project is ambitious, what’s really fascinating is that Dfid has tried to evaluate Tuungane I rigorously, using a randomised controlled trial. Villages were enrolled in Tuungane through a public lottery. With 1.8 million people in the treatment group and a large control group, such an evaluation would be challenging to conduct in a rich country. In the DRC, where enumerators risk death and must wade through water up to their necks to reach the villages they are surveying, it’s mind-blowing.

Tuungane is a community-driven development project, or CDD. CDD is fashionable in development circles these days. The idea is that communities receive cash from donor agencies on condition that they come up with appropriate institutions for deciding how to spend the money. CDD projects will often insist on standards of transparency, democracy, or gender balance. The hope is that not only will the money be spent well, but that it may also catalyse accountable local institutions.

But does CDD deliver on this? The Tuungane I evaluation has now been completed by a team from Columbia University. The evaluation was based on a second project, Rapid, which was separate from Tuungane. Rapid handed out cash with few strings attached to Tuungane and non-Tuungane villages. The evaluators observed what happened: was the money embezzled, or well spent, and how were the decisions reached? This was the acid test of whether Tuungane had helped to promote effective village institutions.

The good news is that the Tuungane project was well executed and the money typically arrived where it was supposed to. In the DRC this is no small achievement.

Yet the results fall short of the CDD hype. The evaluators found that the Rapid cash grants were reasonably well spent whether or not a village had previously been exposed to three years of community building through Tuungane. Local institutions were more accountable than one might expect, but there was no sign that Tuungane could take any credit for this. Neither did Tuungane projects display any economic returns – although arguably there was too little time between spending the cash and evaluating the results for such returns to become apparent.
It’s a shame that the results haven’t matched the expectations of the CDD optimists, but it’s hardly a surprise. Tuungane is large in absolute terms, but it’s just a few pounds per person. It would be odd to expect miracles. The safe arrival of cash in the hands of very poor people is surely worth celebrating.

Still, because Tuungane was rigorously evaluated, even an unmitigated failure would have produced valuable information about what works and what does not. It is far too common for development projects simply to list their inputs: how much money was spent, and on what. To see a discussion of what happened is rarer; to see rigorous causal evidence assembled is rarer still. It should be applauded.

First published in FT Magazine.

EDIT: This should be implicitly obvious but I should make it explicit: randomisation took place on a village by village level, so although there were almost 2 million people in the treatment group there were only 280 distinct areas evaluated in the treatment group, and 320 in the control group.

Home workers or home shirkers?

Where do you imagine I might be writing these words? Am I at the FT? Or crunched up on a train? Perhaps I’m at the kitchen table or by a swimming pool. I may be wearing a suit, swimming trunks or pyjamas. Once you start to imagine some of the possibilities, you may find them difficult to banish from your mind.

For most occupations – from chef, to surgeon, to security guard – telecommuting is impossible. But an increasing number of jobs are becoming feasible to do from home. Perhaps it’s not surprising, then, that telecommuting is catching on. In the US, 10 per cent of people sometimes work from home, and more than 4 per cent of people do so predominantly. The curious thing is, we know very little about whether home working is effective – and within specific industries, different companies sometimes have very different practices. Swathes of management thinking are still akin to medieval medicine: there are lots of ideas floating around, but nobody really knows what’s effective and what’s superstitious nonsense.

My eye was caught, then, by a new study conducted by Nicholas Bloom, James Liang, John Roberts and Zhichun Jenny Ying, all economists at Stanford University. Liang also happens to be the founder and chairman of Ctrip, a Chinese travel agency, listed on the Nasdaq and currently valued at about $2bn.

This confluence of interests created a remarkable opportunity. Ctrip employs a lot of call-centre staff, and call-centre jobs – just like columnist jobs – turn out to be perfectly amenable in theory to working from home. Staff can be monitored through digital means, and all they need is a computer, a phone and a quiet space. But Liang simply didn’t know whether introducing telecommuting would work well. So, with Bloom and colleagues monitoring the results, Ctrip introduced a carefully designed randomised trial. From a pool of 255 qualified volunteers, Ctrip used birthdays – odd or even – to assign about half to nine months of home working and half to continuing to work from the office.

The telecommuting was a big success. Home workers on the same shifts as their office-bound colleagues were online and available for more minutes because they took fewer breaks and fewer sick days. They also took slightly more calls per hour logged in because, in the quiet home environment, they could hear customers more clearly. Each call was just as productive. Meanwhile, the home workers reported more job satisfaction and a better mood in general, and they were less likely to quit their jobs.

Totting up the results, Ctrip reckoned that each home worker, on average, produced better performance worth $375, saved $1,250 in office rental costs, and also saved $400 because of reduced turnover and training. That saving of more than $2,000 looks particularly impressive given that the average salary was $3,000 over the course of the same nine months. Telecommuting works, at least for Ctrip – and quite possibly for call centres all over the world.

It’s worth pausing, too, to contemplate the importance of running a proper randomised controlled trial. After the experiment was finished, some people who had not enjoyed working from home came back to the office; while eager would-be home workers replaced them. Because it was the less productive workers who tended to give up home working, this self-selection promptly made home working look twice as productive. We should conclude that home working is likely to be more effective when self-selection is allowed – but also that evaluations based on self-selection instead of randomisation are likely to deceive us.

Now, if you’ll excuse me, it’s time to get a coffee from the staff canteen. Or do I mean a cold beer from the poolside bar?

First published in the FT Magazine.

Elsewhere

  • 1 Twitter
  • 2 Flickr
  • 3 RSS
  • 4 YouTube
  • 5 Podcasts
  • 6 Facebook

Books

  • Messy
  • The Undercover Economist Strikes Back
  • Adapt
  • Dear Undercover Economist
  • The Logic of Life
  • The Undercover Economist

Tim’s Tweets

Search by Keyword

Free Email Updates

Enter your email address to receive notifications of new articles by email (you can unsubscribe at any time).

Join 3,473 other subscribers

Do NOT follow this link or you will be banned from the site!