Elster (2000) on emotions as credibility enhancers

As part of my summer reading program, I recently read Jon Elster’s Ulysses Unbound (2000) and will be posting some thoughts on it here. In this first installment I’ll discuss the idea that emotions may provide a form of self-binding that can help to overcome self-interest.

In section I.5, Elster considers provocative work by Frank and Hirschleifer that claims (separately) that emotions like envy, anger, guilt, or honesty “could have evolved because they enhance our ability to make credible threats.” The basic idea here is that in some situations an actor would benefit from being able to make threats, such as the threat to refuse a small offer in an ultimatum game, but that those threats are not credible without the actor feeling anger or another “irrational” emotion. The purpose of some emotions, in this view, is to produce privately-experienced costs and benefits that can allow players to make threats and promises that are otherwise non-credible. As Elster points out, it is not the emotions per se that can help actors overcome commitment problems; rather, it is the reputation for being emotional that does it (i.e. other actors’ knowledge of one’s privately-experienced emotional costs and benefits), and actually experiencing these emotions could be a good way to develop that reputation.

On page 51 Elster makes a nice move in linking ideas about self-interest and morality to Frank and Hirshleifer’s ideas on the evolutionary advantages of the moral emotions. First he clarifies that the emotions Frank and Hirschleifer are inserting into behavior are really standing in for side benefits and side penalties that make a given behavior sustainable in a repeated game with a given payoff structure and discount rate. He then goes on to point out how this is “essentially turning an old argument on its head”:

From Descartes onward it has often been argued that prudence or long-term self-interest can mimic morality. Because morality was thought to be more fragile than prudence, many welcomed the idea that the latter was sufficient for social order. By contrast, if one believes that self-interest is likely to be shortsighted rather than farsighted, the moral emotions might be needed to mimic prudence.

To restate the point somewhat, if we can define a type of behavior that is the “moral course of action” (e.g. to give generously in a dictator game), and we can identify the purely self-interested course of action (e.g. give nothing), then any discrepancy between the two can be bridged by “moral emotions” that the players experience (e.g. a warm glow from giving, or guilt from not giving). This clarification highlights what might be dissatisfying about this work (as reported by Elster), in common with e.g. the classic work on the paradox of voting or even Levi’s invocation of normative values in explaining tax compliance: any apparently paradoxical behavior can be explained by saying that the payoffs have been misjudged. But this is not what Frank and Hirshleifer are doing, presumably: they want to explain the existence of emotions, which are privately experienced costs and benefits provoked by interactions with others, not the paradox of cooperation; their interesting point is that these emotions may serve at least in part to help us develop reputations that make our (self-serving) threats and promises credible.

Levi: “Quasi-Voluntary Compliance”

A key term in Margaret Levi’s Of Rule and Revenue (1988) is “quasi-voluntary compliance.” As far as I can tell, Levi uses this term to refer to a situation in which citizens comply with the state’s demands (e.g. to pay taxes) out of a combination of strategic and normative considerations. The strategic considerations involve the calculation of the probability of being caught and the punishment that would be exacted; the normative considerations include the sense that the bargain between the citizen and state is “fair” — that the citizen believes that the state is providing sufficient public goods in return for his tax payments, and that the burden for the state’s activities falls on the citizenry in an equitable way. Thus Levi wants to emphasize (e.g. on page 53-54) that citizens will base their compliance decisions on their understanding of the government’s enforcement procedures not just because those enforcement procedures affect the citizen’s own probability of being caught, but also because they affect the citizen’s view of whether others will be paying their fair share. (And, citizens care about whether others are paying their fair share not just because this affects the probability that they will be caught but because they place a normative value on fairness and will refuse to pay taxes if they perceive the system to be unfair.)

If this is indeed what Levi means by “quasi-voluntary compliance,” then her explication the concept is disappointingly convoluted. At points Levi presents the idea of quasi-voluntary compliance (QVC) as if it were a fundamentally different conception of compliance from what would come out of a Becker-style costs-and-benefits analysis. Unless I’m missing something, it’s not: it merely adds normative concerns to the citizens’ calculations. This does contribute something important to the analysis of rulers’ strategies: if citizens care about fairness or legitimacy, then rulers must take care in choosing tax rates and enforcement systems that they do not violate citizens’ sense of fairness and thus undermine their revenue goals; rulers trying to maximize revenue should also think about the public good they are providing (and citizens’ perceptions of those goods) because, even though these goods are non-excludable and thus would not be part of a purely materially-motivated citizen’s compliance decision, the government’s output matters to fairness-minded taxpayers. But this contribution would have been a lot clearer to me if it were introduced as an extension and modification of a common costs-and-benefits calculus rather than a wholly different concept of compliance.

Given that the definition of quasi-voluntary compliance (QVC) has to do with the utility function of citizens, in practice it should be hard to tell the difference between QVC and mere compliance (the situation in which people pay their taxes because of coercion pg. 64). The main point Levi makes is that citizens will comply less when they perceive that others are not complying and the state is not delivering promised goods (e.g. pg. 68). This could be because of fairness, but it could also be mere compliance: if others are not complying, I may be able to get away with not complying too because others’ non-compliance tells me that the enforcement system is not working well (and that my own non-compliance may be overlooked because so many others are also not complying). (Also, if the state is not providing public goods, maybe it’s because no one else is paying.) The question is how one would know how much (if at all) these normative considerations really matter. At some points QVC seems to be in effect when coercion is not observed, but of course the most successful coercion is the kind that is implicit. In the introductory chapters Levi does offer one phenomenon that would indeed be predicted by “quasi-voluntary compliance” but not in a non-normative account: “rulers invest in deterrence that constituents perceive as being directed toward others” (pg. 67). The challenge would be to distinguish a) deterrence that is carried out in order to boost tax revenues from those being targeted from b) deterrence that is carried out in order to boost tax revenues from others (and not because those others think “I could be next!”).

On to cases. How does QVC enter into Levi’s analysis of states’ revenue strategies? In discussing the Roman Republic, Levi refers to QVC in her explanation for the use of “tax farming” in remote provinces; her argument seems to be that without the social rewards of high income and citizenship, and without detailed information on citizens, collecting taxes in the usual way would have been too expensive. “Without quasi-voluntary compliance, the agency costs of the census rose significantly” (pg. 80). In early parliaments in France and England, QVC helps us understand the role of parliaments in providing a venue in which the ruler could justify his taxes (“parliamentary consent shrouds a ruler’s policies in legitimacy”, pg. 118). In the introduction of the income tax in 18th-century Britain, Levi sees QVC at work in the attention that was paid to the justifications for the tax and the equitability of its administration. In 20th-century Australia, Levi sees QVC as helping to explain individual taxpayers’ objections to their assessments, as well as tax revolts and labor union campaigns against tax avoidance. I find these claims to be more convincing as we move ahead in time, in part because in the latter cases Levi brings to bear more evidence of debates about justification and enforcement (which would be hard to explain in another way), whereas in e.g. the Roman case one could easily explain the use of tax farming in the provinces without recourse to QVC.

I think the best evidence that citizens’ sense of fairness is an important constraint on taxation is that public debates surrounding taxation focus on both government waste and evasion/progressivity/fairness; if citizens were merely being held up by a predatory state and paying just because they don’t want to be arrested, then they should not care about what the government does with their tax revenues or whether anyone else is similarly being held up. On the other hand, for both kinds of debates one can argue that pure economic explanations are sufficient. When citizens complain about government waste or otherwise complain that they are paying too much for the government services they receive, it could simply be that the citizens legitimately want lower taxes for all of society (see e.g. Meltzer-Richard) or simply for themselves (the standard free-rider prediction). Likewise, when there are debates about how the tax burden is to be shared, it need not be that citizens actually care about fairness: it could be instead that simply want to pass more of the burden on to others. I am intrigued by the idea of building on Levi’s QVC idea to investigate patterns in parliamentary debate over time, but this indeterminacy gives me pause: what speech would persuade a skeptic that the speaker is concerned about fairness and not simply about reducing his own tax bill?

In conclusion, I come away from this book intrigued by the contention that fairness helps to explain the history of state revenue extraction but disappointed in the somewhat muddled way in which the ideas are presented and the lack of evidence for the importance of fairness. I think (and I suspect Levi might agree) that this is a book that would have benefited from an explicit application of game theory, or at least a bit more rigor in specifying e.g. the citizens’ outside option, what non-compliance would mean, etc. The idea that normative considerations matter to citizens in determining whether they will pay their taxes is intriguing and believable, but I don’t see a way to convincingly demonstrate to a skeptic that considerations of fairness are fundamental and not epiphenomenal.


Here is what Peter Schweizer says about Gabe Lenz and Kevin Lim’s paper on the wealth of members of Congress:

One study used a statistical estimator to determine that members of Congress were ‘accumulating wealth about 50% faster than expected’ compared with other Americans.

Is that a fair summary of their research? Here is a quote from the abstract of the paper:

We thus conclude that representatives report accumulating wealth at a rate consistent with similar non-representatives, potentially suggesting that corruption in Congress is not widespread.

Schweizer’s claim is strictly true, in that Gabe and Kevin did reporting using a “statistical estimator” that suggested faster-than-expected wealth accumulation. But they also reported that, based on their analysis, it was the wrong estimator; using a better estimator reversed the findings.

I guess Schweizer stopped reading after the fourth sentence of the abstract, so he simply didn’t realize that by the ninth sentence the paper was completely contradicting the argument of his book.

Political investing in the news

There is suddenly a lot of attention being paid to investing behavior of members of Congress. As Jens and I work on finishing up our two papers on the topic, I am trying to keep up with the public discussion.

Larry Lessig alerted me to this Newsweek/Daily Beast article about a new book by Peter Schweizer called Throw Them All Out (subtitle: “how politicians and their friends get rich off insider stock tips, cronyism, and land deals that would send the rest of us to prison”). I had given a talk at Larry’s weekly seminar in the spring about our (Jens and mine) work on this issue, in which the general message was that members of Congress overall are not very good investors, and that existing investigations of “insider trading” in Congress (and ethics issues more generally) suffer from a general bias toward finding wrongdoing even when the evidence is more ambiguous. So, given that I was saying that things weren’t so bad and Peter Schweizer is now publishing this book saying that things are very bad, Larry asks me, “Is he wrong?”

I have not read the book (it just went on sale today I believe), but here are some thoughts on what I could learn about it from the article, and how it relates to our work on the investments of members of Congress:

a) Our work so far is about average behavior, and not isolated instances of wrongdoing. If there is wrongdoing, it probably is at the level of isolated instances — not everyone in Congress, not all the time. It is perfectly consistent for Congress as a whole to do poorly and for improper trading to be going on, and even for an individual to do poorly overall and to be doing some improper trading. Our work responds in part to an earlier study that showed extremely good average performance, which would really only be possible with widespread wrongdoing; showing poor average performance (as we do) does not prove the absence of wrongdoing.

b) Also, some of the behavior Schweizer is talking about is outside of what we analyze, e.g. options on index funds — our analysis is about equity holdings.

That said:

c) John Kerry may have had some conveniently timed trades, but our analysis suggests he would have done better overall had he invested in an index fund. That doesn’t mean he acted ethically, but it does take some of the edge off of this “politicians get rich while we suffer” narrative.

d) There is deep cherry-picking going on here. You could write a book of completely bone-headed investments that come from the same data. If well-timed trades prove corruption, what do poorly-timed trades prove?

e) The current discussion talks a lot about how Congress has exempted itself from insider trading laws, but I think (not being a securities law expert) that is kind of bogus. They are just as exempt from insider trading laws as I am. It’s simply that the SEC regulations on insider trading apply to information held by corporate insiders, but don’t address other types of information that might be gathered by politicians, academics, journalists, bankers, bloggers, hedge fund managers, and others who are in a position to learn about market developments. It seems like an exaggeration to say (as Schweizer does here) that members of Congress “have legislated themselves as untouchable as a political class.” Also, there are ethical restrictions in both houses of Congress against profiting from your political position. Perhaps these should be enforced more strictly, but this places members of Congress roughly in the same category as journalists, who learn a lot of stuff about the market but are prohibited by self-regulation from profiting from it — except that members of Congress are required to disclose their investments while journalists are not.

Overall, I think the whole story lends itself to the kind of argument Larry makes in his book Republic, Lost — it’s hard to tell whether corruption is going on, but why bother allowing it to seem as if it is? If I were in Congress, I would not be trading stocks: I would own broad index funds of U.S. equities and bonds, and/or have my money in a qualified blind trust. I would also probably vote to require other members of Congress to do the same. I would do these things because I would not trust the public to really figure out whether corruption is occurring or not, and because I don’t think losing the flexibility to play around in the stock market is much of a cost to pay at all. (In fact, overall it would have helped members of Congress, according to our study!) I wish we could count on the public to accurately identify instances of corruption, but I think the rewards to “finding” wrongdoing (and reporting on it) are large enough, and the rewards to arguing otherwise small enough, that the public will generally conclude the worst whether or not there is legitimate cause for concern.

What time is lunch?

When people in London suggest a time for lunch, they suggest 1pm. In the US it would be noon, right? I find that curious.

I suspect this is a case where it’s kind of arbitrary what time you go to lunch, but people have just converged on a standard practice, and that practice is different in the US and the UK. (You would think there would be an incentive to go a little earlier to avoid the crowds, but on the other hand it’s probably useful for remembering lunch dates to just go with the standard time.) This is therefore a case of what social science types call a coordination game, in which there are “multiple equilibria.” If everyone else is going to lunch at 1, you go at 1; if everyone else is going at noon, you go at noon; so once a society has converged on a equilibrium lunchtime, it is hard to shake (even if you started down that route for random reasons).

I have not yet determined whether the workplace calendar is generally shifted back an hour or not. I walked to work at around 8:45 this morning and it seemed like rush hour to me.

Also, I checked, and sunrise and sunset are not generally later here in London than in NYC.

I wonder if there’s an interesting story explaining why London started down the 1pm path and e.g. NYC went with noon. Also, is it the same in other cities in the UK? In Europe?

Kahn and Kotchen on unemployment and environmental concern

Matthew Kahn (a teacher of mine during my MA at Tufts) and Matthew Kotchen have an interesting sounding paper showing that people appear to be less concerned about the environment when the economy is doing worse. Fewer people search Google for “global warming” and fewer survey respondents say they think global warming is occurring when their state’s unemployment rate is higher. (This is with state and month-year fixed effects, meaning that the difference is not just capturing over-time changes in attitudes or stable geographical differences between people in richer and poorer states.)

Some of the results, like the one about Google search terms or another finding about people’s responses to a “most important problem question,” are consistent with the idea that economic concerns crowd out environmental concerns. But the fact that survey respondents say global warming is not happening when their local economy is doing poorly says something different: it suggests that economic problems do not simply change people’s priorities, they also change their views. (Or that, when someone’s priorities are changed, his or her views adjust to become consistent with those priorities: if I don’t spend much time worrying about the environment, the problem must not be happening.) (Sorry: or that it takes time to learn that global warming is happening, and people don’t have that time when they are worried about the environment.)

Started at LSE

After last year’s very enjoyable post-doc at Yale’s Leitner Center, I have shipped off to the LSE to start as a Lecturer (asst. prof, in US terms) teaching in the MPA program. I am still settling into my office in Connaught House, and still working out housing for next month, but so far I am really enjoying both the city and the school. I met some of the students last week at the introductory session for MPA first-years and I was extremely impressed with their sharpness and the variety of interesting experiences they bring to London.

More soon — I’m going to try to do some more writing here.

Stock trading project written up in Bloomberg/BusinessWeek

The project on the stock portfolios of members of Congress that Jens and I have been working on for over two years is finally almost done, and now it has been written up by Bloomberg. The paper is tentatively titled “Political Capital: The (Mostly) Mediocre Performance of Congressional Stock Portfolios, 2004-2008”. The writeup looks pretty accurate to me. I was curious what aspect the media would end up focusing on, given that the story is kind of subtle and doesn’t play directly into a corruption narrative. In this case the writer chose to focus on the local premium while telling the rest of the story further down.

(Finally) set up on new MacBook Air

I am fully up to speed now with my new MacBook Air.

I’ve had it now for a little over a week, and yesterday finished installing my rails environment and downloading the databases I have been working with. (For setting up the Rails environment on Snow Leopard, I recommend this guide.)

I love this computer. Above all I love how light and sleek it is: this weekend I went to NYC for a bachelor party and a baby shower and brought only my violin case — with my MacBook Air, a change of clothes, and a toothbrush slipped in the space where you can store sheet music. I just love that efficiency.

I also really like the screen resolution, the way the computer starts up and shuts down very quickly, the way it makes basically no noise (no moving parts!) and does not get hot. I still have my early 2008 15″ MacBook Pro around, and it’s funny how it feels so big and clunky. The old screen does look massive now that I’m accustomed to the 13″ MBA, but somehow I don’t seem to miss the extra space, and I certainly love how portable the new machine is.

So — now that I’m really set up it’s back to work.

Working on a remote server

Since I figured out how to install R on my Dreamhost VPS, I’ve started sending some computations to the server to run. I’m sure my workflow will be honed as I do this more, but I just wanted to share a bit about how this works for me.

The key element of my approach is SVN. If you don’t know what SVN is: SVN is kind of like a cross between TimeMachine and GoogleDocs for geeks — a way to backup your work and collaborate with others. If you do know what SVN is, you probably think I should use git; I know, I know. At least I’m not using CVS.

So, I write code on my laptop and as I go I test it out on data and check the code in to my SVN repository (hosted incidentally at Assembla). When I am ready to do something on the server, I create a space on my VPS and, from that directory, do an SVN “checkout” of the project I’m working on, which grabs the code from my SVN repository and makes a copy on the server. I may in addition need to FTP some data to the server; I could check the data into SVN as well and I may do that going forward, but because I was somewhat constrained in my SVN repository I have not done this so far.

By this stage, I have basically replicated a chunk of my laptop — the code and data I need to do my computations — on the server. So now I ssh into the server and run the code there as I would locally. When it’s done I fetch the results from the server to do more processing locally.

In my current project I had not been planning to work this way, so I had written a lot of absolute paths (e.g. “~/data/X”) in my code. Because things were not set up that way on my server, I had to change a lot of paths to make them relative, which is fine. But I’m thinking in the future I could set up my laptop and server space to look more similar, so that the transition would be more seamless. I guess in the extreme you could check in a whole directory of your harddrive (code, data, etc) into SVN and thus have a complete copy of that repository both on your local machine and on the server. The only issue is how to deal with stuff you don’t want checked in — huge datasets, images/output from code, etc. I’ll keep honing it.

Until we’re all seamlessly in the cloud I think this setup will help me be more productive. I had had enough of trying to do work while running CPU-intensive stuff in the background, or having my computer chugging along overnight.