Unlikely Events Influenced by Financial Incentives

With the UK’s Chief Medical Officer, Sir Liam Donaldson, proposing that alcohol should cost a minimum of 50p per unit, many opposers are arguing that the increase would “punish ordinary drinkers without deterring the winos, brawlers and wife-beaters”. However, as Tim Harford notes, it may well work as the unlikeliest of events are influenced by financial incentives.

Economists Joshua Gans and Andrew Leigh have discovered that after the Australian government announced that it would abolish inheritance tax, effective 1 July 1979, the death rate fell in late June of that year before surging in early July. Gans and Leigh reckon that half the likely taxpayers managed to escape death long enough to escape the tax too.

More cheeringly, when the Australian government announced (with six weeks notice) a “baby bonus” of about £1,250 for families of children born on or after 1 July 2004, something very strange happened in the labour wards. The number of happy events on 1 July was an all-time record, and twice as many births as on 30 June.

Whether entering this world or leaving it, people respond to financial incentives.

For a primer on incentives, you can do worse than reading Russell Roberts’ Incentives Matter article—one of the Ten Key Ideas from the Library of Economics and Liberty.

via The Undercover Economist