Unanticipated Effects of Soda Tax, example 1037

On the surface the logic of a soda tax seems simple: raise the price of an unhealthy food, people consume less, and public health improves.  But, as I've pointed out again and again on this blog, the story is much less simple than it first appears.  

First, even if we believe people suffer from various behavioral biases, higher prices almost certainly make people worse off.  Second, when we raise the price of one unhealthy thing, people might substitute to consume other unhealthy things.  Third, if the tax is just added at the checkout counter and not on the shelf display, it may not have nearly the effect on purchase behavior as assumed.  Forth, if people know the reason for the tax, some may "protest" and buy more instead.  Fifth, the projected weight loss from such taxes often relies on unreasonable rules of thumb like 3500kcal=1lb. Six, even when taxes have an effect, the causal impact may arise more from an "information effect" rather than a "price effect."  Seventh, such taxes may induce unanticipated effects because of how sellers respond to the policy.  Finally, soda taxes are regressive - having a proportionally larger effect on on lower income households (see also my co-authored paper on effects of "unhealthy" food taxes more generally).

Now, comes this new paper in the American Journal of Agricultural Economics by Emily Wang, Christian Rojas, and Francesca Colantuoni, which incorporates the insight that some households are more likely to respond to promotions and to store.  The abstract:

“We apply a dynamic estimation procedure to investigate the effect of obesity on the demand for soda. The dynamic model accounts for consumers’ storing behavior, and allows us to study soda consumers’ price sensitivity (how responsive consumers are to the overall price) and sale sensitivity (the fraction of consumers that store soda during temporary price reductions). By matching store-level purchase data to county-level data on obesity incidence, we find higher sale sensitivity in populations with higher obesity rates. Conversely, we find that storers are less price sensitive than non-storers, and that their price sensitivity decreases with the obesity rate. Our results suggest that policies aimed at increasing soda prices might be less effective than previously thought, especially in areas where consumers can counteract that price increase by stockpiling during sale periods; according to our results, this dampening effect would be more pronounced precisely in those areas with higher obesity rates.”

How risk averse are you?

Economists have long been interested in trying to figure out people's tolerance for risk.  Such information is useful in predicting, for examples, which crops farmers will plant, which stocks investors will buy, how much insurance is bought, how much of a premium one is willing to pay for organic food, and how fast people drive.  Of course, we don't expect all people to have the same risk preferences, so for decades economists have sought to identify tools and methods that will allow them to discover different people's levels of risk aversion.

One of the most popular techniques is the so-called Holt and Laury (H&L) multiple price list (MPL) based on this paper in the American Economic Review.  As of this writing, the paper has been cited 3,900 times according to googlescholar, making it one of the most cited economic papers published in the last 15 years.  The approach requires people to make a choice between a relatively safe lottery (e.g., 10% chance of $2 and a 90% chance of $1.60) and a relatively risky lottery (e.g., 10% chance of $3.85 and a 90% chance of $0.10).  Then, the subject repeats the choice except the probability of the higher payoffs increases.  This process is repeated again and again about 10 times until one gets to the very easy choice between 100% chance of $2 and 100% chance of $3.85 (If you don't know which of those you prefer, give me a call.  We need to talk).  One very crude measure of risk aversion is simply the number of times a person chooses the relatively safe lottery over the relatively risky lottery.  

The H&L method is relatively easy to use, which goes a long way toward explaining it's popularity.

With all that as a backdrop, I'll point you to a new paper I published with Andreas Drichoutis in the Journal of Risk and Uncertainty. We point out an important problem with using the H&L method as a measure of risk aversion and propose a new, yet equally easy to use, MPL that helps solve the problem.  If you're not an academic economist, the rest of this may get a bit wonky, but here goes:

“In what follows, we show that H&L’s original MPL is, perhaps ironically, not particularly well suited to measuring the traditional notion of risk preferences — the curvature of the utility function. Rather, it is likely to provide a better approximation of the curvature of the probability weighting function. We then introduce an alternative MPL that has exactly the opposite property. By combining the information gained from both types of MPLs, we show that greater prediction performance can be attained.”

Here is one of the main critiques of H&L, which relates to whether people weight probabilities non-linearly (the parameter γ is a measure of the extent to which probabilities are "distorted").

“Now, consider a simple example where individuals have a linear utility function (i.e., they are risk neutral in the traditional sense), U(x) = x. With the traditional H&L task, a risk neutral person with U(x) = x and γ = 1 would switch from option A to B at the fifth decision task. However, if the person weights probabilities non-linearly, say with a value of γ = 0.6, then they would instead switch from option A to B at the sixth decision task. Thus, in the original H&L decision task, an individual with γ = 0.6 will appear to have a concave utility function (if one ignores probability weighting) even though they have a linear utility function, U(x) = x. The problem is further exasperated as γ diverges from one. Of course in reality, people may weight probabilities non-linearly and exhibit diminishing marginal utility of earnings, but the point remains: simply observing the A-B switching point in the H&L decision task is insufficient to identify the shape of U(x) and the shape of w(p). The two are confounded. While it is possible to use data from the H&L technique to estimate these two constructs, U(x) and w(p), ex post, we argue that more information is contained about w(p) than U(x) in the original H&L MPL.”

The other problem we point out with the H&L approach is that it provides very little information about the shape of U(x) as only four dollar amounts are used in the design (and only two differences are uniquely identified).  Instead, 10 different probabilities are used, which provides much more information about the shape of γ.  What can one do about this if they truly want to know about the shape of U(x)?  We suggest a new kind of payoff-varying MPL.

“Given the preceding discussion, one might ask if there is a simple way to use a MPL that yields more information about U(x) and, at least in some special cases, avoids the confound between w(p) and U(x)? One can indeed achieve such an outcome by following an approach like the one used by Wakker and Deneffe (1996) in which probabilities are held constant. Using this insight, we modify the H&L task such that probabilities remain constant across the ten decision tasks and instead change the monetary payoffs down the ten tasks. ”

I'm under no allusion that our new MPL will become nearly as popular as the original H&L task.  But, if we even get one-tenth their number of citations, I'll be thrilled.

What do school children want to eat?

In the past I have, at times, been somewhat critical of the National School Lunch Program (NSLP) guidelines destined to make school lunches healthier by reducing calories, sodium content, saturated fat, etc.  It's not not that I'm against healthy kids!  Rather, I bristled at the idea of a bunch of nutritionists, policy makers, etc. setting rules and guidelines for how they think kids should eat without considering how the children would respond to the rules.  Nutritional content is but one of the components we care about when eating - don't we also care about how the food tastes, how much it costs, whether it leaves feeling full, whether it is safe to eat, etc. etc.  In short, the guidelines were established with limited understanding of what children want to eat, and as such we knew very little about whether the rules might increase food waste, increase the frequency of home lunches, cause unintended substitution patterns, and so on.  

In an interesting paper in the most recent edition of the American Journal of Agricultural Economics, a team of six researchers sought to do what should have been done prior to implementing nutritional guidelines.  In particular, the authors studied almost 280,000 school lunch choices of about 5,500 elementary age children in a suburban South Carolina school district.  The authors know the precise foods available at each lunch offering, the nutritional characteristics of the foods, which foods the child selected (or whether the child brought a lunch from home - note that lunch menus were published well in advance), and some of the characteristics of the child who made the choice such as their grade, gender, race, and whether they received free or reduced price lunch.

The authors are able to take all this data to estimate demand curves associated with different food offerings.  Their demand models let them answer questions like the following:

• If the sodium content of a pizza offering were lowered, how would that change the number of children who select it?  
• If a low fat pizza is paired with a peanut butter sandwich, which would most people choose?
• If the caloric content were unilaterally lowered on all offerings, how many more children would bring their lunches from home?       

Here's what the authors find:

“If the protein content of Entrée 1 is increased by 3.2grams (one standard deviation of all entree offerings over the course of study), students are, on average, 2.8 percentage points more likely to select that offering. Increasing the fat content of Entrée 1 by one standard deviation (3.9grams) has a similar effect, though smaller in magnitude; students are only 0.2 percentage points more likely to select Entrée 1 because of this increase in its fat content. Increasing the carbohydrate content has the opposite effect; the average probability of choosing Entrée 1 over the alternatives decreases by 3 percentage points if the carbohydrate content increased by 6.8grams (one standard deviation). Thus, the first row of table 3 reveals that students prefer more fat and protein but dislike additional carbohydrates. While the results for sodium are positive, the effect is not statistically significant.”

There are important differences across children:

“While an increase in the fat content of Entrée 1 increases the average probability that a student receiving free lunch will select it, the same increase in fat reduces the likelihood a student who pays full-price will select Entrée 1. The results also suggest that students who pay full-price are more likely to select offerings with more protein than students receiving free or reduced-price lunches (Bonferroni p-value <0.0001), and those who received free lunches are more likely to reject entrées with additional sodium relative to students who pay full-price or students who received reduced-price lunches (Bonferroni p-value =0.0044).”

The authors use their results to suggest how "schools can increase the healthfulness of their students’ meals by replacing unhealthy options with relatively healthy options that are already popular amongst the students."  One things the authors didn't do (but which is possible given their estimates) is to ask: are the children better or worse off (at least as measured by their own preferences revealed by their short run choice behavior) with the new nutritional standards?  Which types of children are now happier or sadder?  Because there is no price variation in the dataset, the authors can't provide a monetary measure of the loss (or gain) in student happiness, but they could covert it to some other unit they measure - such as grams of protein or calories.  

Nonetheless, this is a really interesting study, and it has a number of important findings.  Here's some from the conclusions:

“Nationwide between school year 2010–11 and 2012–13, the number of students receiving free lunches increased while the number of students purchasing full-price lunches decreased, leading to an overall reduction in participation by 3.7% (Government Accounting Office 2014). The results of our analyses suggest that the underlying preferences for offerings with higher levels of fat and lower levels of carbohydrates may be driving the decline in NSLP participation. Full-price participants are most likely to respond to changes in the nutritional content of the offered entrées by opting out of purchasing a school lunch altogether. Our findings have particularly important implications for the NSLP’s stated goal of reducing childhood obesity as they indicate that children are likely to reject those entrées that are most compatible with this particular aim. However, our results do suggest that the future guidelines reducing sodium levels may not trigger additional participation declines.”

Why do people waste food?

The author and celebrity chef Dan Barber had an op-ed yesterday in the New York Times that touched on food waste.  Oddly, he seems to associate waste with large-scale specialized agricultural grain operations.  In fact, these are the crops that are most easily stored and transported, and it is these larger farms that have easier access to storage facilities and technologies to prevent waste.  

In any event, I'd say Barber's editorial is fairly representative of the larger literature on food waste.  That is to say, food waste is seen as something akin to a "sin" or to a "mistake" that we must stop at any cost.  Take for example, this quote from a National Geographic article:

“Ethically, food waste is bad. ”

I suspect most economists have a hard time with this sort of reasoning.  The decision to discard food is a decision like any other economic decision.  Deciding to discarding food is "bad" only to the extent that there is some sort of market failure.  To be sure, there may be some un-priced externalities associated with waste, but these aren't often well articulated by advocates of food waste reduction.  Even still, it isn't the decision to discard that is "bad", what is "bad" is the lack of a market to price the externality.

A useful starting point is to go back to first principles and understand the economic factors that "reasonably" or "rationally" lead people to discard food in the first place.  That is precisely what Brenna Ellison and I have tried to do in a new short paper that was just published in the journal Applied Economics Letters.

The paper constructs a mathematical model of consumer behavior based on the notion that people take prices and wage rates as given and then choose how much time to spend working, how much time to spend in food preparation, and how many raw food ingredients to buy so as to maximize their well-being (which is defined by the meals they eat and the amount of time in leisure).  In this so-called household production model, consumers are also producers: they combine their time with raw food inputs to produce meals, which are the ultimate source of value for the consumer.

It is actually hard to conceptualize "waste" in a model like this (or any economic models of optimization).  I've heard heated debates between some of my fellow agricultural economists over this matter, and there is a camp that would argue (quite persuasively I might add) that there is no such thing as waste.  In that view "waste" really would represent a mistake or an arbitrage opportunity.  If someone valued my trash more than I did, they ought to be willing to pay to take it from me; if no one does, then (as I actually do) I pay someone else to remove it, who finds no other economical use for it other than to bury it and let nature take its course.  In this more strident view, we might "discard" items, but a well functioning economy doesn't "waste" items.  

All that is to say, in a mathematical model like ours, one has to have some way of defining waste.  We define it as the the inverse of the amount of meals produced per unit of raw food input.  A cynic might say: you've just redefined the marginal productivity as raw food inputs as waste.  Guilty as charged.  If you have a better solution, I'm happy to hear it.  

In any event, this set-up allows us to view waste as a function of economic variables.  We show that:     

“Differences in market prices for raw food ingredients, p, or differences across food
consumers in the opportunity cost of their time, w, might thus explain differences in food waste. It is also possible that education, background, or cooking ability can lead to different marginal productivities of time used in meal preparation. ”

The nice thing about this approach is that one can also assume that people combine their time and food inputs to produce other things (in addition to meals) like human capital or health.  If so, it is also possible to show that if consumption of a meal lowers health (e.g. by consuming a spoiled or raw ingredient), a larger amount of waste might be optimal.

If one is willing to accept some assumptions about the mathematical relationships involved, the model produces some testable hypotheses.  Namely:

• individuals with higher wages will have more food waste,
• individuals with higher non-wage income will have less food waste,
• individuals with greater talents/ability/education at turning raw food inputs
  and time into meals will waste less,
• the amount of waste will depend on the extent to which people prefer leisure to meals.

Importantly, in this framework waste is not a "mistake" nor is it "unethical" - it is the best thing for the consumer to do given their income, prices, and preferences.  For waste to be a "bad", my decision to discard food would have to affect other people not involved in my decision.  One could imagine situations like this and this sort of frameworks provides a starting point for thinking about costs and benefits of policies and initiatives aimed at reducing waste.

I'll conclude by noting that even the Onion knows there are "rational" reasons to discard food that aren't "bad" or "unethical".  Here are few of their humorous suggestions to cut down on food waste.

“Avoid impulse buying by only going to the grocery store for one ingredient at a time.

Hire an impoverished family to sit at your dinner table and guilt you into eating every last morsel.

Make sure to eat the oldest items in your fridge first, as listeria will deter you from additional grocery purchases for the next seven to 10 days.

Instead of buying a whole tub of strawberries and an entirely new can of whipped cream, use the remaining half can of tomato paste, last serving of chicken piccata, or whatever other leftovers you have in the fridge to spice up your love life.

Try not to prepare more food than you can eat, unless you are entertaining the Lady Carroway for supper and must impress her with your bounty.

Make use of expired food by reaching out to any neighborhood kids who can be dared to eat it for a few bucks.”

Pew Survey on Consumers, GMOs, and Trust in Science

About a week ago, the PewResearchCenter released a new report (report summary here) on GMOs, organic, and trust in food science.  The report has already been covered quite a bit in the media, but I thought I'd share a few observations on the study's headline results.  

First, the study finds:

“Four-in-ten Americans (40%) say that most (6%) or some (34%) of the foods they eat are organic. ”

It's hard to know what to make of this claim as "some" is a pretty loose category.  One important point to keep in mind here is that USDA data reveal that, except for a few exceptions like lettuce or carrots, for most foods the percent of production that is is organic is typically far less than 5%. 

The study also finds:

“The minority of U.S. adults who care deeply about the issue of GM foods (16%) . . . are also much more likely to consider organic produce healthier”

The finding is consistent with prior research showing that WTP for organic is heavily influenced by the desire to avoid pesticides and GMOs.  In fact, there was a lot of attention given to the organic industry's support of the new mandatory labeling law for GMOs, which allowed disclosure via relatively innocuous QR codes.  The organic industry has worked to make sure people know non-GMO is not synonymous organic.  In other words, these two attributes (organic and non-GMO) are likely demand substitutes for consumers, and the organic industry knows this.  

One of the highlighted conclusions from the study is:

“The divides over food do not fall along familiar political fault lines. ”

I'm not so sure.  While I agree things like concern for GMOs or preferences for organic don't have strong correlations with political ideology, the same can't be said for people's desires to regulate GMOs (say via labels or bans) or subsidize organics .  See, for example, this paper entitled "The political ideology of food" I published in Food Policy in 2012. From the abstract:

“Food ideology was related to conventional measures of political ideology with, for example, more liberal respondents desiring more government involvement in food than more conservative respondents . . .”

As I've written about in the past, I think it is important to separate "food preferences" from "policy preference", and on this last issue, there are big partisan and ideological divides.   

Much of the news coverage I saw about the report focused on the results related to American's trust in scientists and GMOs.  The study reports

“Americans have limited trust in scientists connected with genetically modified foods.”

 The study also reveals only about half the respondents think scientists think GMOs are safe to eat.  Well, Pew's other research shows us that it is more like 88%.  Thus, people under-estimate scientists beliefs about the safety of GMOs.  One might think then, that the answer is to just tell people about the scientific consensus regarding GMOs.  However, my research with Brandon McFadden suggests this probably won't have much affect.  In our study, the biggest determinant of how an individual responded to information about the science on GMOs was their prior belief about the safety of GMOs.  In fact, about a third of the people who thought GMOs were unsafe prior to information said they thought GMOs were even more unsafe after receiving statements from the National Academies of Science, the American Medical Association, etc. indicating GMOs were safe (we called these folk "divergent"); the plurality of people who thought GMOs were unsafe just ignored the scientific information indicating GMOs were safe.  This behavior is a form of motivated reasoning that Dan Kahan has discussed extensively in his work on cultural cognition.  We look for the information that supports our prior beliefs and ignore or discount the rest.  

On this issue of trust in scientists and GMO foods: it is important to note that trust in virtually ALL institutions is down over time.  Gallup has been tracking trust in about a dozen institutions since the 1970s.  Aside from a few exceptions (like the military and police), trust is way down for most institutions.  For example over 65% of people had a great deal or a lot of trust in "church or organized religion" in the 1970s, whereas today the figure is 41%.  For "public schools", confidence was running about 60% in the mid 1970s, but today is only 30%.  Newspapers went from around 40% to now around 20%.  "Big business" from around 30% to now around 18%.   "The medical system" from 80% to 39%.  Similar trends exist for congress, the presidency, organized labor, banks, and so on.   

As a result, it is important to ask how much trust is there in scientists . . . compared to what?  I haven't asked this question specifically in regard to GMOs in particular or food science in general, but a while back I asked on my monthly Food Demand Survey (FooDS):  “How trustworthy is information about meat and livestock from the following sources?” Fifteen sources were listed (the order randomly varied across respondents), and respondents had to place five sources in the most trustworthy category and five sources in the least trustworthy category. A scale of importance was created by calculating the proportion of times a meat and livestock information source as ranked most trustworthy minus the proportion of times it was ranked least trustworthy.

We found:

“The USDA and FDA were reported as most trustworthy with 50% more people indicating the source as most trustworthy than least. A University professor from Harvard were seen as slightly more trustworthy than one from Texas A&M, but both were viewed as less trustworthy than interest groups like the Farm Bureau, the CSPI, or the HSUS.

News organizations, and particularly food companies, were viewed as least trustworthy. Chipotle was the seen as the least trust worthy organization studied – the restaurant chain was placed in the least trustworthy category 69% more often than in the most trustworthy category.”

While individuals scientists at either Harvard or Texas A&M were less trusted than some others perhaps it was because it was phrased a single professor rather than a group of professors.  Indeed, the four top groups are all collections of scientists (among other people).  A subsequent survey asked how much people knew about each of these individuals and institutions, and while CSPI is trusted, it isn't well known.  I suspect people were responding to the word "science".  So, I think there is good reason to suspect people trust scientists as much or more than other societal institutions.

The issue of trust and acceptance of GMOs has been researched quite heavily in the academic literature (e.g., see several studies by Lynn Frewer).  In this paper,  she and coauthors show that people's response to information on GMOs doesn't depend on how much they trust the source per se, but rather it's the other way round: people trust the sources giving them the information that fits with their prior beliefs.  So, again we're back to motivated reasoning.  Still, we should acknowledge some research that shows "information matters."  I've done work on this topic, as has Matt Rousu, Wally Huffman and Jason Shogren.  This last set of researchers show, for example, that relatively uninformed people are influenced by information by interested and third party sources.

There is a lot more in the Pew report, but I think I'll leave it here for now.