Let Them Eat OpportunityCards: a new policy tool that may reduce inequality

Governments have unique private information about individual incomes. This suggests a new policy tool: consumers can be offered an “OpportunityCard” certifying their income, and firms can be allowed to price­ discriminate on this basis. This is politically appealing: it should reduce consumption inequality through the use of market mechanisms, rather than through taxes and spending. However, the efficiency consequences are theoretically ambiguous. I propose a pilot field experiment to provide empirical evidence on output, efficiency, and practical issues.


2 thoughts on “Let Them Eat OpportunityCards: a new policy tool that may reduce inequality

  1. Responding to some questions and point from @JayCarldon from Facebook

    ## Administration and legal issues
    > Who would issue the cards? IRS records are confidential. What documentation to obtain card would be necessary? Do docs reflect the past? Could those docs be fraudulent?

    – The government could issue these cards. Clearly there are important legal and privacy issues, but that is why this is something the government would need to be involved in. (Otherwise a private company could do this already). The ‘government’ broadly speaking, defines and enforces the legal requirements.

    – No one’s information would be released or shared without their permission; consumers would have to *request* these cards

    – Fraud may be a concern, but a similar concern faced by all sorts of identification and verification institutions, and “means-tested policies”.

    – There is some precedent for ‘firms verifying income’ via W2’s etc. Usually it has gone the other way — a bank wants to know you have a *high enough* income before making you a loan.

    – The government also helps universities verify parental income for student-aid packages

    – Japan’s “My Number identity system” is already doing some of this tracking, (I believe) allowing firms to charge a lower VAT rate for those on lower incomes; so there is some international precedent.

    ## Expiration and changing incomes
    >Would the OC’s expire since incomes change? If so, how quickly would OC’s expire? If someone loses job, with less income or lack of it how quickly would OC’s be responsive to that?

    – Perhaps you would have to renew the card every year. Businesses must decide whether they find it profitable to set their price on the basis of these cards, and they can decide whether they want to insist on ‘the most recent information.’

    – If I lost my job I would have a incentive to get my card updated quickly

    ## Stigma
    > Food stamps are one thing at a grocery store, but if “poor” would you want to broadcast that everywhere you go?

    – It might not be only the ‘poor’; as we know, the top 1% has vastly greater income than much of the population. It could be that firms find it profitable to offer the highest ‘standard’ price only to the very wealthy, and offer graded discounts to most other people.

    – Thus a large share of the population may find it useful to occasionally show these cards, lessening the stigma.

    – Like ‘loyalty cards’ in supermarkets, this could be done fairly discretely

    ## Labor market incentives
    > Income growth is the reward for applying oneself and acheiving. Though poverty is a social problem, is rewarding lack of achievement what society wants?

    – We already do have progressive income taxation and means-tested benefits, etc. Redistribution is a fact of life at the moment. There is a fairly general consensus that for a society to function well it needs encourage and reward hard work and achievement, but also, for various reasons, provide some social safety-net and try to minimize poverty.

    – The OpportunityCard may be either *additional* to the existing tax and benefit system, or it may substitute for it it, to some extent. However, it could be argued that the OC is not ‘society rewarding lack of achievement’ but just the application of market forces.

    … and that is my “short answer”.

  2. Responding to some good questions from Larry Reinstein (I will incorporate all of this into a revised FAQ)

    1. Is the middle-eastern market with haggling over price for the same item with every customer therefore the most efficient market…each customer paying the max and min simultaneously?

    – ​ ​If the seller in the shook ​or bazaar could figure out the exact willingness-to-pay (wtp) of each consumer, then yes, this should obtain maximum efficiency in general (if we don’t factor in the waste of time and stress from the bargaining process.)
    – … But this is not how this works, imho.
    – The seller judges the willingness based on some ‘statistical discrimination,’ based on the observable characteristics of the buyer (her clothes, accent, etc.) This is basically ‘third-degree price-discrimination’ and it is imperfect.
    – In addition to this the bargaining process forms a ‘mechanism’ for learning more about the buyer’s valuation. The longer the buyer is willing to bargain, the less the value of her time, and perhaps the less her willingness to pay.

    2. Would your system allow vendors to charge HIGHER prices since
    they now have a pool of customers who they know are not poor? Should
    this effect be considered in the math?

    ​- This absolutely will occur and it is considered ‘in the math.’ Not all consumers will benefit, and there are countervailing efficiency issues

    3. Would this proposal dis-incentivize (hate that word) the marginal
    income earners to work harder and longer to earn more…since now they
    can get by better with these discounts? Less incentive for self
    improvement and advancement? An unwanted outcome that needs to be

    ​- Jay Carl​don made this same point. It is a consideration I have thought about a lot.
    – The short answer is “yes, it will occur, just as ‘the distortion of labor-market incentives’ is an unfortunate consequence of progressive taxation.”
    – A longer answer gets into issues of “optimal differential commodity taxation” and “mechanism design”. The OC will have a similar effect as a differentiated ‘commodity tax’ … like a sales tax or VAT on alcohol or bread that is different for different incomes (something Japan may be experimenting with).
    – In fact, the microeconomic theory finds that a differential commodity tax may do better, in considering the equity/efficiency tradeoff, than a simpe progressive income tax. It depends on whether the ‘right’ goods are more heavily taxed for the rich.
    – But we don’t know whether the OC will be a movement towards the ‘optimal differentiated commodity tax’ and have the effect of raising relative prices for the rich on the ‘right’ goods; this will require some testing (although we may be able to make some inferences from existing data)

    4. Let them eat vs Let us eat? I like your new name choice but wonder
    if this variation has more emotional impact.

    ​- Good point, but is ‘let us ​eat cake’ a familiar phrase?

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