Study: What if you knew how much your boss makes?

A hand holds up a bundle of dollars while many other hands do the same in the background
Credit: RapidEye for iStock/Getty Images

More states are requiring employers to disclose information about their workers’ salaries with the hope it will reduce gender and racial pay gaps. But increasing pay transparency can also have some surprising impacts on worker productivity, according to a new large-scale study that is the first to examine how employees respond when they find out how much both their peers and bosses make.

The study, co-authored by Assoc. Prof. Ricardo Perez-Truglia, asked over 2,000 employees at a large commercial bank in Southeast Asia to guess their peers’ and managers’ salaries, then monitored their work habits after they were given the salary information. The main findings: Employees became less productive when they discovered their peers were making more money than they thought, but they worked harder when they discovered their bosses were earning more than they estimated.

“It was not uncommon for employees to find out that some of their bosses got paid three, four, five times as much as they do, sometimes 20 times as much,” said Perez-Truglia, whose study is forthcoming in the Journal of Political Economy. “What shocked us was that when you compared yourself to your peers, small pay differences demotivate you. But when you find out your bosses make an obscene amount more than you make, you don’t care. If anything, you become more productive.”

The productivity boost was strongest for manager positions that were just a few promotions away from an employee’s current job, but the effect faded when it came to high-level, unattainable positions. This suggests workers believe, “If I work hard and get promoted, I will get paid an obscene amount myself,” Perez-Truglia said.

He and co-author Zoë Cullen of Harvard Business School also found that employees were better at guessing peer pay than manager pay. Employees also wanted the company to release more salary information—as long as it wasn’t their own.

The researchers did not study pay disparities by race or gender, but said their evidence relates to the growing debate on pay transparency laws. “There is a widespread view that forcing firms to be more transparent would reduce pay inequality,” they wrote. “Our findings suggest that these policies may be effective, but in a narrow sense: While transparency may pressure firms to reduce horizontal inequality (between peers), employees are unlikely to exert the same pressure to reduce vertical inequality (between employees and managers), which constitutes the bulk of pay inequality.”

The experiment

The research was conducted at an unidentified Southeast Asian bank in 2017, when Cullen was working there as chief economist. The researchers asked employees to guess the average base salaries of their managers and peers. Then, they conducted an experiment: half of the subjects, selected at random, would get to see an estimate of how much their peers or managers actually get paid.

The researchers then measured the behavior of these employees for 90 days after they saw, or did not see, what others were making. They found that employees worked harder–spending more hours at work, sending more emails from their company account and making more sales—when they found out their managers earned more than they thought. But those who found out their peers made more than they had estimated slacked off.

For example, they estimated that a 10% increase in manager salary over what employees had guessed increased the average hours employees worked by 1.5%, while a 10% increase in peer salary over what employees had guessed reduced the hours they worked by 9.4%.

The end of the survey included questions related to employee morale, such as job and pay satisfaction, and attitudes toward pay inequality. “When we tell them their peers get paid more, they say inequality is an issue. But when we tell them their bosses get paid more, they say they don’t care,” Perez-Truglia said.

On average, employees underestimated their bosses’ salaries by about 14%, but when it came to their peers’ pay, about half guessed too high and half guessed too low.

Would companies benefit?

Finding out how much peers earn “would positively affect some people and negatively affect some people,” with the net result for the company being about zero. “They cancel each other out,” Perez-Truglia said. Disclosing manager pay, however, would have a small positive impact on productivity.

On balance, the researchers concluded that companies and their employees could benefit from greater pay transparency.

Their results are consistent with previous research that found employees become demotivated when they find out their peers make more than they do. A 2012 study of University of California employees by UC Berkeley economists David Card, Emmanuel Saez, and Enrico Moretti along with Alexandre Mas of Princeton University showed that employees who found out they were earning less than the median for their unit were less satisfied with their job and more likely to look for a new one, while above-median earners were unaffected.

This new study is the first to look at the impact on employees who discover their boss’ pay, Perez-Truglia said.

He and Cullen also found that employees were hungry for salary information, and many were willing to “pay” for it. In the experiment, some employees gave up a chance to win almost $200 to see their boss’ or peers’ salaries. Employees may feel they need pay information “to decide whether to work harder to get promoted, or to use it as a bargaining chip in future salary negotiations,” they wrote.

Separately, in response to two survey questions, 65% of the employees said they would like their company to disclose to all employees the same type of average pay data provided in the experiment. However, 75% opposed disclosing everyone’s exact salary. “One plausible interpretation,” the authors wrote, “is that while employees value the salary information a lot, they may value their privacy even more.”

 

Professor John Morgan

Game theory expert
Side view, close-up shot of Professor John Morgan teaching a class, with a Sharpie in his hand.

Professor John Morgan, an economist who found elegant ways to analyze the world through the lens of game theory and whose popular classes and sage mentorship made a deep impression on students, died Oct. 6 at age 53.

During his nearly two decades at Berkeley Haas, Morgan left his mark through his unconventional teaching that drew on strategy games he invented; his wide-ranging research on pricing and competition, auctions, expertise, and voting; and his generous leadership. He had been struggling with an autoimmune disease, but he continued with his research and had planned to resume teaching in the spring.

“It didn’t take long for anyone who met him to realize that his small physical stature was a disguise for the giant of a person he was,” said Prof. Steve Tadelis. “We have great researchers, we have great teachers, and we have people who give freely of themselves. But I cannot think of a single person who embodies all three of these at the extreme levels that John did.”

Morgan was the Oliver E. and Dolores W. Williamson Chair of the Economics of Organizations, co-director of the Fisher Information Technology Center, founding director of the Xlab, faculty director for Berkeley Executive Education, and a member of the California Management Review editorial board. He was the inaugural winner of the Williamson Award, Haas’ highest faculty honor, and won the Cheit Award for Excellence in Teaching in 2006.

He was devoted to his students, a number of whom became good friends and repeated co-authors after they graduated.

“He would generously give his time to PhD students. He put in the hard work to make them better—and they did quite well on the job market,” said Bo Cowgill, PhD 15, now an assistant professor at Columbia University. “Yet he also cared about things outside of academic success and climbing the career ladder. … He was like a father figure or a mentor for questions about life.” Adds Cowgill, “On top of that he was hilarious—he could bring down the house with his mixture of humor and insights on game theory and economics.”

Morgan’s game theory class was one of the most popular at Haas. Students competed in his signature strategy games, which he incorporated into a semester-long game based on the reality TV show Survivor. He said he wanted to teach students to be “outward thinkers,” by which he meant they would need to be able to relate to others to succeed in business.

“You don’t really learn how to empathize by having some professor tell you about the need to empathize. … You actually have to do it,” Morgan said.

Plans for a memorial are still being discussed. Donations in Morgan’s memory may be made to the American Autoimmune Related Diseases Association (AARDA) or The Humane Society of the United States.

Read his full obituary.

‘A giant of a person’: Economist John Morgan dies at 53

Professor John Morgan, an economist who found elegant new ways to analyze the world through the lens of game theory, and whose popular classes and sage mentorship made a deep impression on his students, passed away Oct. 6 at age 53. He died peacefully at his Walnut Creek home.

Headshot of Professor John Morgan
Professor John Morgan

During his nearly two decades at Berkeley Haas, Morgan left his mark through his prolific and wide-ranging research, his unconventional teaching that drew on strategy games he invented, and his generous leadership. He had been struggling with a painful autoimmune disease that put him on medical leave, but he continued with his research and had planned to resume teaching in the spring.

“It’s impossible to over-express what a force John was in this school, and it didn’t take long for anyone who met him to realize that his small physical stature was a disguise for the giant of a person he was,” said Prof. Steve Tadelis, a close colleague in the Economic Analysis & Policy Group. “We have great researchers, we have great teachers, and we have people who give freely of themselves. But I cannot think of a single person who embodies all three of these at the extreme levels that John did.”

It’s impossible to over-express what a force John was in this school… —Prof. Steve Tadelis

 

Morgan was the Oliver E. and Dolores W. Williamson Chair of the Economics of Organizations; co-director of the Fisher Information Technology Center; founding director of the Experimental Social Sciences Laboratory (XLab); a member of the California Management Review editorial board; and faculty director and tireless advocate for Berkeley Executive Education. In 2013, he was the inaugural winner of the Williamson Award, given to faculty who embody the school’s four Defining Leadership Principles. He also won the Cheit Award for Excellence in Teaching in 2006.

Professor John Morgan writing on a whiteboard.
Morgan teaching at the whiteboard in 2011. (Photo: Jim Block)

Pennsylvania native

Born on November 11, 1967, in Wilkes-Barre, Pa., Morgan was raised in Ashley, Pa. He met his future wife, Heather Evans, when they were teenagers working at the Osterhout Free Library in Wilkes-Barre. They went to different high schools but both attended the University of Pennsylvania, where Morgan graduated summa cum laude in economics from the Wharton School in 1989. The couple was married in 1991, and celebrated their 30th anniversary in August.

Morgan earned a PhD in economics from Pennsylvania State University in 1996 and landed an assistant professorship in economics and public affairs at Princeton University. Following stints as a visiting professor at Penn and New York University, and a visiting fellow at Nuffield College, University of Oxford, he joined Berkeley Haas in 2002. During his career at Berkeley, he also spent time as a visiting fellow, Trinity College, and an eternal fellow, Judge Business School, both at the University of Cambridge, U.K.

His doctoral thesis was an early example of his elegant reasoning, colleagues said. “Financing Public Goods by Means of Lottery” showed why, despite their reputation as regressive, lotteries are a very effective method of raising funds for public benefit: Unlike taxes, they are voluntary, and those who are paying have the chance to get some of the benefit distributed back to them.

Academic derring-do

Among the areas Morgan delved into were pricing and competition in online markets, auctions, expertise, reputations, and voting. He looked at why prices can vary so widely on the internet when it’s so easy to shop around; showed that people aren’t very good at accounting for hidden fees like shipping costs; and even had a paper on the economics of psych-outs, or why showing off can make competitive sense, despite being frowned upon.

No matter the topic, Morgan had an exceptional ability to dispassionately analyze problems, colleagues said. And while his brilliance with economic models stood out, he also loved experimental work, co-founding the Haas Xlab to allow researchers to see if their theories held up in practice.

“I wished we could bottle John, and give every economist a dose of his clear thinking,” said Prof. David Levine, chair of the Economic Analysis & Policy Group, who had been working with Morgan to return to the classroom in the spring. “He thought about ethics. He took the perspectives of other people. He was smarter than me—in fact, he was smarter than just about everyone.”

According to Tadelis, Morgan’s “rate of publication was second to none” before his illness took a toll. Levine was among several colleagues who commented on Morgan’s academic derring-do, which stood out even at an elite institution. “Sometimes his brilliance was intimidating—for example, the time he had two different articles in the same issue of the preeminent economics journal, the American Economic Review,” Levine said.

Prof. Ernesto Dal Bó, a political economist, often discussed voting theories with Morgan. “I enjoyed a front-row seat as he wrote really clever models investigating the informational and welfare properties of important voting institutions,” Dal Bó said. “John’s mathematical models of voting often delivered surprise, and always delivered significant truth and beauty. He was a uniquely gifted researcher who made those around him think much harder, while cheering us up with his wit.”

Mentor and father figure

Those qualities also made an impression on the doctoral students who sought him out for his attentive mentorship and unique approach to life and work.

“Conversing with him was like being on an adventure. He would throw himself at intellectual challenges and follow them wherever they went, and he was willing to challenge convention and be controversial on certain topics.” said Bo Cowgill, PhD 15, now an assistant professor at Columbia University. “On top of that he was hilarious—he could bring down the house with his mixture of humor and insights and game theory and economics.”

He was devoted to his students, a number of whom became good friends and repeated co-authors after they graduated.

“He would generously give his time to PhD students. He put in the hard work to make them better—and they did quite well on the job market,” Cowgill said. “Yet he also cared about things outside of academic success and climbing the career ladder. He would encourage students to take time for their mental health and their lives outside of their careers. He was like a father figure, or a mentor for questions about life.”

Morgan sometimes offered his own money as prizes for students who won his strategy games.

“Survivor” at Haas

Morgan taught strategy, leadership, microeconomics and policy, and his long-running game theory class was one of the most popular at Haas. He blasted rock music to welcome students to class and energize them for competition in his signature strategy games, which he eventually incorporated into a semester-long game based on the reality TV show Survivor. He said his goal was to teach students to be “outward thinkers,” by which he meant they would need to be able to relate to others to succeed in business.

“You don’t really learn how to empathize by having some professor tell you about the need to empathize. It’s like reading a self-help book. It doesn’t work. You actually have to do it,” he said.

He received awards from the National Science Foundation, and was selected as a visiting scholar at the Hoover Institution and the International Monetary Fund. He consulted on auctions and dynamic pricing for Google, was a research scientist at Yahoo!, and served as a consultant to the Federal Trade Commission.

“We will dearly miss John’s sharp wit, brilliant intellect, and personal warmth,” said Dean Ann Harrison. “He was greatly beloved by colleagues and students alike.”

Devoted family man

John Morgan wearing a Red Sox shirt
Morgan was a passionate fan of the Boston Red Sox.

Yet Morgan had another side, as a grounded and devoted husband to Heather, an enthusiastic father to his son. He also pursued many non-academic interests. “John was a brilliant, loving, quirky, wonderful man who never had just hobbies; they always became obsessions,” said Heather Morgan. He had a deep and wide-ranging knowledge of history, which he loved to share. He also loved golf, travel, and hiking, as well as fountain pen collecting, photography, drawing, watercolor, and painting miniatures for strategy board games and Dungeons & Dragons. (For many years, he ran a weekly D&D game for his son and friends.) He was also an enormous fan of the Boston Red Sox, and he shared a love of the Oakland A’s and fantasy sports with his son.

In addition to his wife and son, Aidan, Morgan is survived by his mother, Diana Williams Morgan, of Wilkes-Barre, Pa.; father, Roy J. Morgan, Zephyrhills, Fl.; brother, David W. Morgan (Julie), Longwood, Fl.; aunt, Maxine Williams, Ashley, Pa.; nieces and nephews, and brothers and sisters-in-law. Plans for a memorial are still being discussed. Donations in John’s memory may be made to the American Autoimmune Related Diseases Association (AARDA) or The Humane Society of the United States.

 

 

 

 

Small businesses follow big chains’ lead on pandemic closures, research finds

Closed due to coronavirus
Photo: Gwengoat for Getty Images

From the earliest days of the coronavirus pandemic, local shops, restaurants, and other small business have struggled with how best to respond to the ever-changing crisis.

A new Berkeley Haas study found that when it came to closures, the big chains set the tone: In the first few weeks of the pandemic, local businesses not affiliated with a chain were more likely to close their doors if competing chain outlets in the same ZIP code shut theirs.

The study, based on cell-phone location data and published in the journal Management Science, sheds light on how businesses influence each other through “social learning.”

And while the focus was on business closures, “the key lessons are applicable to some of the questions businesses are grappling with now,” such as whether to impose mask or vaccine mandates or let employees work from home, said co-author Mathijs de Vaan, an assistant professor of management at Berkeley Haas.

The researchers, who included Berkeley Haas professors Sameer Srivastava and Abhishek Nagaraj along with PhD student Saqib Mumtaz, used anonymized cell-phone tracking data to determine whether local and chain establishments were open or closed each day between March 1, 2020— just before local governments began issuing stay-at-home orders—and April 15, 2020.

“Many of these directives were ambiguous or not enforced, leaving business owners with latitude to interpret the guidance as they see fit,” the authors noted.

Business owners had to make unprecedented closure decisions not knowing how their customers and employees would react. The situation was so uncertain that going into the experiment, the team couldn’t predict whether the closure of a chain store would cause an independent business nearby to do the same or remain open for competitive reasons.

“If I’m a small business owner, it’s not so straightforward what I should do,” de Vaan said. “If the big guy stays closed, maybe I can make more money. Conversely, maybe the big guy is better equipped to know” the right response.

The researchers analyzed daily visits to 230,403 local businesses that were in the same industries and ZIP codes as chain outlets affiliated with 319 large national brands. They focused on service-oriented outfits such as retail shops, restaurants, movie theaters, and gyms, and excluded industries deemed essential, such as grocery stores and gas stations.

The team tried to control for other local variables that could cause establishments to close, such as shelter-in-place orders, local infection rates, or demographics. “Interestingly, we found the decisions of these branded chains were uncorrelated with the local Covid conditions,” de Vaan said.

In a typical example, the researchers looked at fitness centers in two neighboring ZIP codes in Collin County, Texas, on March 25, 2020. One ZIP code had an Orangetheory chain gym that was closed, while the other had an Anytime Fitness chain location that was open. They found that all six local gyms in the same ZIP code as the closed Orangetheory were closed, while three out of five local establishments in the same ZIP code as the Anytime Fitness were also open.

Looking at all industries and locations nationwide, they estimated that if a chain store closed one day, a competing community business in the same ZIP code was, on average, 3.5% more likely to close the next day. That may not sound like a lot, but that’s just the daily level. “If you accumulate 3.5% across days and establishments and places, it adds up to be a fairly consequential effect in a town that may have hundreds of businesses,” Srivastava said.

The researchers concluded that, “if you don’t have clear-cut information, you are going to look at people around you,” de Vaan said.

Given that local governments are unlikely to mandate vaccines, “it creates an arena for social influence to pop up,” de Vaan said. If a large company required vaccinations, small competitors have to decide whether following suit would cause them to gain or lose customers and employees. Based on their findings, de Vaan predicts that small businesses would be more inclined to follow suit, but cautions that they didn’t study that question.

“Perhaps most importantly,” the authors concluded, “this paper shows that when government directives and health guidelines are ambiguous, firms will look for other information to guide their decision making. Obviously, such ambiguity may have been intentional if local governments believe that firms are well positioned to make these important decisions. But if one assumes that this is not the case, policy makers and local governments should consider the consequences of a lack of clarity and precision in their directives.”

 

Study: Ride-sharing apps cut alcohol-related traffic deaths by 6%

 

Ambulance accident scene
Photo: LSOphoto for iStock/Getty Images

A new analysis finds that the ride-sharing platform Uber has reduced overall U.S. traffic fatalities by about 4% overall, and cut alcohol-related traffic deaths by over 6%. That represented about 494 fewer deaths in 2019 alone—about 214 fewer of them from drunk-driving, according to the study.

The National Bureau of Economics Research working paper, Uber and Alcohol-Related Traffic Fatalities, is co-authored by Berkeley Haas Prof. Lucas Davis and Michael Anderson, UC Berkeley professor of Agricultural and Resource Economics.

Davis and Anderson revisited past studies on the impacts of ride-sharing that were based on traffic accident trends when Uber and other ride-sharing companies first began operating in various cities. Those studies had inconsistent, often contradictory results, and the researchers suspected that the publicly available data was not detailed enough to show the true impacts of ride-sharing.

Their new study is based on proprietary data the researchers obtained from Uber on monthly rides from 2012 to 2017 for all 70,000 U.S. census tracts, combined with National Highway Traffic Safety Administration (NHTSA) data on all fatal U.S. traffic accidents from 2001 to 2016.

The data allowed for a more granular analysis: Since Uber is far more popular in some areas than others, they found that prior publicly available data explained less than 3% of the census-track variation in ride-sharing. After crunching the new data, the researchers estimated that by 2019, Uber rides cut traffic fatalities by about 6.1% overall, and cut alcohol-related driving deaths by about 4%. Davis and Anderson found that the effects were even larger during nights and weekends—as expected.

Last year in the United States, there were 42,000 traffic fatalities, with total economic damages approaching half a trillion dollars, Davis said. Based on estimates of the value of statistical life, the annual life-saving benefits from ride-services range from $2.3 to $5.4 billion. Lyft was just getting started during the study period, but the impact would presumably be even larger if data from Lyft were included in the analysis, he said.

”I’m excited about the potential for ride-sharing, automated vehicles, and other new technologies to reduce this staggering loss of life,” Davis said.

The research was highlighted in a Wall Street Journal op-ed on Friday.

 

 

Two Haas profs elected to the American Academy of Arts and Sciences

Berkeley Haas professors Annette Vissing-Jørgensen and Stefano DellaVigna are among the six UC Berkeley faculty members elected to the American Academy of Arts and Sciences (AAAS) for 2021.

The organization, which was founded in 1780 to honor top scholars and leaders from every field who address issues of “importance to the nation and the world,” announced 252 new members today.

Prof. Annette Vissing-Jørgensen
Annette Vissing-Jørgensen

“We are honoring the excellence of these individuals, celebrating what they have achieved so far, and imagining what they will continue to accomplish,” said David Oxtoby, president of the American Academy, in the announcement. “The past year has been replete with evidence of how things can get worse; this is an opportunity to illuminate the importance of art, ideas, knowledge, and leadership that can make a better world.”

Annette Vissing-Jørgensen holds the Arno A. Rayner Chair in Finance and Management and serves as chair of the Finance Group. Her research focuses on empirical asset pricing, monetary policy, household finance and entrepreneurship, and  spans both asset pricing and corporate finance.

Stefano DellaVigna
Stefano DellaVigna

Stefano DellaVigna is a professor of business administration at Berkeley Haas and is the Daniel Koshland Sr. Distinguished Professor of Economics in the Department of Economics.  He is co-director of the Berkeley Initiative for Behavioral Economics and Finance, and his research interests include behavioral finance and economics, psyschology and economics, and applied microeconomics.

 

See the full list of Berkeley faculty elected to the AAAS.

The economic impact of racial violence: Lisa Cook

The impacts of racism and discrimination have long been measured in terms of the harm done to the affected group—lower wages, lower educational attainment, or poorer health, for example.

Dr. Lisa Cook
Dr. Lisa Cook

Those measures alone are too narrow for Professor Lisa Cook, who argues that that racial, ethnic, and gender discrimination damages the economy as a whole, and not just those who face discrimination. And she’s found a way to prove it.

Cook, a professor of economics and international relations at Michigan State University and a graduate of the Berkeley Economics PhD program, shared her research as part of the “New Thinking at Berkeley Haas” speaker series. Her lecture, “The Cost of Racism,” was hosted by Laura Tyson, distinguished professor of the graduate school and former dean.

In path-breaking research, Cook linked the surge in segregation laws, lynchings, and other racial violence in the U.S. from 1870 to 1940 to a significant decline in patenting and innovation among African Americans. The economic impact of that decline was equivalent to the GDP of a medium-sized European country at the time, and the impact is still felt today, she calculated. 

“Violence diminishes innovation and economic activity, with persistent effects,” says Cook. “The year 1899 is still the peak year for patenting-per-capita for African-Americans—and that’s even using 2010 patent data.”

Cook, PhD 97, recently served as a member of President Biden’s transition team. Like Tyson, she also served on the President’s Council of Economic Advisers. Cook was a senior economist under the Obama Administration, working on innovation and the Eurozone crisis, while Tyson chaired the council under the Clinton Administration. Cook’s wide-ranging research covers economic growth and development in emerging economies, international trade, financial institutions and markets, and economic history. She is also an advocate for increasing diversity in the field of economics, serving as director of the American Economics Association Summer Training Program.

Cook has examined the implications of racial and gender disparities in income and wealth inequality at all stages of the innovation process, and developed new ways to study the long-term economic impact of race-related violence, which Tyson noted is an issue we’re very much still grappling with today. 

“This is very important, very original research showing that there are costs for our entire society, and our entire economy because of these barriers,” Tyson said. “They have personal effects on the individual, on the family, on the community, but they also have macro, aggregate, big effects.”

In order to conduct her analysis, Cook had to first compile data on race and patents, which did not previously exist. She has also helped develop a national database of lynchings that can be used in empirical research going forward. 

At the end of her talk, Cook laid out a long list of policy prescriptions to eliminate barriers for talented people to fully participate in the economy. She also said it’s a time for “big ideas and blue sky thinking” to combat persistent, systemic racism, sexism, and discrimination.

Watch the full lecture.

In honorary lecture, Dean Harrison argues for policies that increase competition

Why have some developing economies grown so much faster than others? Do economies grow faster when left alone, or can interventions such as subsidies spur more growth? Which kinds of interventions accelerate economic development—and which policies hinder it?

Dean Ann Harrison

Those were the questions motivating a talk by award-winning economist and Berkeley Haas Dean Ann Harrison, who delivered the 2021 Paul Streeten Distinguished Lecture on Global Development Policy at Boston University last week. This annual lecture celebrates the legacy of Boston University Economics Professor Paul Streeten, and was last given by Nobel Laureate Joseph E. Stiglitz.

In a talk punctuated by historical and present-day examples and grounded in empirical research, Harrison made the case that policies which promote competition are the most effective, and those that limit competition—such as tariffs—end up reducing a country’s productivity. Dean Harrison concluded by speaking about how industrial policy can be employed to fight climate change, which she described as “the biggest market failure in human history.”

Watch the lecture and read a summary of the talk by by James Sundquist, a Global China Initiative Fellow at BU’s Global Development Policy Center, below.

Don’t Be Afraid to Compete: The Role of Industrial Policy in Global Development

Economist Catherine Wolfram joins US treasury to focus on energy & climate policy

Berkeley Haas Professor and Associate Dean Catherine Wolfram has been named to President Biden’s treasury department as deputy assistant secretary for climate and energy economics—a position that reflects the administration’s increased focus on fighting climate change.

Portrait of Professor Catherine Wolfram
Prof. Catherine Wolfram (Photo: Jim Block for Berkeley Haas)

She joins Treasury Secretary Janet Yellen, a professor emerita, and Assoc. Prof. Adair Morse, appointed deputy assistant secretary of capital access last month, as the third Berkeley Haas woman in the U.S. Department of the Treasury.  

“It’s fantastic that the Biden Administration is paying so much attention to climate change, and I’m excited to be part of the efforts,” said Wolfram, a world-renowned expert who has published extensively on climate and energy economics and led randomized controlled trials to evaluate energy programs in the U.S., Ghana, and Kenya. “It’s one thing to sit in your office and write about what policy makers should and shouldn’t do, but I’m really curious to see how these decisions get made in practice.” 

Wolfram started her role in the treasury’s Office of Economic Policy this week. She is on leave from UC Berkeley, where she was serving as associate dean for academic affairs and chair of the Berkeley Haas faculty, and as a member of the school’s Economic Analysis & Policy Group as the Cora Jane Flood Professor of Business Administration. She was also on the faculty of the Energy Institute at Haas, where she was a regular contributor to the popular blog. In addition, she was an affiliated faculty member in UC Berkeley’s Agriculture and Resource Economics Department and the Energy and Resources Group. 

Outside of Berkeley, she served for five years as program director of the National Bureau of Economic Research’s Environment and Energy Economics Program.

“Catherine has played a pivotal leadership role at Haas over the past several years, overseeing our stepped-up faculty recruiting, helping to create a new entrepreneurship and innovation group and a new certificate program in sustainability, and of course, supporting the faculty through the challenging transition to online instruction during the pandemic,” said Dean Ann Harrison. “Her leadership experience combined with her passion for climate policies grounded in rigorous research will make her a great asset to the treasury department.”

Wolfram has analyzed energy efficiency programs and the effects of environmental regulation on energy markets, and has developed statistical measures for improving business and policy decisions. In the developing world, she has analyzed rural electrification programs—finding they are not a silver bullet for eradicating poverty.  

“Catherine brings a rare combination of expertise on energy and climate issues in developed and emerging markets,” said Prof. Severin Borenstein, faculty director of the Energy Institute at Haas. “With experience in both areas, she sees the connections between making progress on carbon emissions domestically and helping grow developing economies on a sustainable pathway.”

Wolfram earned a PhD in economics from MIT in 1996 and a bachelor’s in economics from Harvard University in 1989. Before joining the Haas faculty in 2000, she was an assistant professor of economics at Harvard.

Wolfram and Morse are carrying on a strong tradition of Berkeley Haas women economists in public service. Yellen, the first woman to lead the Federal Reserve, is now the first woman to serve as treasury secretary. She’s also the first person to have served in the nation’s three top economic roles, since she also chaired the President’s Council of Economic Advisers during the Clinton administration. Another Haas economist, Professor Laura D’Andrea Tyson, was the first woman to chair the Council of Economic Advisors.

 

Report: Californians pay up to triple what it costs to provide electricity

Power lines stretch across the landscape toward Mission Peak in Fremont, CA.
Power lines stretch across the landscape toward Mission Peak in Fremont, CA. (Photo: Zeiss4Me for iStock/Getty Images)

Californians not only pay some of the highest electricity rates in the country, but they pay two-to-three-times more for power than it costs to provide, according to a report released today by researchers at the Energy Institute at Haas and the non-profit think tank Next 10.

These uncommonly high rates result from utilities passing on a myriad of fixed costs to consumers—everything from generation, transmission, and distribution to wildfire mitigation, subsidies for rooftop solar and low-income customers, and energy efficiency programs.

The result is an increasingly inequitable pricing structure that must be reformed as California transitions to clean electricity, the report argues.

“What Californians pay is much higher than the true marginal cost of using electricity,” said Prof. Meredith Fowlie, faculty director for the Energy Institute at Haas, in a press release. She authored the study with Prof. Severin Borenstein of Berkeley Haas and Assoc. Prof. James Sallee of the Department of Agricultural and Resource Economics. “This puts an unnecessary cost burden on low- and middle-income households as we transition to using clean electricity.”

Uncommonly high rates

Data from Designing Electricity Rates for An Equitable Energy Transition reveal that the state’s three largest investor-owned utilities (IOUs) charge residential electricity customers much higher prices than are paid in most of the country. In the least expensive area, Southern California Edison (SCE), residential prices per kilowatt-hour are about 45% higher than the national average. Prices for Pacific Gas & Electric (PG&E) are about 80% higher, and prices in the San Diego Gas & Electric (SDG&E) territory are roughly double the national average.

This is because the the utilities bundle their fixed costs—including subsidies for houses with rooftop solar and increasingly expensive wildfire mitigation—into kilowatt-hour prices paid by consumers. Up to 77% of what consumers pay goes toward these fixed costs, which don’t change if they use more or less power.

Inequities are growing: As wealthier households transition to rooftop solar and buy less power from the grid, these fixed costs are distributed through a smaller volume of kilowatt-hours delivered by the utilities. That raises the costs even more for the remaining, lower-income customers, researchers said.

“Lower- and middle-income households are bearing a far greater cost burden for the state’s power system than seems fair,”  Borenstein said. “We’re proposing solutions that would recover system costs through sales or income taxes, or an income-based fixed charge, which would pay for long-term capital costs while ensuring all those who use the system—and specifically, wealthier households—contribute equitably.”

Lower- and middle-income households are bearing a far greater cost burden for the state’s power system than seems fair. —Severin Borenstein

The report comes as an increasing number of Californians are struggling to pay their utility bills. About eight million residents currently owe money to investor-owned utilities, according to a recent presentation by the California Public Utility Commission. Rates are projected to rise again due to wildfire-related costs.

“There’s no question that we need to power buildings and transportation with California’s abundant clean electricity. The climate and health benefits will be enormous,” said F. Noel Perry, founder of Next 10, an independent, nonpartisan, nonprofit that commissioned the report. “The question is, how can we change the inequitable and unsustainable way we currently pay for electricity?”

Among the report’s findings and recommendations:

  • Prices consumers pay are two-to-three times the cost of providing the electricity. About 66% to 77% of the costs that investor-owned utilities recover from ratepayers are associated with fixed costs of operation that do not change when a customer increases or decreases consumption.
  • Lower- and middle-income households bear a greater burden. These households are increasingly responsible for covering high fixed costs as relatively wealthier households install rooftop solar and total consumption from the grid declines. That leaves lower-income earners to pay an increased share of the fixed costs.
  • A more equitable model would recover fixed costs from sales or income taxes, or an income-based fixed charge.
    • Raising revenue from sales or income taxes would ensure that higher-income households pay a higher share of the costs.
    • Moving utilities to an income-based fixed charge would allow recovery of long-term capital costs, while ensuring all those who use the system contribute to it and also keeping costs affordable. In this model, wealthier households would pay a higher monthly fee in line with their income. The report examines a variety of implementation options for this model.

“We believe policymakers could consider pursuing an income-based fixed charge based on three criteria: Set prices as close to cost as possible; recover the full system cost; and distribute the burden of cost recovery fairly,” said Sallee.

Borenstein will present the report’s findings to the Public Utilities Commission on Wednesday at its special meeting on electricity rates and costs.

Read the full release and report.

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