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Rafael Di Tella on economic inequality, policy making for the criminal justice system, and fairness in labor markets

April 2018. GrowthPolicy’s Devjani Roy interviewed Rafael Di Tella,

William Ziegler Professor of Business Administration at Harvard Business School, on economic inequality, policy making for the criminal justice system, and fairness in labor markets. | Click here for more interviews like this one.

Links: Rafael Di Tella’s faculty page at Harvard Business School | Research page on DASH (Digital Access to Scholarship at Harvard) | NBER research page | SSRN research page

Growthpolicy.org. What should we do about economic inequality?

Rafael Di Tella: We should increase taxes at the very top to insure “risks” at the very bottom (such as health, unemployment, etc.) and fund programs that improve quality of life (such as subsidiz[ing] social clubs, forced holidays, forced paternity leave, etc.).

Growthpolicy.org. You have made several noteworthy contributions to research on fairness, altruism, and economic behavior. In your research on altruism, for instance, you prove that people avoid altruistic actions by distorting beliefs about the altruism of others. What, if any, are the implications of these findings for economic incentives in labor markets?

Rafael Di Tella: I haven’t thought a lot about the implications of this paper. It seems that people really modify their beliefs about what is going on in the world, and about the actions that others undertake, in order to suit their objectives. In this project, these objectives are material gain by confiscating another player and maintaining a high opinion of yourself (as a person who wouldn’t arbitrarily confiscate another person). The key to resolving the challenge in this case is to take advantage of any opportunity you get to get offended with the other player. I guess that a(n internal) labor market application focuses on the special benefits for firms from appearing fair to employees that have the chance of embezzling funds.

Growthpolicy.org. Your research on desensitization to violent crime provides concrete evidence that crime victims become habituated to crime exposure as compared to non-victims. For a policymaker, what would be the implications of your findings?

Rafael Di Tella: The paper was an attempt to understand better the costs of crime and why sometimes governments that fail to deliver on reducing crime get reelected. A big unresolved issue for answering your question is how to measure the true costs once adaptation has set in. To be clear, I don’t know that we have made a lot of progress on the theory behind hedonic adaptation, and the issue of desensitization that we study is part of it. I see this project as a modest contribution to a difficult problem.

Growthpolicy.org. You have authored a significant body of research on crime and social behavior—for instance, your work on electronic monitoring versus incarceration and the effects of each on criminal recidivism. As you point out in your paper, society has been dealing with this question since Jeremy Bentham proposed the “Panopticon” in 1791. On the subject of criminal recidivism, what, according to you, are some of the current challenges for social welfare systems?

Rafael Di Tella: Crime is a major social problem, which affects the poor more than the rich (because the former have access to less effective technologies to deter crime). One contributor to the amount of crime, paradoxically, could be the prison system. Indeed, in many countries, people leaving prisons have a higher tendency to commit crimes than before they got into a prison. Thus, and besides the extraordinary cruelty that society is inflicting on people to go to some of these prisons, prisons could be counterproductive: they deter some people, but the people that are sent there end up being more dangerous. This is one of the (many) reasons that we have to develop alternatives to incarceration and we think that electronic (or GPS) monitoring of offenders is one of them.

Growthpolicy.org. In your research on the role of anger in regulation, you establish a framework that shows how anger and competition are connected. What are the policy implications of your research for regulators?

Rafael Di Tella: It is very simple: regulatory agencies have been put in place to increase the fairness of market economies but, somehow, economists have managed to twist that objective into one of efficiency. In other words, we went from justice and preventing exploitation to eliminating “Harberger’s Triangles.” It is really remarkable. Our project tries to develop a model where the gains from maintaining the beliefs that firms are “nice” is really large and the main objective of regulation. We think that scrutiny of the type of regulation actually implemented in democracies gives ample support for our approach.

Growthpolicy.org. In a recent paper, you assessed children’s sharing behavior and beliefs using a game theoretic approach. Why is it important for economists and policy makers to study social behavior in children?

Rafael Di Tella: It was part of a series of papers trying to understand self-serving beliefs and how they might affect cooperation. One of the reasons that it is interesting to study children is that it gives you some idea of when these behaviors/mental mechanisms are developed and how much emotional maturity/sophistication is required. But you should ask my co-authors who were the main drivers of this project and have more experience in thinking about children’s development.