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Innovation is a primary driver of economic growth and of the rise in living standards, and a substantial body of research has been devoted to documenting the welfare benefits from it (an example being Trajtenberg’s 1989 study). Few areas have experienced more rapid innovation than the Personal Computers (PC) industry, with much of this progress being associated with a particular component, the Central Processing Unit (CPU). The past few decades had seen a consistent process of CPU innovation, in line with Moore’s Law: the observation that the number of transistors on an integrated circuit doubles every 18-24 months (see figure below). This remarkable innovation process has clearly benefitted society in many, profound ways.

A notable feature of this innovation process is that a new PC is often considered “obsolete” within a very short period of time, leading to the rapid elimination of non-frontier products from the shelf. This happens despite the heterogeneity of PC consumers: while some (e.g., engineers or gamers) have a high willingness-to-pay for cutting edge PCs, many consumers perform only basic computing tasks, such as word processing and Web browsing, that require modest computing power. A PC that used to be on the shelf, say, three years ago, would still adequately perform such basic tasks today. The fact that such PCs are no longer available (except via a secondary market for used PCs which remains largely undeveloped) raises a natural question: is there something inefficient about the massive elimination of products that can still meet the needs of large masses of consumers?

Consider, for example, a consumer whose currently-owned, four-year old laptop PC must be replaced since it was severely damaged. Suppose that this consumer has modest computing-power needs, and would have been perfectly happy to keep using the old laptop, had it remained functional. This consumer cannot purchase the old model since it has long vanished from the shelf. Instead, she must purchase a new laptop model, and pay for much more computing power than she actually needs. Could it be, then, that some consumers are actually hurt by innovation?

A natural response to this concern might be that the elimination of older PC models from the shelves likely indicates that demand for them is low. After all, if we believe in markets, we may think that high levels of demand for something would provide ample incentives for firms to offer it. This intuition, however, is problematic: as shown in seminal theoretical work by Nobel Prize laureate Michael Spence, the set of products offered in an oligopoly equilibrium need not be efficient due to the misalignment of private and social incentives. The possibility that yesterday’s PCs vanish from the shelf “too fast” cannot, therefore, be ruled out by economic theory alone, motivating empirical research.

A recent article addresses this question by applying a retrospective analysis of the U.S. Home Personal Computer market during the years 2001-2004. Data analysis is used to explore the nature of consumers’ demand for PCs, and firms’ incentives to offer different types of products. Product obsolescence is found to be a real issue: the average household’s willingness-to-pay for a given PC model is estimated to drop by 257 $US as the model ages by one year. Nonetheless, substantial heterogeneity is detected: some consumers’ valuation of a PC drops at a much faster rate, while from the perspective of other consumers, PCs becomes “obsolete” at a much lower pace.

The paper focuses on a leading innovation: Intel’s introduction of its Pentium M® chip, widely considered as a landmark in mobile computing. This innovation is found to have crowded out laptops based on older Intel technologies, such as the Pentium III® and Pentium 4®. It is also found to have made a substantial contribution to the aggregate consumer surplus, boosting it by 3.2%- 6.3%.

These substantial aggregate benefits were, however, far from being uniform across different consumer types: the bulk of the benefits were enjoyed by the 20% least price-sensitive households, while the benefits to the remaining 80% were small and sometimes negligible. The analysis also shows that the benefits from innovation could have “trickled down” to the masses of price-sensitive households, had the older laptop models been allowed to remain on the shelf, alongside the cutting-edge ones. This would have happened since the presence of the new models would have exerted a downward pressure on the prices of older models. In the market equilibrium, this channel is shut down, since the older laptops promptly disappear.

Importantly, while the analysis shows that some consumers benefit from innovation much more than others, no consumers were found to be actually hurt by it. Moreover, the elimination of the older laptops was not found to be inefficient: the social benefits from keeping such laptops on the shelf would have been largely offset by fixed supplier costs.

So what do we make of this analysis? The main takeaway is that one has to go beyond aggregate benefits and consider the heterogeneous effects of innovation on different consumer types, and the possibility that rapid elimination of basic configurations prevents the benefits from trickling down to price-sensitive consumers. Just the same, the paper’s analysis is constrained by its focus on short-run benefits. In particular, it misses certain long-term benefits from innovation, such as complementary innovations in software that are likely to trickle down to all consumer types. Additional research is, therefore, needed in order to fully appreciate the dramatic contribution of innovation in personal computing to economic growth and welfare.

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By Giulio Fella and Giovanni Gallipoli

Crime is a hot issue on the policy agenda in the United States. Despite a significant fall in crime levels during the 1990s, the costs to taxpayers have soared together with the prison population. The US prison population has doubled since the early 1980s and currently stands at over 2 million inmates. According to the latest World Prison Population List (ICPS, 2013), the prison population rate in 2012 stood at 716 inmates per 100,000 inhabitants, against about 480 in the United Kingdom and the Russian Federation – the two OECD countries with the next highest rates – and against a European average of 154. The rise in the prison population is not just a phenomenon in the United States. Over the last twenty years, prison population rates have grown by over 20% in almost all countries in the European Union and by at least 40% in one half of them. The pattern appears remarkably similar in other regions, with a growth of 50% in Australia, 38% in New Zealand and about 6% worldwide.

In many countries – such as the United States and Canada – this fast-paced growth has occurred against a backdrop of stable or decreasing crime rates and is mostly due to mandatory and longer prison sentencing for non-violent offenders. But how much does prison actually cost? And who goes to jail?

The average annual cost per prison inmate in the United States was close to 30,000 dollars in 2008. Costs are even higher in countries like the United Kingdom and Canada. Punishment is an expensive business. These figures have prompted a shift of interest, among both academics and policymakers, from tougher sentencing to other forms of intervention. Prison populations overwhelmingly consist of individuals with poor education and even poorer job prospects. Over 70% of US inmates in 1997 did not have a high school degree. In an influential paper, Lochner and Moretti (2004) establish a sizable negative effect of education, in particular of high school graduation, on crime. There is also a growing body of evidence on the positive effect of education subsidies on school completion rates. In light of this evidence, and given the monetary and human costs of crime, it is crucial to quantify the relative benefits of policies promoting incarceration vis-à-vis alternatives such as boosting educational attainment, and in particular high school graduation.

When it comes to reducing crime, prevention may be more efficient than punishment. Resources devoted to running jails could profitably be employed in productive activities if the same crime reduction could be achieved through prevention.

Establishing which policies are more efficient requires a framework that accounts for individuals’ responses to alternative policies and can compare their costs and benefits. In other words, one needs a model of education and crime choices that allows for realistic heterogeneity in individuals’ labor market opportunities and propensity to engage in property crime. Crucially, this analysis must be empirically relevant and account for several features of the data, in particular for the crime response to changes in enrollment rates and the enrollment response to graduation subsidies.

The findings from this type of exercise are fairly clear and robust. For the same crime reduction, subsidizing high school graduation entails large output and efficiency gains that are absent in the case of tougher sentences. By improving the education composition of the labor force, education subsidies increase the differential between labor market and illegal returns for the average worker and reduce crime rates. The increase in average productivity is also reflected in higher aggregate output. The responses in crime rate and output are large. A subsidy equivalent to about 9% of average labor earnings during each of the last two years of high school induces almost a 10% drop in the property crime rate and a significant increase in aggregate output. The associated welfare gain for the average worker is even larger, as education subsidies weaken the link between family background and lifetime outcomes. In fact, one can show that the welfare gains are twice as large as the output gains. This compares to negligible output and welfare gains in the case of increased punishment. These results survive a variety of robustness checks and alternative assumptions about individual differences in crime propensity and labor market opportunities.

To sum up, the main message is that, although interventions which improve lifetime outcomes may take time to deliver results, given enough time they appear to be a superior way to reduce crime. We hope this research will advance the debate on the relative benefits of alternative policies.

Giulio Fella is a Senior Lecturer in the School of Economics and Finance at Queen Mary University, United Kingdom. Giovanni Gallipoli is an Associate Professor at the Vancouver School of Economics (University of British Columbia) in Canada. They are the co-authors of the paper ‘Education and Crime over the Life Cycle‘ in the Review of Economic Studies.

Review of Economic Studies aims to encourage research in theoretical and applied economics, especially by young economists. It is widely recognised as one of the core top-five economics journal, with a reputation for publishing path-breaking papers, and is essential reading for economists.

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Image credit: Prison, © rook76, via iStock Photo.

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By Alexander M. Gelber

When tax incentives draw single women into the labour force, what activities do they sacrifice? Do they spend less time enjoying leisure? Do they cut back on household chores? Do they give up time with their children?

Over the past thirty years, US policymakers tried to increase participation of single mothers in the labour force by expanding the Earned Income Tax Credit and reforming the welfare system. One key motivation for reform was the perception that some single mothers were choosing to be idle and instead ought to contribute more productively to society by working. But did the policy reforms induce single mothers to shift from one productive activity – work at home – to another – work in the market? In a new paper published in the Review of Economic Studies, we find that the answer is “yes”: tax policy largely shifts single women between work at home and work in the market. Interestingly, however, when tax incentives draw them into the labour force, they may not cut much from their “quality time” with their children.

Remarkable patterns in the data suggest that tax policy had a very important effect on the labour supply and housework decisions of single women over this period. From the mid-1980s to the mid-to-late-1990s, the incentive to participate in the labour force greatly increased for single women with children relative to those without children. This was largely due to major expansions of the Earned Income Tax Credit—which transfers money to low-income single households only if they participate in the labor force—and cutbacks in welfare, both of which impacted low-income single women.

The figure below shows that over the same period of years, hours of market work for single women with children increased substantially relative to those without children, as previous literature has documented. This suggests that the changes in policy may have been responsible for the large changes in market work over the same period.

Strikingly, the pattern for housework looks like a mirror image of the pattern for market work. Hours of housework fell substantially for women with children relative to those without children over the period of the primary policy changes, with little relative change outside of this period. The relative fall in housework accounts for over half of the relative increase in market work, suggesting that most of the change in market work came out of housework. We find that for every additional hour that a single woman spends working in the market in response to a change in tax policy, she spends about 40 minutes less time working at home.

Mean usual hours of market work and housework of single women with and without children, 1975-2004

Importantly, we find no evidence that single women’s amount of time spent with children (as the primary activity, i.e. “quality time”) decreases significantly. We also find that single women’s time spent eating and preparing food decreases and that time spent sleeping changes insignificantly.

We find evidence that single women’s purchases of food away from home, such as takeout and restaurant meals, increase in response to an increase in the incentive to participate in the labour force. This makes sense: Women are busier when they enter the labour force and make up some of the time by purchasing food prepared by others instead of themselves. We also find some evidence that overall food purchases rise. Single women thus appear to use market goods to substitute for time: they become busier when they enter the labor force and save time by buying food in the market instead of themselves spending time on food.

Interestingly, howev