Barely Legally

Confessions of a Moot Court Bailiff

Adventures in Incentives for Homes and Cars

As a resident of Brooklyn for the last decade, affordable housing is more than a passing interest to me. The number of apartments in New York City is significantly outstripped by the number of people who want to rent apartments here. As you’d imagine, this leads to a slightly crazy real estate market; tiny apartments sell for five or six times the cost of the home I grew up in in the suburbs, and the average monthly rent for a Brooklyn apartment is $2,800.

This is a problem that affects lots of cities in America and around the world. If lots of peple are moving to a city, and there aren’t enough places to live for everyone, prices are going to go up in a hurry. Timothy B. Lee writes in Vox about Tokyo’s One Weird Trick to avoiding runaway rent: building new places to live.

Tokyo does a better job of allowing housing supply to keep up with housing demand. In 2014, Tokyo issued permits for 142,417 new housing units. In contrast, the entire state of California — which has three times the population of Tokyo — issued permits for only 83,657 new housing units. Little wonder that demand for housing has outstripped supply in the Bay Area.

In the United States, local housing markets are plagued by grassroots “Not In My Back Yard” (NIMBY) activists who organize to stop efforts to build town homes and apartment buildings in their local neighborhoods. Because every construction project is located near somebody, the result tends to be that little housing gets built anywhere.

In contrast, Harding writes, Japan sets housing regulations at the national level. As a result, if a Tokyo landowner wants to knock down his single-family home and replace it with a six-unit condo building, there’s little that his neighbors can do to stop it. That can be annoying to individual homeowners, of course. But it also has the huge upside of keeping housing costs under control.

Note of course that homeowners in any neighborhood/city have a strong economic incentive to limit the construction of new housing. If housing is difficult to come by, you can sell or rent your home for a higher price than if housing is plentiful. While this may not explicitly motivate any individual activist attempting to block new construction, collectively, homeowners all benefit from this. (That’s that invisible hand we’re all familar with.)

Over at the Daily Beast, Clive Irving has another great example of a system unintentionally incentivizing lousy behavior. His article is aboutVolkswagen’s decision to spend a decade cheating at emissions tests:

Executives even carefully evaluated what the cost would be to the company if they were caught. Reviewing previous cases of violations of environmental regulations by auto manufacturers in the U.S. they predicted that the likely fines posed “only a moderate cost risk.” They cited the highest fine, imposed against Hyundai/Kia as amounting to “barely $91 per vehicle” and added “fines in this amount are not even remotely capable of influencing the share price of a globally operative company such as Volkswagen.”

VW is going to settle the various lawsuits for $15.3 billion, which covers about 600,000 cars. That’s a fine of about $25,500 per vehicle, so VW’s executives were only off by about twenty-eight thousand percent. They had no way of knowing the federal government was about to make an example out of them, so VW were acting as though the pressure to not cheat was barely a rounding error. That’s why they did some pretty sleazy stuff:

And the New York case provides a whole lot more insight into the lengths VW went to cheat the system. It details six successive versions of defeat devices used across the range of VW, Audi, and Porsche diesels. Moreover, it reveals that VW went a further step to make sure it was not caught. In New York and other states the annual inspections do not actually measure the exhaust emissions. They rely on the car’s onboard diagnostics (OBD) to detect whether the car is running clean.

“To allow its defeat device equipped vehicles to pass New York’s inspection and maintenance tests,” says the lawsuit, “Volkswagen therefore needed to, and in fact did, implement a further cheat: It programmed the OBD systems to falsely report at inspection time that the automobile emissions systems were working properly.”

Got that? VW cheated because federal and state regulators asked VW to police itself, and had historically provided a slap on the wrist for cheaters. All while VW was subject to increasingly stringent emissions requirements. It doesn’t take a genius to see that’s a system with a strong incentive for “creative” (read: cheaty) solutions.

All is not lost, though. This $15.3 billion settlement is a great way to change the calculus for people who would cheat in the future: it’s not just a slap on the wrist anymore. The guys responsible for this are going to think long and hard before pulling this kind of stunt agai-

VW’s Management Board, the nine men who had presided over the perpetration of fraud, the cover-up and then a public relations debacle that followed its exposure, were awarded $70 million in executive compensation for 2015 alone.

Oh, come on.