Incentives : The Fuel of Economics

From the much esteemed New York Times, we have David Leonhardt talking about: To-Do List: Wrap Gifts. Have Baby.

For decades and decades, the busiest day of the year in the nation’s maternity wards fell sometime in mid-September. Americans evidently do a lot of baby-making during the cold, dark days of December, and once a baby has been made, the die for its birth date has largely been cast.

Or at least that’s the way it used to be. In the last 15 years, there has been a huge increase in the number of births that are induced with drugs or come by Caesarean section. In either case, parents or doctors can often schedule a baby’s arrival on a day of their choosing.

Not surprisingly, they tend to avoid weekends and holidays, when doctors have other plans, hospitals are short of staff and the possibility of an unfortunate birthday — Christmas Day, anyone? — looms. During holiday weeks, births have become increasingly crowded into the weekdays surrounding the holiday.

Over this same period — since the early 1990s — the federal government has been steadily increasing the tax breaks for having a child. For parents to claim the full amount of any of these breaks in a given year, a child must simply be born by 11:59 p.m. on Dec. 31. If the baby arrives a few minutes later, the parents are often more than a thousand dollars poorer.

Not surprisingly, they tend to avoid weekends and holidays, when doctors have other plans, hospitals are short of staff and the possibility of an unfortunate birthday — Christmas Day, anyone? — looms. During holiday weeks, births have become increasingly crowded into the weekdays surrounding the holiday.

Over this same period — since the early 1990s — the federal government has been steadily increasing the tax breaks for having a child. For parents to claim the full amount of any of these breaks in a given year, a child must simply be born by 11:59 p.m. on Dec. 31. If the baby arrives a few minutes later, the parents are often more than a thousand dollars poorer.

Obviously, there are reasons beside taxes that someone might prefer having a baby in late December rather than early January. Many people will be on vacation next week, with extended family in town to see a new baby and help around the house. The stress of having relatives visit may also be enough to send some expectant mothers into labor.

So to see if taxes were truly the culprit, Mr. Chandra and another economist, Stacy Dickert-Conlin of Michigan State, devised some clever tests. They found that people who stood to gain the most from the tax breaks were also the ones who gave birth in late December most frequently. When the gains were similar, high-income parents — who, presumably, are more likely to be paying for tax advice — produced more December babies than other parents.

Excellent article. I suppose praise is due for the newspapers once in a while as well.

The article clearly demonstrates the role of economic incentives on such mundane matters as child birth. Of course, it's the arbitrariness of the calendar that is to blame.

The article also correctly points out the obvious solution : you should only get a tax break for the fraction of months in the year since the baby was born i.e. if the baby is born in December, you only get 1/12th the tax break.

There is a similar binary decision variable playing out in Germany.

From the BBC, we have Pregnant Germans seek cash bonus.

Many German mothers-to-be are reportedly trying to delay labour so their births coincide with a generous new government scheme.

Parents of babies born on or after 1 January will be entitled to up to 25,200 euros (£16,911, $33,300) to ease the financial burden of parenthood.

But those born even a minute earlier will not be covered by the scheme.

Doctors have been warning women not to take any medication to try to delay labour, and few, they stress, would put the life of their baby at risk for the sake of the money.

But what many mums-to-be do in order to bring on labour, pregnant Germans are now anxious to avoid.

These include drinking red wine, eating curries and taking part in physical activity.

This is just plain stupid but then the Germans have never been much on the side of economic rationality.