My son has two children and my daughter four. I propose to give £5,000 to each grandchild in my will. Would this be equitable, given that £20,000 would go to my daughter’s side of the family and only £10,000 to my son’s?
Mr Robinson

Dear Mr Robinson,

Let me be frank: at first glance I thought your dilemma was idiotic. If you want to hand out equal shares, that’s fine – but make your mind up. Given your daughter’s fecundity and some basic arithmetic it is quite clear that you cannot simultaneously give equal shares to grandchildren and to children.

Why, then, would you hand out £5,000 to each grandchild and still fret about fairness between your children? Your children don’t get the money; your grandchildren do. Similarly, it would make no sense to hand out £15,000 to each child and then start worrying that your grandchildren had been unequally treated.

Yet arch-rationalists such as Gary Becker or Robert Barro might leap to your defence. Assume your children are Becker-Barro altruists. This means that they care not about how much cash they give, but about the total sum their children receive from all sources.

If you give your grandchildren £5,000 each, that is simply £5,000 that their parents don’t have to give. They will adjust their bequests in the light of yours. Viewed in this way, your attempts to give money to your grandchildren are really hidden transfers to your children – and you would be quite right to worry that your daughter was getting more than your son.

But before you pat yourself on the back (Becker has a Nobel prize; Barro may get one too), ask yourself if your children are Becker-Barro altruists. Most people focus narrowly on their bequests, not on the total receipts of their offspring. I doubt your children are Becker-Barro altruists. After all, you aren’t.

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When the Chancellor of the Exchequer reduced value-added tax from 17.5 per cent to 15 per cent as an incentive for consumers to spend, there was a widespread view that the reduction was too small to be of use. Now that we are approaching the time when VAT returns to 17.5 per cent, some retailers say that the increase will have a negative impact. This doesn’t sound logical, but is it true?
Andrew Hewett, Hertford

Dear Andrew,

I remember the complaints well: how is a 2.5 per cent cut in the price of goods going to boost spending? (Let us leave aside the facts that while the cut was 2.5 percentage points, it was actually only 2.1 per cent; that not all goods are liable for the tax; and that some retailers decided to increase pre-tax prices rather than reduce post-tax prices.) And in truth, the VAT cut, while billed as a “stimulus”, was tiny compared with the vast government deficit.

My own view is that people are price-sensitive, so the modest VAT cut probably had a modest effect, the increase will reverse that effect, and the details will be so small that we will never know for sure.

Is it logical to claim that the cut was pointless but the rise is significant? The motive for the claim is obvious enough. And it may be justified. The switch each way caused a fixed cost: menus had to be printed, staff trained, accounts re-counted and tills reprogrammed. It is reasonable, and perhaps true, to say that the benefits for businesses of the VAT cut were swallowed by the costs of adjustment. The VAT rise, and a second round of adjustment costs, simply adds injury to the insult.

Psychology may be at work too. Behavioural economists believe in “the endowment effect”, a tendency for people to overvalue the status quo. The VAT cut seemed trivial until retailers got used to it. Now they regard it as indispensable.

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Marketplace worked with me to produce this video about the economics of signalling in the workplace. They did a fantastic job, and you even get to hear my David Attenborough impression. The video is loosely based on one of the Dear Economist letters. Enjoy!

Do waiters in mid-priced restaurants work less than those at high-end ones? If not, shouldn’t their tips be the same (in absolute terms)?
Manoj

Dear Manoj,

I can see where you’re coming from: a 10 per cent tip on a £20 meal is less than a 10 per cent tip on a £100 meal. If it’s the same waiter doing the same job, shouldn’t the tip be, say, £5 for each meal – a 25 per cent tip in one case and a 5 per cent tip in the other?

This is not what happens. According to a survey by the economist Ofer Azar, the absolute size of tips in the US is overwhelmingly dependent on the size of the bill. In Europe, formal service charges often replace tips and the FT’s restaurant insider, Nicholas Lander, tells me that such charges tend to be proportionate to the bill – or if anything, to be a higher percentage in the fanciest restaurants.

I am not sure the puzzle is quite as perplexing as you think, though. First, the connection between what the customer tips and what the waiter gets is far from straightforward. Waiters are not slaves: if tips are too low to attract them, then the restaurant owner will have to add a wage. And if a waiter can earn hundreds of pounds in tips at a top restaurant, the owner will be able to demand a share without running short of staff.

Second, high-priced restaurants tend to have fewer customers per waiter, to ensure attentive service. They receive higher tips, but fewer of them.

Despite these points, it is of course possible that waiters are paid more in better restaurants. But in a capitalist society, skilled workers expect to earn more. I suggest you sample the quality of service at El Bulli or the Fat Duck, and pop into Pizza Hut on the way home. Then tell me again that the waiters should earn the same at each place.

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Alex Ritson of Cass Business School interviews me about Dear Undercover Economist.

With the imminent passing of my pet rat I am faced with a lot of grief; he has been a great pet and so I will be more saddened by his passing than if he had been a bad one. My question is: is it possible for the cost (the grief from losing a friend/pet/family member) to outweigh the benefit (the joy gained through time spent with them) and so make the purchase of my pet not worth it, as the net benefit would be negative? Would there be a point where you would say: “I don’t want to get involved because I love X so much that I will be destroyed if I lose him?”
Ilka

Dear Ilka,

Your intriguing problem has not, as far as I know, been explored by economists before, although it has been discussed by artists. Your ailing rat puts me in mind of a departed sparrow, mourned in verse by Catullus. Paul Simon expressed the trade-off more directly in his early song “I Am a Rock”: “If I never loved I never would have cried.”

But poetic speculation gets us nowhere. Let’s head straight to the data. Andrew Oswald, professor of economics at Warwick University, provides the following data points to ponder, based on surveys of life-satisfaction. Relative to never having been married, being married is worth 0.38 “points” of life satisfaction on a scale of 1-7. Being separated is worth -0.24, widowed -0.19 and divorced -0.09.

This is not much to go on, but it is better than nothing. If we incautiously interpret these numbers as causal – in fact they are merely correlations – then we could conclude that 20 years of marriage is compensation for up to 40 years of widowhood. Ten years of marriage more than justifies 40 years as a divorcee.

For human marriages, these odds seem pretty good. For a pet rat, less so: the little darlings hit puberty at six weeks and rarely live past three years. Perhaps you should buy a tortoise next time.

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After reading with interest your plan to start exercising last Christmas (by giving to charity if you didn’t meet your goals), I’d be obliged if you could offer an opinion on a similar scheme I have concocted. Wine is the problem. I drink too much of the glorious stuff, and am unable to convince myself that doing so is unhealthy.

Your idea of giving to charity would not work with me. I’m uncharitable, I’m afraid, and would probably rather lie than give my earnings away. Here is my alternative. Each month I will deposit the total amount I would spend on wine in the family joint bank account. If I want a bottle, it must come out of this account, but whatever is left at the end of the month is to be given to my wife and children.

This appears to be an excellent solution; in my view, the guilt of taking something away from my beloved wife and children is far greater than taking from myself. Do you agree?
DW

Dear DW,

In classical economic theory, your scheme would be useless. Every pound spent on the demon drink is always a pound unavailable to your wife and children, and it should make no difference which bank account you put it in.

But Richard Thaler, a leading behavioural economist, has a theory of “mental accounting” that supports your plan. We do attach different labels to different pounds: this one is for my pension, that one is slush money. And Thaler has discovered that those labels make a difference to the way we behave.

Your scheme may well work, then. But like all commitment strategies, there is a risk that it will backfire, and you end up with the worst of all worlds. You may find yourself unable to stop drinking, feel more guilty than ever, and demonstrate unambiguously to your family that you love booze more than you love them. You evidently like to live dangerously: good luck.

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For those who haven’t been able to get tickets to my talks at LSE last week or Cass Business School tomorrow, here’s yet another chance! I’m speaking about the ideas in Dear Undercover Economist at One Alfred Place on Thursday, 6.30pm for 7pm.

One Alfred Place is normally members only, but they have agreed to open the talk to non-members.