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Tuesday, September 25, 2012

'Kim Clausing on Signaling, Tax Return Disclosure, and Toads'

From the perspective of the economics of signaling, Mitt Romney is behaving like "an awfully small toad":

Romney’s Tax Returns and The Economics of Signaling : Why Small Toads Still Croak, by Kimberly Clausing, Reed College: When toads compete for mates, they face important strategic decisions regarding whether to fight over mates or continue searching. Wanting to take on smaller rivals and avoid larger ones, toads gauge the wisdom of fighting each other in part by hearing each others’ croaks. Deep croaks belong to larger toads since toad vocal cord length is associated with toad size. This raises a puzzle, though, for one might think larger toads would croak and smaller toads would stay quiet, yet most toads tend to croak, whether or not their voice is deep.

The economics of signaling can help explain this puzzle. As soon as the largest toads croak, that gives the next largest toads an incentive to croak since otherwise they’d be assumed to be the average size of the remaining pool of toads. Once somewhat large toads croak, medium sized toads have an incentive to croak lest they be assumed smallish, and the situation unravels until nearly all toads are croaking.

This situation is a useful example of the full disclosure principle at work. As long as some individuals benefit from revealing beneficial characteristics of themselves, others are forced to disclose their less stellar characteristics, lest they be assumed to be a representative member of the remaining pool. ...

Candidates for office have long shared many years of tax returns in order to allay citizen concerns... Yet Mitt Romney steadfastly refuses to provide the public with more than two years of tax returns.

How are we to understand this refusal? Does Romney think that his tax returns are so bad that disclosure is really worse than nondisclosure, even knowing that the public must be assuming that there is something unpleasant in there? ...
 If Romney is a rational strategist, surely he would release the returns unless he thought there was something in there that was genuinely worse than what we are already assuming. In the case of animal behavior, that would make Romney an awfully small toad.

    Posted by on Tuesday, September 25, 2012 at 12:24 AM in Economics, Politics | Permalink  Comments (13)


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