A Wager on the Impact of CFPA:

Josh Wright and Adam Levitin have been going back and forth about Wright’s paper (co-authored with David Evans) about the predicted impact of the adoption of the Consumer Financial Protection Agency (CFPA) on the availability of credit, economic growth, and new business formation (many new businesses rely on their founder’s personal consumer credit, such as credit cards, to start businesses, a point for which the CFPA makes no allowance).  Wright and Evans offer some lower-bounds estimates of the predicted impact of the CFPA on interest rates and the other variables.  Levitin has criticized their estimates as arbitrary.  The estimates matter in thinking about the overall costs and benefits of the CFPA.  Levitin criticizes the Wright & Evans estimates, but he offers no estimates of his own of the costs, benefits, or net costs and benefits of the proposal.  Prof. Levitin seems to conclude from the absence of any estimated cost-benefit analysis, or any prediction of whether the benefits would exceed the costs, that this means we should go forward with the CFPA, a conclusion that seems questionable to me as I would think that the proponent of a new regulation (or a proponent of deregulation for that matter) would typically bear the burden of proof in advocating for a move from the status quo.

Be that as it may, Wright has proposed that the issue be settled on the field of battle–through a wager!  Here’s Wright’s wager (the stakes are undefined at this point):

The CFPA Act’s supporters have fought vigorously for this piece of legislation.  Professor Levitin appears quite confident that our analysis represents a “scare statistic” meant to avoid rigorous cost-benefit analysis and to ignore precision.   Of course, we find this line of attack ironic in light of the complete absence of empirical evidence in favor of the CFPA Act mustered up by its supporters.  More generally, we’d like to offer Professor Levitin the opportunity to prove that he means what he says about our overestimate of the lower bound of the impact of the CFPA Act on consumer credit and about the beneficial effects of the CFPA Act more generally.  We are economists.  And so we also believe in the power of revealed preferences.  We stand by our estimate of the lower bound at 2.1 percent.  If Professor Levitin is correct that is a ‘scare statistic’ that we’ve inflated from the true number, we would like to provide an opportunity for Professor Levitin to profit from our misguided approach and to test whether he really believes that the effect on consumer credit will be smaller than that.

We propose the following wager to Professor Levitin:

If the effect on consumer credit is less than 2.1 percent, you win and we lose

If and when the CFPA Act is passed, there will be ample data to test the impact of the CFPA on consumer credit directly.  We’re happy to negotiate what methods should be used to calculate the number to both of our satisfaction.  We’re also happy to let you name the stakes.  But let’s make it interesting.  If it’s good enough for Mankiw and Krugman, it’s good enough for us.  What do you say?

I wish that wagers such as this would become more common.  The most famous was probably the Simon-Ehrlich wager.

Back during the debates over the 2005 bankruptcy reform act I wish that I had thought to make a wager on whether bankruptcy filings would decline following the reform.  Critics argued that filings would stay the same because bankruptcy filings are largely involuntary (so consumers don’t respond to incentives) or even that bankruptcy filings would rise because credit card issuers would expand credit supply and lending to riskier borrowers.  I think a well-specified wager (as is the Wright challenge) is an excellent way of seeing how much people believe their claims as opposed to just making rhetorical arguments.