Tuesday, February 7, 2012

Economics professor investigates file sharing, tax evasion

Business professor Koleman Strumpf

Koleman Strumpf’s office doesn’t look terribly organized, and when you talk to him, you get the feeling that his mind is moving faster than his mouth. His website, assuming you want to click every link, can take hours to get through. The window blinds in his office are closed and he sits at his desk surrounded by two desktop computers and a laptop.

Strumpf is the Koch Professor of Economics at the University of Kansas School of Business. He has degrees from Stanford University and the Massachusetts Institute of Technology. Strumpf is author or co-author of more than a dozen papers with three more on the horizon. He is the associate editor for The Journal of Prediction Markets and he uses these markets to teach his economics students. When someone wants a crowd to make a decision on a question, Strumpf said, prediction markets are set up. The students use fake money, but they research and trade as if it were real.

“I think it’s a good experience, particularly for undergraduates, to get an opportunity to see how markets function firsthand,” Strumpf said. “I don’t know how much experience most of the undergraduates have in trading, but this is a pretty painless and riskless way to do it.”

In addition to teaching, Strumpf is working on a number of papers. One of these papers deals with an important aspect of Kansas, the aviation industry. Wichita is the air capital of the world, at least for now, because of the many airplane manufacturers located in the city. Many people in the state and in the nation own general aviation planes. A general aviation plane is any plane other than a commercial plane. Kansas is one of the states that tax these planes. It’s broken down by county, so if you have a plane in Douglas County, you owe a certain amount based on the tax code in that county. The law says that if your plane is parked in Douglas County on Jan. 1, you owe taxes on it. Some owners have interpreted the law very literally, although most lawyers that Strumpf has spoken with disagree with the interpretation.

“So they get in their planes on Dec. 31,” Strumpf said, “fly to Oklahoma, a state that doesn’t tax their planes, hang out for a day and come back on Jan. 2.”

Strumpf has information from the FAA on more than 20 million flights over a period of five years. Most tax evasion is not observable, Strumpf said, such as a waiter getting paid cash or someone putting their money in an overseas bank account. In this case, with the FAA flight data, he can physically observe it.

“The idea is to see if there is disproportionate activity around the assessment date of Jan. 1 in a state like Kansas that taxes planes, compared to Oklahoma,” Strumpf said.

Another part of Strumpf’s research is file sharing. File sharing has come to the spotlight once again with the recent SOPA and PIPA bills that were adamantly opposed by Google and other websites. Strumpf has something to say about this issue. He has been researching the world of file sharing almost since the beginning. In 2007, he published his first paper on the subject, though there was an earlier draft in 2004. To give a reference point, Napster was shut down in the summer of 2000. Strumpf collaborated with Harvard business professor Felix Oberholzer-Gee on “The Effect of File Sharing on Record Sales: An Empirical Analysis” and “File-Sharing and Copyright.” In their first paper they come to the conclusion that “downloads have an effect on sales which is statistically indistinguishable from zero.” Their second paper, “File-Sharing and Copyright,” found that file sharing does not hurt album sales at all. But, even with that data, the government is still trying to pass legislation to stop file sharing.

“Will content industry people try to get another law passed?” Strumpf asked. “Yes, without any doubt. Will any of this stuff work? It’s very skeptical.”

Legally, Napster was easy to take care of, he said, because it was entirely in the United States. Now we have things like Pirate Bay and Mininova which are not located in a central place.

If something like SOPA passed, Strumpf said, someone will probably make a nice windows-based graphical user interface to share files within a couple of months.

“It would be hard to shut things down at this point,” he said. “The internet is too international to have any one country regulate things. When there’s enough demand for the activity, markets will arise to supply it.”

That’s the economist in him speaking. The U.S. activity on BitTorrent is only about 20-25 percent of the total, Strumpf said. In addition to looking at the impact of file sharing on the music industry, Strumpf is working on analyzing the impact it has on the movie industry. He has five months of data about what movies were in theaters, which movies were most popular on DVD and what movies were downloaded in that time. Ascertaining what movies were downloaded, when they were downloaded and where they were downloaded requires Strumpf to have the internet protocol (IP) addresses of the devices used. An IP address is a unique set of numbers assigned to each device with an internet connection. He can usually identify the location of a device down to the zip code just by knowing the IP address. So, to understand what effect downloading has on the movie industry, he divides the data by metro area so he can compare different parts of the country, and by movie to discover what movies were popular in certain cities. Using the IP addresses of those who downloaded movies, he can see how much downloads effect movie sales in that area.

The growth of the Internet in general may be largely because there just aren’t that many regulations for it. Without regulations, it has had the chance to explode in the past decade.

“It’s about as international as anything I can think of,” Stumpf said about the Internet. “It transcends country, culture and language.”

These are just a few of Koleman Strumpf’s many interests. In just six years at the KU School of Business he has published four papers and been featured in The Wall Street Journal, Spin Magazine and Forbes, among others.

If you would like to know more about his research, read other stories in which he’s been featured or find out what music he likes, visit his website.