Research Backs Rebates

Income tax rebates can boost the economy, a researcher finds. Plus: Are higher-cost products better? Bad news on financial literacy; a final proposal for B-school research

by Francesca Di Meglio

When Jonathan Parker, a professor at Northwestern University's Kellogg Graduate School of Management, did his research on the effects of tax rebates the government doled out in 2001, it may have been mainly an academic project. But with a new rebate plan designed to aid the faltering economy in the works, his conclusions—that rebates can indeed increase consumer spending and therefore help the economy bounce back to life—take on new significance.

Parker's study of the 2001 rebates, published in the American Economic Review in December, 2006, showed that rebates work to help end recession if the government gets the timing right. By tracking the spending habits of people who received their rebates at different times, Parker and his colleagues concluded that those who received the rebate spent about one-third of the money in the first month and another third three months later.

Conventional academic theory, according to the paper, is that consumers don't respond to temporary measures such as tax rebates. However, the researchers could match the receipt of the rebates with higher spending levels and concluded that the 2001 rebates provided a "substantial" stimulus to the economy.

Naturally, Parker is paying close attention to the rebates the government is sending out later this year to boost the current economic situation. He's working with both government agencies and private entities that track spending patterns to add questions to surveys about how households are using the rebate money this time around.

Parker says the rebates could effectively turn around the economy in 2008. But he adds that some of what is being done is different from the 2001 approach. For starters, he says, this time around the government is sending the money to more low-income families. And people will get a larger rebate, which means they might not spend as large a portion of the money as in 2001.

Another factor is timing. Although the rebates are being sent out relatively rapidly, most of the money won't be sent until May, after the Internal Revenue Service digs out from under its annual income-tax filing deluge.

The bottom line, says Parker: Rebates sent out at the right time can make a difference in the economy.

Business and the Brain

Do marketing tactics actually get inside your brain and affect the amount of pain or pleasure you experience? Apparently so, says a Stanford business-school researcher.

Baba Shiv, professor of marketing at the Stanford University Graduate School of Business, says even he believed lower price meant lower quality—until he bought a lower-priced generic and more expensive brand-name version of cough syrup during a particularly bad flu season and found that neither worked. A desire to look further into this conventional way of thinking led Shiv to study just how much such beliefs affect people.

Recently, Shiv was part of a group that published a study in The Journal of the American Medical Association (JAMA) in which test subjects received placebo pills they thought were pain relievers. Some participants were told they were receiving the full-priced version of the drug at $2.50 per dose, and others would be getting discounted pills that cost 10¢ each. (In reality, all the participants were taking the same sugar pills.) The researchers monitored the part of the brain that registers pain. They found there was more activity indicating pain in the brains of those who were told they received the cheaper medication.

It showed that mind over matter has some validity—and that most people believe lower cost means lower value, so much so that it affects them neurologically.