Sunday, August 20, 2006

Information Technology Solves Government Asymmetric Information Problems

The New York Times today reports how some cities have used aerial photos to mitigate asymmetries of information with regard to which home owners have improved their properties. Cities are now collecting more property tax revenue due to this change and homeowners have less scope to lie as they seek reductions in their property taxes.

A broader point can be made that government use of information technology has improved urban quality of life. Do London’s cameras deter crime? Major city GIS maps of crime “hot spots” help police deploy their resources. Road pricing has become a reality now that vehicles can easily pay without stopping for entering a congested zone.
Broadly distributed data bases on which restaurants violate public health codes in California have created a “day of shame” for restaurants with mice and garbage. Broadly distributed data bases on which public schools have high test scores encourages accountability as parents choose where to live and home prices reflect the differentials. Both examples highlight how information technology affect individual choice.

Key asymmetries of information remain. Consider the Internal Revenue Service. If Mr. Smith reports that he earned $100,000 in 2005, did he really earn $130,000? Is he under-reporting his income? The IRS conducts audits to scare people into telling the truth but it is unclear whether the expected punishments are large enough. Who knows how many billions in tax revenue the government does not collect because it can’t measure people’s income accurately. Could improvements in IT mitigate this problem?

In the private sector issues of asymmetric information have been well studied by economists interested in adverse selection. George Akerlof’s concerns about how market efficiency is affected if only people trying to sell “lemons” appear at the used car market and that only sick people try to buy health insurance would vanish if used car buyers could cheaply be informed by a vehicle mechanic about the used vehicle’s condition or if health insurance sellers could cheaply receive a doctor’s report on an insurance buyer’s health. In both of these examples, information technology could reduce the asymmetries of who knows what. In the case of the used car, the seller has private information about its quality. In the case of the health insurance, the buyer has private information about his own health levels. The concern is that only the sick will buy health insurance. Thank goodness for hypochondriacs such as Woody Allen. Their existence tends to mitigate concerns that only the sick will buy insurance and this will lead to insurance companies going bankrupt.

New York Times
August 20, 2006
National Perspectives
Why Some Homeowners May Not Be Smiling for These Cameras
THERE are about 300,000 row houses in Philadelphia, which means there are about 300,000 row house owners in Philadelphia who would like to see their tax assessments lowered.
Some of them get in touch with the city’s Board of Revision of Taxes. A caller may say, “Our house is in the worst condition of any on the block,” said Barry Mescolotto, the board’s assistant administrator.
These days, Mr. Mescolotto has a good answer: “I’ll say, ‘I’m looking at a photo of your house, and it looks to be about the same as all the others.’ ”
“That usually ends the conversation,” Mr. Mescolotto said.
Until recently, assessors had to accept homeowners’ claims or visit the properties themselves. But in 2003, the city hired the Pictometry International Corporation, a company in Rochester, N.Y., to provide images of every building in the city.
Once a year, Pictometry flies a Cessna 172 over Philadelphia, taking thousands of black-and-white photographs. The low-altitude shots, unlike satellite images, show buildings at about a 40-degree angle. Pictometry’s computers organize the photos so they can be searched by address. Nearly 200 employees in Mr. Mescolotto’s office have the software on their computers.
Pictometry isn’t the only company offering aerial photos to assessors, but it has won adherents in more than 200 cities and counties, according to Dante Pennacchia, Pictometry’s chief marketing officer. Its competitors include an Israeli company, Ofek International, working with Aerial Cartographics of America, based in Orlando, Fla.
Mr. Mescolotto said that the Pictometry system, which costs Philadelphia about $100,000 a year, “probably paid for itself within about two weeks.”
“If you have a dog, or a locked fence, we may not be able to get into your backyard to see something you’ve built,” Mr. Mescolotto said. But Pictometry flies over dogs and fences.
In addition to home improvements, the software has also helped his office pick up more than 100 cellphone antennas that have been erected on existing structures. Each tower, he said, “adds so much value that, taxwise, it’s the equivalent of finding a new house.”
Pictometry’s software makes it possible for assessors not only to see buildings, but also to measure them, down to the hundredth of a foot. But trying to zoom in on people’s faces causes the photos to dissolve into pixels. “It’s not at the resolution where you can look in windows, or read license plates,” said Kenneth M. Wilkinson, the property assessor of Lee County in Florida. “The system preserves privacy.”
Mr. Wilkinson has made the Pictometry images available to the public over the Internet. (To see images of properties in Lee County, visit the property assessor’s site,, and then click on Pictometry. Registration is free.) The site has received millions of hits, according to Mr. Wilkinson.
And that makes a few people unhappy. One of his employees, he said, received a telephone call from a retired New York City policeman, who didn’t want people to see that he had two Cadillacs in his driveway.
Another time, he said, a woman complained that her garage door was open, and people could see a mess inside. “You can’t make an appointment to have your picture taken,” Mr. Wilkinson said.
Mr. Wilkinson says that Lee County’s tax base has grown rapidly — to about $180 billion today from about $4.5 billion in assessed valuation when he took office 25 years ago.
He said the county is dependent on Pictometry. The contract with the company, signed in 2001, came in particularly handy after Hurricane Charley made landfall in Lee County in August 2004.
By law, the county had until Jan. 1, 2005, to adjust the assessed valuation of every property affected by the hurricane. Without Pictometry, “there is no way we could have had it done in time,” Mr. Wilkinson said.
In addition, Mr. Wilkinson said, petitions to lower assessments have declined since 2001, to about 500 a year from an average of 2,000 a year. “People are surprised how well we know their property,” he said.
Recently, Mr. Wilkinson’s office has been using Pictometry’s “change detection” feature: After flying over the county, the company prepares a list of properties that appear to have been altered since the last fly-over.
“The software takes us right to those properties,” Mr. Wilkinson said. “We can look, and see that you’ve added a pool.”
Scott Yamamoto, the property appraiser for Geauga County, Ohio, which is east of Cleveland, also uses the change-detection feature. The computer, he said, is programmed to look for “something that wasn’t there before, or something that was there before but isn’t there now.”
“We get a list, in spreadsheet form, of all the parcels where there was some type of change,” he said.
Unfortunately, he said, there are a lot of false positives. A pile of sand, or snow on the ground, can trigger the change detector. “Or a boat parked close to a garage can look to the computer like the garage has been expanded,” he said.
But Mr. Yamamoto is not complaining. The first time his office used the change-detection feature, he said, his office “picked up about $1.8 million in property value that we could not see from the ground.”
That translated into $35,000 in tax revenue last year for his rural county.
He said many taxpayers like the software, “because when they call you to talk about their property, you know right away what they’re talking about.”
“But,” he said, “a property owner isn’t going to call us and say, ‘I built a riding arena back in the woods, and you can’t see it — ha, ha, ha.’ ”