Tag: John Barrios


John Barrios

At Olin Business School, “values based, data driven,” is a pillar that informs our decisions and strategic plans. Recently, John Barrios, assistant professor of accounting, brought that principle to Washington, DC, where his research helped inform and ultimately shape a feature of the Build Back Better legislation.

Attracting and supporting entrepreneurship and investment in communities is a crucial driver of economic growth and is one goal on which Republicans and Democrats can agree. Startups require significant capital, though. That’s where venture capital funds come into the picture.

Venture capital firms raise funding for startups or emerging companies that have been deemed to have high growth potential in exchange for equity or ownership in the company.

“Unlike the large hedge funds and private equity funds, venture capital funds are typically smaller in size and scale,” Barrios explained. “Fund managers usually sit on the company’s board and may be involved in day-to-day operations like a consultant.”

Carried interest

Aside from management fees—which are minimal and primarily cover operational costs—venture capital managers mainly make money when the investments are profitable. Their cut of the profit is known as carried interest. Carried interest is currently taxed as a capital gain rather than general earned income. This method of taxing makes venture capital more worthwhile for managers.

To outsiders, though, taxing carried interest at capital gains rates looks like a loophole for the rich to minimize their tax burden, Barrios said. So it wasn’t surprising that the initial version of the Build Back Better legislation included a provision to tax carried interest as general earned income.

Barrios and Yael Hochberg, at Rice University, wanted to study the potential impact of these tax changes on the economic attractiveness of new venture capital fund formation. In other words, would increased taxes on carried interest turn away would-be fund managers? And, if so, what impact would this have across the country?

“Such tax changes have the potential to have far-reaching effects on the creation and growth of innovation-driven entrepreneurial ventures in precisely the locations where policymakers are often seeking to increase entrepreneurial activity and growth,” the authors wrote.

Findings inform policymakers

The researchers used data from the Private Capital Research Institute/Burgiss and PitchBook, which provided information about funds by state and size. From that data, Barrios and Hochberg generated sample income streams for a venture capital fund manager for funds of varying sizes over the life of a single fund under the current tax taxation regime as well as under the proposed tax regime that taxes carried interest at ordinary income rates.

They then compared those potential incomes for fund managers to the average wage earnings for a person with similar education and experience, by state, adjusting for cost of living and other factors.

Their analysis found that changing the taxation regime for carried interest from long-term capital gains rates to ordinary income rates would significantly reduce the attractiveness of forming a new fund for the vast majority of funds in US states other than California, Massachusetts and New York.

“Given the importance of VC [venture capital] funding for US innovation, our findings may serve to inform and aid policymakers in their current deliberations as they consider, design, and implement potential new tax laws that will affect the VC industry,” they wrote.

As previously noted, the findings did inform and aid policymakers. The proposal of taxing carried interest as earned income was struck from the Build Back Better legislation, which is currently stalled but not dead.

Innovation in mid-America

Barrios said this is good news for cities across the country—like St. Louis—that have made generating new businesses a top priority.

“If we really want to foster entrepreneurial hubs and stimulate investments in middle America, it’s going to take more than tax credits. You need capital, and that comes from VCs,” Barrios said.

“People have this vision of venture capital managers being really wealthy. In reality, starting a VC fund in mid-America is risky and not as profitable as you might think,” Barrios said. “More than 50% of them do not make a positive return. Even successful partners could reasonably make a comparable income working a nine-to-five job at a consulting firm.

“Changing the taxation would make it even less lucrative and would make it more difficult to get people to raise the capital needed to support the innovation happening in our communities.”

Something is out to kill you. How do you react? Do you respond based on whether you’re a Republican or a Democrat?

“One would hope that when your life is on the line that partisanship drops out, right?” said Olin’s John Barrios, assistant professor of accounting.


Wrong. It doesn’t. Not according to Barrios’ National Bureau of Economic Research working paper titled “Risk Perception Through the Lens of Politics in the Time of the COVID-19 Pandemic.”

Barrios coauthored the paper with Yael Hochberg of Rice University.

As COVID-19 began its epic march across the United States, politicians and commentators were divided on the severity of the public health threat. Barrios and Hochberg examined people’s behavior whose perceptions of risk were informed by the news media and those of the partisan leaders. They found that the partisan divide was reflected in the social-distancing behavior of individuals.

Their research shows that a higher share of Trump voters in a county is associated with lower perceptions of risk during the pandemic. As the share of Trump voters rises, individuals search less for information on the virus. They also engage in less social distancing behavior, as measured by smartphone location patterns.

Why patterns reverse

The patterns persist in the face of state-level mandates to close schools and businesses or to stay at home. They reverse only when conservative politicians are exposed to the virus or when the White House releases federal social distancing guidelines.

“Perception really matters in terms of how you behave,” Barrios said. “And it’s even more important in these epidemics because of the externalities that our behavior has.”

Some might be very cautious because they perceive COVID-19 as dangerous. “Yet if my neighbor doesn’t really care, it doesn’t matter how much I stay in my apartment if he knocks on the door after he’s been walking around the whole of Chicago,” Barrios said.

Barrios set out to understand how individuals perceive the guidance from both the Centers for Disease Control and Prevention and those in political power. “Our idea was: To what extent would we observe differences in the behavior of these individuals? Given that the political party in power at this point is a Republican president, while the House (of Representatives) is Democratic.”

Even after controlling for economic characteristics in an area and the actual risk of contracting COVID-19, “we still observe a difference between high-Trump areas versus low-Trump areas,” Barrios said.

Over the course of the pandemic, governments have issued various directives regarding closing nonessential businesses and schools and sheltering in place. On March 16, federal guidelines for social distancing for a 15-day period were announced. Compliance with the directives varied substantially across counties with high and low shares of Trump voters. “In high Trump voter share counties, there is a significantly lower reduction in both average daily distance traveled and in visits to nonessential businesses,” Barrios said.

Those patterns shifted dramatically once the pandemic began affecting Republican politicians. Barrios’ paper notes the emergence of COVID-19 infections among participants at the annual Conservative Political Action Conference early this year. On March 9, Texas Sen. Ted Cruz and the chairman of CPAC self-quarantined after exposure to someone with COVID. After that announcement, people in counties with high Trump voter shares shifted their behavior. They reduced daily distance traveled and visits to nonessential businesses.

“They’re kind of catching up,” Barrios said. “Democrat areas in the same time period are still becoming more conservative, they’re social distancing more. It’s just that Republican areas are now doing it at a higher rate because they’re catching up because they’re taking it seriously.”

Same risk, different perspectives

Barrios said  “it’s worrying” that partisanship affects compliance with public health policy. “We’re not saying that the Democrats were right or Republicans were right. We’re simply saying that it’s very noteworthy that despite being exposed to the same risk, we still see different perspectives,” he said.

“Our main point is: If you want to think about policy and compliance in this voluntary, free society that we live in, the sources of this information matter and affect how we perceive that information,” Barrios said.

“And the fact that we have either news sources or political leaders that have diametrically opposed views on subjects, for whatever reason, seems to affect the behavior of individuals in ways that have real consequences—in this case, human lives.”

People who vote are more likely to practice social distancing during the COVID-19 pandemic than people with a lower sense of civic duty—regardless of political affiliation, according to a new study from a WashU Olin researcher.

John Barrios

Even as US states began reopening, voluntary social distancing remained prevalent in high civic-capital counties, said Olin’s John Barrios, assistant professor of accounting. He describes “civic capital” as having to do with trust in institutions.

“That’s not like trust in a politician,” Barrios said. “It’s actually more about institutional trust in the system rather than partisanship.”

In communities where civic capital runs high, people do things that don’t immediately benefit them personally, such as voting, volunteering or donating blood. Moreover, they generally trust their fellow citizens.

“Social distancing behavior depends on the willingness of individuals to consider the welfare of the collective when taking their own actions—a concept that has been linked to civic capital,” Barrios and co-authors note in “Civic Capital and Social Distancing During the COVID-19 Pandemic,” forthcoming in the Journal of Public Economics.

“If people actually go out and vote at a higher rate, that indicates there is some trust in the system,” Barrios said.

The research indicates that in US locations where civic capital is higher—as measured by voter participation—people’s response to the loosening of COVID-19 lockdowns was muted, suggesting that some measures of compliance didn’t require the full force of law. Where civic capital is lower, however, the data show that people began ignoring social-distancing mandates even before they were lifted.

The evidence points to the importance of civic capital in designing policy responses to pandemics.

“We don’t have a vaccine yet. So a lot of this opening up of the economy is going to be based on this voluntary compliance with social distancing: wearing a mask, staying six feet apart,” Barrios said.

‘Trench warfare’

Governments everywhere face challenges in the fight against COVID-19. For instance, on one front, a key concern has been how many tests a day can be administered.

And then there are the social issues.

“As the fight moves to trench warfare, ensuring adequate compliance with public health recommendations becomes extremely important for the success of strategies to contain the virus,” Barrios said.

Using mobile phone and survey data, he and the University of Chicago’s Luigi Zingales, Northwestern University’s Efraim Benmelech and Paola Sapienza, and Rice University’s Yael V. Hochberg researched variations in voluntary compliance with government recommendations.

Recent literature on compliance with social distancing instructions has focused on political leaning and trust in government. (In the US, Trump-leaning counties comply less. In Europe, people in regions where trust is high in government comply more than in other regions.)

This new research moves beyond political affiliation and shows civic capital has an important role in explaining behavior.

“There is work that shows that this civic capital is associated with more efficient business, more compliance,” Barrios said. “And now we can say, ‘Well, we can have compliance in public health.’ Suppose you are in a high civic-capital area. In that case, you pay more attention to these voluntary measures, you practice more social distancing, even controlling for the political partisanship in the area.”

Social distancing behavior

To measure social distancing behavior, the authors relied on anonymous mobile phone data from Unacast and Google Community Mobility Reports. The data providers supply anonymous data on changes in the number of visitors to—and time spent in—certain places, compared with a baseline for the same day of the week from January 3 through February 6.

Civic capital was harder to measure. The authors used electoral participation as the first indicator of civic capital, “since voting is the ultimate example of civic duty, with no personal payoff.” They computed average voter participation during the presidential elections from 2004 to 2016, obtained from the MIT Election Data Science and Lab, and mapped the data geospatially.

They then created scatter plots relating social distancing behavior to civic capital. Each of the plots controls for the number of confirmed COVID-19 cases, population density, income per capita, population, day of the week and the number of days since the first case in the county.

Increases in civic capital are associated with decreases in mobility data near restaurants, cafes, shopping centers, theme parks, museums, libraries and movie theaters.

“If people are less likely to go out in counties with high civic capital, they will spend more time in the proximity of their residences,” the authors write. “The results confirm this trend.”

Telephone survey

It is possible, however, that counties with higher civic capital have more restrictive stay-at-home orders. To address this, the authors conducted a telephone survey of 980 US adults on April 6-April 12 to measure social interaction and social distancing.

They asked, among other questions, “How many people were you in close physical contact with socially in the past seven days, not including people that live with you?”

The survey further showed that individuals with higher trust also practiced more social distancing.

What about elsewhere?

The authors wondered if the effect of civic capital was just a US phenomenon, or did it apply to other countries as well? So, they then turned to European data. Even after controlling for the severity of the virus in regions, the age and education of the population, and population density, they found that more civic areas experienced a steeper decline in mobility around retailing and a steeper rise in the time spent by their residence.

“Overall, our findings show that civic capital is correlated with social distancing behavior consistently across individuals, European regions, and US counties.”

Understanding voluntary compliance with government guidelines is an essential step toward designing any government policy, but especially so during a pandemic, Barrios said.

Suppose citizens can’t be trusted to comply voluntarily with reasonable social distancing rules. In that case, governments have to either mandate rigid regulations and enforce them or use other ways to contain the disease.

As countries and states reopen their economies, epidemiologists can only predict how individuals will respond to new rules—and how the disease will spread—by looking at the mobility of individuals after restrictions have been lifted, the authors write. “Any variable able to predict compliance can significantly improve their predictions and thus provide better policy guidance.”

The research results have implications beyond COVID-19. “They confirm the idea that a local region’s civic capital is a source of collective capital, enabling societies to function better in general,” according to the paper.