Negative income tax

From Wikipedia, the free encyclopedia

In economics, a negative income tax (NIT) is a welfare system within an income tax where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government.

Such a system has been discussed by economists but never fully implemented. According to surveys however, the consensus view among economists is that the "government should restructure the welfare system along the lines" of one. It was described by British politician Juliet Rhys-Williams in the 1940s and later by United States free-market economist Milton Friedman.

Negative income taxes can implement a basic income or supplement a guaranteed minimum income system.

In a negative income tax system, people earning a certain income level would owe no taxes; those earning more than that would pay a proportion of their income above that level; and those below that level would receive a payment of a proportion of their shortfall, which is the amount their income falls below that level.

General welfare

A negative income tax is intended to create a single system that would not only pay for government, but would also fulfill the social goal of making sure that there was a minimum level of income for all. It is theorized that, with an NIT, the need for minimum wage, food stamps, welfare, social security programs and other government assistance programs could be eliminated, thus reducing the administrative effort and cost to a fraction of what it is under the current system, as well as eliminating the perverse incentives created by these overlapping aid programs, e.g. when a minimum wage worker who earns a little more nets out with less income because they are newly ineligible for aid. Theoretically, the worker would then be stuck in a welfare trap and would have no incentive to seek higher wages.

A NIT does not disrupt low-wage markets, whereas a minimum wage law makes certain that people whose skills are not sufficient to justify that kind of wage will go unemployed. A NIT would therefore increase the availability of cheap labor, which would enable businesses to do domestically some of the work which they would otherwise have to outsource to other countries.

A NIT could reduce administrative overhead, since the large bureaucracies responsible for administering taxation and welfare systems, with the multitude of rules, thresholds and different applications required, could be greatly reduced or eliminated. The savings from this could then be returned to the people through spending on different government activities, via tax cuts, or any array of different ways.

Specific models

Various different models of negative income tax have been proposed. 

One model was proposed by Milton Friedman. In this version, a specified proportion of unused deductions or allowances would be refunded to the taxpayer. If, for a family of four the amount of allowances came out to $10,000, and the subsidy rate was 50%, and the family earned $6,000, the family would receive $2,000, because it left $4,000 of allowances unused, and therefore qualifies for $2,000, half that amount. Friedman feared that subsidy rates any higher would lessen the incentive to obtain employment. He also warned that the negative income tax, as an addition to the "ragbag" of welfare and assistance programs, would only worsen the problem of bureaucracy and waste. Instead, he argued, the negative income tax should immediately replace all other welfare and assistance programs on the way to a completely laissez-faire society where all welfare is privately administered. The negative income tax has come up in one form or another in Congress, but Friedman eventually opposed it because it came packaged with other undesirable elements antithetical to the efficacy of the negative income tax. Friedman preferred to have no income tax at all, but said he did not think it was politically feasible at that time to eliminate it, so he suggested this as a less harmful income tax scheme.

Flat tax with negative income tax

The effort for reporting and supervision can be significantly reduced by combining basic income with flat income tax. The relationship between gross and net income for individuals can be adjusted to correspond roughly to current relationship at all income levels, implying that income tax is effectively progressive. A flat rate income taxation with tax exemption implements a negative income tax as well as maintaining an actual tax rate progression at extremely low administrative cost. This is achieved by paying a tax on the tax exemption to all taxpayers, e.g. in monthly payments. The tax on the tax exemption is computed by applying the nominal flat tax rate to the exemption. The tax on the income is drawn directly from the source, e.g. from an employer. The tax on income is computed by applying the nominal flat tax rate to the income. 

This simple method results in an effective progressive rate taxation (although the tax rate for the taxes drawn at the source is flat) which is positive once the income exceeds the tax exemption. If, however, the income is less than the tax exemption, the effective progressive rate actually becomes negative without any involvement by any tax authority. As for the positive progression, only very high incomes would lead to an actual tax rate which is close to the nominal flat tax rate.

The tax on tax exemption also can be understood as a tax credit, which is paid back once an income has reached the level of the tax exemption. This level marks the point where paid taxes and the tax credit are equal. Above that point the state earns taxes from the taxpayer. Below that point the state pays taxes to the taxpayer.

Example:

• The income tax rate is 50%.
• The tax exemption is $30,000.
• The subsidy rate is 50% and equal to the income tax rate.

Under this scheme:

• A person earning $0 would receive $15,000 from the government.
• A person earning $25,000 would receive $2,500 from the government.
• A person earning $30,000 would neither receive any money nor pay any tax.
• A person earning $50,000 would pay a tax of $10,000.
• A person earning $100,000 would pay a tax of $35,000.

Flat tax implementations without the provision of a negative income tax actually need an additional effort in order to avoid negative taxation. For such a tax, the exemption only can be paid after knowing the earned income. Flat tax implementations with negative income tax allow the payment or crediting of the income tax at any interval, independent of the amount of the actual income.

Implementation

While the notion has long been popular in some circles, its implementation has never been politically feasible. This is partly because of the very complex and entrenched nature of most countries' current tax laws: they would have to be rewritten under any NIT system. However, some countries have seen the introduction of refundable (or non-wastable) tax credits which can be paid even when there is no tax liability to be offset, such as the Earned Income Tax Credit in the United States and working tax credit in the UK. 

In 1971, President Richard Nixon proposed a negative income tax as the centerpiece of his welfare reform program, but the NIT was not approved by Congress; however, Congress did pass a bill establishing Supplemental Security Income (SSI), providing a guaranteed income for elderly and disabled persons.

A policy called negative income tax has been implemented for a certain bracket of low incomes in Israel, but it deviates considerably from the more comprehensive model usually favored by advocates.

Experiments

From 1968 to 1982, the US and Canadian governments conducted a total of five negative income tax experiments. They were the first major social science experiments in the world. The first experiment was the New Jersey Income Maintenance Experiment, proposed by MIT Economics graduate student Heather Ross in 1967 in a proposal to the U.S. Office of Economic Opportunity. The four experiments were in:

1. The New Jersey Income Maintenance Experiment: Trenton, Passaic, Paterson, and Jersey City, New Jersey with Scranton, Pennsylvania added to increase the number of white families, 1968–1972 (1357 families)
2. The Rural Income Maintenance Experiment: Rural areas in Iowa and North Carolina, 1969–1973 (809 families)
3. Gary, Indiana, 1971–1974 (1800 families)
4. Seattle (SIME) and Denver (DIME), 1971–1982 (4800 families)
5. Manitoba, Canada ("Mincome"), 1974-1979

In general they found that workers would decrease labor supply (employment) by two to four weeks per year because of the guarantee of income equal to the poverty threshold.

Advocates

In the United States, Milton and Rose Friedman promoted the idea in 1980 in their book and television series Free to Choose. More recently, a negative income tax was advocated by the Green Party as part of their 2010 platform.

In Australia, a negative income tax is advocated by the Pirate Party as part of their tax policy.

In Slovakia, welfare and tax system reform based on NIT is proposed by classical liberal Freedom and Solidarity party.

In his final book Where Do We Go from Here: Chaos or Community? (1967), American civil rights leader and Nobel Peace Prize winner Martin Luther King Jr. wrote

I am now convinced that the simplest approach will prove to be the most effective — the solution to poverty is to abolish it directly by a now widely discussed measure: the guaranteed income.

— from the chapter titled "Where We Are Going"

Criticism

A common criticism is that the NIT might reduce the incentive to work, since recipients of the NIT would receive a guaranteed minimum wage equal to the government payment in the absence of employment. A series of studies in the United States beginning in 1968 attempted to test for effects on work incentives. Jodie Allen summarizes the key studies:

The Stanford Research Institute (SRI), which analyzed the SIME/DIME findings, found stronger work disincentive effects, ranging from an average 9 percent work reduction for husbands to an average 18 percent reduction for wives. This was not as scary as some NIT opponents had predicted. But it was large enough to suggest that as much as 50 to 60 percent of the transfers paid to two-parent families under a NIT might go to replace lost earnings. They also found an unexpected result: instead of promoting family stability (the presumed result of extending benefits to two-parent working families on an equal basis), the NITs seemed to increase family breakup.

The link between NIT and divorce was later determined to be due to a statistical error.

Another criticism comes from the relative expense of the establishment of such a tax. According to a research project conducted by Rutgers University in 2002, a program of targeted job creation would produce similar wealth redistribution with significantly less cost.

Public choice

From Wikipedia, the free encyclopedia

Public choice theory (or Public choice) is "the use of economic tools to deal with traditional problems of political science". Its content includes the study of political behavior. In political science, it is the subset of positive political theory that studies self-interested agents (voters, politicians, bureaucrats) and their interactions, which can be represented in a number of ways – using (for example) standard constrained utility maximization, game theory, or decision theory.

 

The Journal of Economic Literature's classification code regards public choice as a subarea of Microeconomics, under JEL: D7: "Analysis of Collective Decision-Making" (specifically, JEL: D72: "Economic Models of Political Processes: Rent-Seeking, Elections, Legislatures, and Voting Behavior").

Public Choice analysis has roots in positive analysis ("what is") but is often used for normative purposes ("what ought to be") in order to identify a problem or to suggest improvements to constitutional rules (i.e., constitutional economics).

Public choice theory is also closely related to social-choice theory, a mathematical approach to aggregation of individual interests, welfares, or votes. Much early work had aspects of both, and both fields use the tools of economics and game theory. Since voter behavior influences the behavior of public officials, public-choice theory often uses results from social-choice theory. General treatments of public choice may also be classified under public economics.

Background and development

A precursor of modern public choice theory was the work of Knut Wicksell (1896), which treated government as political exchange, a quid pro quo, in formulating a benefit principle linking taxes and expenditures.

Some subsequent economic analysis has been described as treating government as though it attempted "to maximize some kind sort of welfare function for society" and as distinct from characterizations of economic agents, such as those in business. In contrast, public choice theory modeled government as made up of officials who, besides pursuing the public interest, might act to benefit themselves, for example in the budget-maximizing model of bureaucracy, possibly at the cost of efficiency. 

Modern public-choice theory has been dated from the work of Duncan Black, sometimes called "the founding father of public choice". In a series of papers from 1948, which culminated in The Theory of Committees and Elections (1958), and later, Black outlined a program of unification toward a more general "Theory of Economic and Political Choices" based on common formal methods, developed underlying concepts of what would become median voter theory, and rediscovered earlier works on voting theory.

Kenneth J. Arrow's Social Choice and Individual Values (1951) influenced formulation of the theory. Among other important works are Anthony Downs (1957) An Economic Theory of Democracy and Mancur Olson (1965) The Logic of Collective Action.

James M. Buchanan and Gordon Tullock coauthored The Calculus of Consent: Logical Foundations of Constitutional Democracy (1962), considered one of the landmarks in public choice. In particular, the preface describes the book as "about the political organization" of a free society. But its methodology, conceptual apparatus, and analytics "are derived, essentially, from the discipline that has as its subject the economic organization of such a society" (1962, p. v). The book focuses on positive-economic analysis as to the development of constitutional democracy but in an ethical context of consent. The consent takes the form of a compensation principle like Pareto efficiency for making a policy change and unanimity or at least no opposition as a point of departure for social choice. 

Somewhat later, the probabilistic voting theory started to displace the median voter theory in showing how to find Nash equilibria in multidimensional space. The theory was later formalized further by Peter Coughlin.

Decision-making processes and the state

One way to organize the subject matter studied by public choice theorists is to begin with the foundations of the state itself. According to this procedure, the most fundamental subject is the origin of government. Although some work has been done on anarchy, autocracy, revolution, and even war, the bulk of the study in this area has concerned the fundamental problem of collectively choosing constitutional rules. This work assumes a group of individuals who aim to form a government, then it focuses on the problem of hiring the agents required to carry out government functions agreed upon by the members.

Bureaucracy

Another major sub-field is the study of bureaucracy. The usual model depicts the top bureaucrats as being chosen by the chief executive and legislature, depending on whether the democratic system is presidential or parliamentary. The typical image of a bureau chief is a person on a fixed salary who is concerned with pleasing those who appointed him or her. The latter have the power to hire and fire him or her more or less at will. The bulk of the bureaucrats, however, are civil servants whose jobs and pay are protected by a civil service system against major changes by their appointed bureau chiefs. This image is often compared with that of a business owner whose profit varies with the success of production and sales, who aims to maximize profit, and who can in an ideal system hire and fire employees at will. William Niskanen is generally considered the founder of public choice literature on the bureaucracy.

"Expressive interests" and democratic irrationality

Geoffrey Brennan and Loren Lomasky claim that democratic policy is biased to favor "expressive interests" and neglect practical and utilitarian considerations. Brennan and Lomasky differentiate between instrumental interests (any kind of practical benefit, both monetary and non-monetary) and expressive interests (forms of expression like applause). According to Brennan and Lomasky, the paradox of voting can be resolved by differentiating between expressive and instrumental interests.

This argument has led some public choice scholars to claim that politics is plagued by irrationality. In articles published in the Econ Journal Watch, economist Bryan Caplan contended that voter choices and government economic decisions are inherently irrational. Caplan's ideas are more fully developed in his book The Myth of the Rational Voter (Princeton University Press 2007). Countering Donald Wittman's arguments in The Myth of Democratic Failure, Caplan claims that politics is biased in favor of irrational beliefs. 

According to Caplan, democracy effectively subsidizes irrational beliefs. Anyone who derives utility from potentially irrational policies like protectionism can receive private benefits while imposing the costs of such beliefs on the general public. Were people to bear the full costs of their "irrational beliefs", they would lobby for them optimally, taking into account both their instrumental consequences and their expressive appeal. Instead, democracy oversupplies policies based on irrational beliefs. Caplan defines rationality mainly in terms of mainstream price theory, pointing out that mainstream economists tend to oppose protectionism and government regulation more than the general population, and that more educated people are closer to economists on this score, even after controlling for confounding factors such as income, wealth or political affiliation. One criticism is that many economists do not share Caplan's views on the nature of public choice. However, Caplan does have data to support his position. Economists have, in fact, often been frustrated by public opposition to economic reasoning. As Sam Peltzman puts it:

Economists know what steps would improve the efficiency of HSE [health, safety, and environmental] regulation, and they have not been bashful advocates of them. These steps include substituting markets in property rights, such as emission rights, for command and control ... The real problem lies deeper than any lack of reform proposals or failure to press them. It is our inability to understand their lack of political appeal.

Public choice's application to government regulation was developed by George Stigler (1971) and Sam Peltzman (1976).

Special interests

Public choice theory is often used to explain how political decision-making results in outcomes that conflict with the preferences of the general public. For example, many advocacy group and pork barrel projects are not the desire of the overall democracy. However, it makes sense for politicians to support these projects. It may make them feel powerful and important. It can also benefit them financially by opening the door to future wealth as lobbyists. The project may be of interest to the politician's local constituency, increasing district votes or campaign contributions. The politician pays little or no cost to gain these benefits, as he is spending public money. Special-interest lobbyists are also behaving rationally. They can gain government favors worth millions or billions for relatively small investments. They face a risk of losing out to their competitors if they don't seek these favors. The taxpayer is also behaving rationally. The cost of defeating any one government give-away is very high, while the benefits to the individual taxpayer are very small. Each citizen pays only a few pennies or a few dollars for any given government favor, while the costs of ending that favor would be many times higher. Everyone involved has rational incentives to do exactly what they are doing, even though the desire of the general constituency is opposite. Costs are diffused, while benefits are concentrated. The voices of vocal minorities with much to gain are heard over those of indifferent majorities with little to individually lose. However the notion that groups with concentrated interests will dominate politics is incomplete because it is only one half of political equilibrium. Something must incite those preyed upon to resist even the best organized concentrated interests. In his article on interest groups Gary Becker identified this countervailing force as being the deadweight loss from predation. His views capped what has come to be known as the Chicago school of political economy and it has come in sharp conflict with the so-called Virginia faction of public choice due to its assertion that politics will tend towards efficiency due to nonlinear deadweight losses and due to its claim that political efficiency renders policy advice irrelevant.

While good government tends to be a pure public good for the mass of voters, there may be many advocacy groups that have strong incentives for lobbying the government to implement specific policies that would benefit them, potentially at the expense of the general public. For example, lobbying by the sugar manufacturers might result in an inefficient subsidy for the production of sugar, either direct or by protectionist measures. The costs of such inefficient policies are dispersed over all citizens, and therefore unnoticeable to each individual. On the other hand, the benefits are shared by a small special-interest group with a strong incentive to perpetuate the policy by further lobbying. Due to rational ignorance, the vast majority of voters will be unaware of the effort; in fact, although voters may be aware of special-interest lobbying efforts, this may merely select for policies which are even harder to evaluate by the general public, rather than improving their overall efficiency. Even if the public were able to evaluate policy proposals effectively, they would find it infeasible to engage in collective action in order to defend their diffuse interest. Therefore, theorists expect that numerous special interests will be able to successfully lobby for various inefficient policies. In public choice theory, such scenarios of inefficient government policies are referred to as government failure – a term akin to market failure from earlier theoretical welfare economics.

Rent-seeking

A field that is closely related to public choice is the study of rent-seeking. This field combines the study of a market economy with that of government. Thus, one might regard it as a new political economy. Its basic thesis is that when both a market economy and government are present, government agents provide numerous special market privileges. Both the government agents and self-interested market participants seek these privileges in order to partake in the resulting monopoly rent. Rentiers gain benefits above what the market would have offered, but in the process allocate resources in sub-optimal fashion from a societal point of view. 

Rent-seeking is broader than public choice in that it applies to autocracies as well as democracies and, therefore, is not directly concerned with collective decision making. However, the obvious pressures it exerts on legislators, executives, bureaucrats, and even judges are factors that public choice theory must account for in its analysis of collective decision-making rules and institutions. Moreover, the members of a collective who are planning a government would be wise to take prospective rent-seeking into account.

Another major claim is that much of political activity is a form of rent-seeking which wastes resources. Gordon Tullock, Jagdish Bhagwati, and Anne Osborn Krueger have argued that rent-seeking has caused considerable waste. In a parallel line of research Fred McChesney claims that rent extraction causes considerable waste, especially in the developing world. As the term implies, rent extraction happens when officials use threats to extort payments from private parties.

Political stance

From such results it is sometimes asserted that public choice theory has an anti-state tilt. But there is ideological diversity among public choice theorists. Mancur Olson for example was an advocate of a strong state and instead opposed political interest group lobbying. More generally, James Buchanan has suggested that public choice theory be interpreted as "politics without romance", a critical approach to a pervasive earlier notion of idealized politics set against market failure.

The British journalist, Alistair Cooke, commenting on the Nobel Prize awarded to James M. Buchanan in 1986, reportedly summarized the public choice view of politicians by saying, "Public choice embodies the homely but important truth that politicians are, after all, no less selfish than the rest of us."

Recognition

Several notable public choice scholars have been awarded the Nobel Prize in Economics, including James M. Buchanan (1986), George Stigler (1982), Gary Becker (1992), Vernon Smith (2002) and Elinor Ostrom (2009). In addition, James Buchanan, Vernon Smith, and Elinor Ostrom were former presidents of the Public Choice Society.

Limitations

Buchanan and Tullock themselves outline methodological qualifications of the approach developed in their work The Calculus of Consent (1962), p. 30:

[E]ven if the model [with its rational self-interest assumptions] proves to be useful in explaining an important element of politics, it does not imply that all individuals act in accordance with the behavioral assumption made or that any one individual acts in this way at all times ... the theory of collective choice can explain only some undetermined fraction of collective action. However, so long as some part of all individual behavior ... is, in fact, motivated by utility maximization, and so long as the identification of the individual with the group does not extend to the point of making all individual utility functions identical, an economic-individualist model of political activity should be of some positive worth.

Diffusion of innovations

From Wikipedia, the free encyclopedia

The diffusion of innovations according to Rogers. With successive groups of consumers adopting the new technology (shown in blue), its market share (yellow) will eventually reach the saturation level. The blue curve is broken into sections of adopters.

 

Diffusion of innovations is a theory that seeks to explain how, why, and at what rate new ideas and technology spread. Everett Rogers, a professor of communication studies, popularized the theory in his book Diffusion of Innovations; the book was first published in 1962, and is now in its fifth edition (2003). Rogers argues that diffusion is the process by which an innovation is communicated over time among the participants in a social system. The origins of the diffusion of innovations theory are varied and span multiple disciplines. 

Rogers proposes that four main elements influence the spread of a new idea: the innovation itself, communication channels, time, and a social system. This process relies heavily on human capital. The innovation must be widely adopted in order to self-sustain. Within the rate of adoption, there is a point at which an innovation reaches critical mass. 

The categories of adopters are innovators, early adopters, early majority, late majority, and laggards. Diffusion manifests itself in different ways and is highly subject to the type of adopters and innovation-decision process. The criterion for the adopter categorization is innovativeness, defined as the degree to which an individual adopts a new idea.

History

The concept of diffusion was first studied by the French sociologist Gabriel Tarde in late 19th century and by German and Austrian anthropologists and geographers such as Friedrich Ratzel and Leo Frobenius. The study of diffusion of innovations took off in the subfield of rural sociology in the midwestern United States in the 1920s and 1930s. Agriculture technology was advancing rapidly, and researchers started to examine how independent farmers were adopting hybrid seeds, equipment, and techniques. A study of the adoption of hybrid corn seed in Iowa by Ryan and Gross (1943) solidified the prior work on diffusion into a distinct paradigm that would be cited consistently in the future. Since its start in rural sociology, Diffusion of Innovations has been applied to numerous contexts, including medical sociology, communications, marketing, development studies, health promotion, organizational studies, knowledge management, conservation biology and complexity studies, with a particularly large impact on the use of medicines, medical techniques, and health communications. In organizational studies, its basic epidemiological or internal-influence form was formulated by H. Earl Pemberton, who provided examples of institutional diffusion such as postage stamps and standardized school ethics codes. 

In 1962, Everett Rogers, a professor of rural sociology, published his seminal work: Diffusion of Innovations. Rogers synthesized research from over 508 diffusion studies across the fields that initially influenced the theory: anthropology, early sociology, rural sociology, education, industrial sociology and medical sociology. Using his synthesis, Rogers produced a theory of the adoption of innovations among individuals and organizations. Diffusion of Innovations and Rogers' later books are among the most often cited in diffusion research. His methodologies are closely followed in recent diffusion research, even as the field has expanded into, and been influenced by, other methodological disciplines such as social network analysis and communication.

Elements

The key elements in diffusion research are:

Element	Definition
Innovation	Innovation is a broad category, relative to the current knowledge of the analyzed unit. Any idea, practice, or object that is perceived as new by an individual or other unit of adoption could be considered an innovation available for study.
Adopters	Adopters are the minimal unit of analysis. In most studies, adopters are individuals, but can also be organizations (businesses, schools, hospitals, etc.), clusters within social networks, or countries.
Communication channels	Diffusion, by definition, takes place among people or organizations. Communication channels allow the transfer of information from one unit to the other. Communication patterns or capabilities must be established between parties as a minimum for diffusion to occur.
Time	The passage of time is necessary for innovations to be adopted; they are rarely adopted instantaneously. In fact, in the Ryan and Gross (1943) study on hybrid corn adoption, adoption occurred over more than ten years, and most farmers only dedicated a fraction on their fields to the new corn in the first years after adoption.
Social system	The social system is the combination of external influences (mass media, surfactants, organizational or governmental mandates) and internal influences (strong and weak social relationships, distance from opinion leaders). There are many roles in a social system, and their combination represents the total influences on a potential adopter.

Characteristics of innovations

Studies have explored many characteristics of innovations. Meta-reviews have identified several characteristics that are common among most studies. These are in line with the characteristics that Rogers initially cited in his reviews.

Potential adopters evaluate an innovation on its relative advantage (the perceived efficiencies gained by the innovation relative to current tools or procedures), its compatibility with the pre-existing system, its complexity or difficulty to learn, its trialability or testability, its potential for reinvention (using the tool for initially unintended purposes), and its observed effects. These qualities interact and are judged as a whole. For example, an innovation might be extremely complex, reducing its likelihood to be adopted and diffused, but it might be very compatible with a large advantage relative to current tools. Even with this high learning curve, potential adopters might adopt the innovation anyway.

Studies also identify other characteristics of innovations, but these are not as common as the ones that Rogers lists above. The fuzziness of the boundaries of the innovation can impact its adoption. Specifically, innovations with a small core and large periphery are easier to adopt. Innovations that are less risky are easier to adopt as the potential loss from failed integration is lower. Innovations that are disruptive to routine tasks, even when they bring a large relative advantage, might not be adopted because of added instability. Likewise, innovations that make tasks easier are likely to be adopted. Closely related to relative complexity, knowledge requirements are the ability barrier to use presented by the difficulty to use the innovation. Even when there are high knowledge requirements, support from prior adopters or other sources can increase the chances for adoption.

Characteristics of individual adopters

Like innovations, adopters have been determined to have traits that affect their likelihood to adopt an innovation. A bevy of individual personality traits have been explored for their impacts on adoption, but with little agreement. Ability and motivation, which vary on situation unlike personality traits, have a large impact on a potential adopter's likelihood to adopt an innovation. Unsurprisingly, potential adopters who are motivated to adopt an innovation are likely to make the adjustments needed to adopt it. Motivation can be impacted by the meaning that an innovation holds; innovations can have symbolic value that encourage (or discourage) adoption. First proposed by Ryan and Gross (1943), the overall connectedness of a potential adopter to the broad community represented by a city. Potential adopters who frequent metropolitan areas are more likely to adopt an innovation. Finally, potential adopters who have the power or agency to create change, particularly in organizations, are more likely to adopt an innovation than someone with less power over his choices.

Characteristics of organizations

Organizations face more complex adoption possibilities because organizations are both the aggregate of its individuals and its own system with a set of procedures and norms. Three organizational characteristics match well with the individual characteristics above: tension for change (motivation and ability), innovation-system fit (compatibility), and assessment of implications (observability). Organizations can feel pressured by a tension for change. If the organization's situation is untenable, it will be motivated to adopt an innovation to change its fortunes. This tension often plays out among its individual members. Innovations that match the organization's pre-existing system require fewer coincidental changes and are easy to assess and more likely to be adopted. The wider environment of the organization, often an industry, community, or economy, exerts pressures on the organization, too. Where an innovation is diffusing through the organization's environment for any reason, the organization is more likely to adopt it. Innovations that are intentionally spread, including by political mandate or directive, are also likely to diffuse quickly.

Process

Diffusion occurs through a five–step decision-making process. It occurs through a series of communication channels over a period of time among the members of a similar social system. Ryan and Gross first identified adoption as a process in 1943. Rogers' five stages (steps): awareness, interest, evaluation, trial, and adoption are integral to this theory. An individual might reject an innovation at any time during or after the adoption process. Abrahamson examined this process critically by posing questions such as: How do technically inefficient innovations diffuse and what impedes technically efficient innovations from catching on? Abrahamson makes suggestions for how organizational scientists can more comprehensively evaluate the spread of innovations. In later editions of Diffusion of Innovation, Rogers changes his terminology of the five stages to: knowledge, persuasion, decision, implementation, and confirmation. However, the descriptions of the categories have remained similar throughout the editions. 

Five stages of the adoption process

Stage	Definition
Knowledge	The individual is first exposed to an innovation, but lacks information about the innovation. During this stage the individual has not yet been inspired to find out more information about the innovation.
Persuasion	The individual is interested in the innovation and actively seeks related information/details.
Decision	The individual takes the concept of the change and weighs the advantages/disadvantages of using the innovation and decides whether to adopt or reject the innovation. Due to the individualistic nature of this stage, Rogers notes that it is the most difficult stage on which to acquire empirical evidence.
Implementation	The individual employs the innovation to a varying degree depending on the situation. During this stage the individual also determines the usefulness of the innovation and may search for further information about it.
Confirmation	The individual finalizes his/her decision to continue using the innovation. This stage is both intrapersonal (may cause cognitive dissonance) and interpersonal, confirmation the group has made the right decision.

Decisions

Two factors determine what type a particular decision is:

• Whether the decision is made freely and implemented voluntarily
• Who makes the decision.

Based on these considerations, three types of innovation-decisions have been identified.

Type	Definition
Optional Innovation-Decision	made by an individual who is in some way distinguished from others.
Collective Innovation-Decision	made collectively by all participants.
Authority Innovation-Decision	made for the entire social system by individuals in positions of influence or power.

Rate of adoption

The rate of adoption is defined as the relative speed at which participants adopt an innovation. Rate is usually measured by the length of time required for a certain percentage of the members of a social system to adopt an innovation. The rates of adoption for innovations are determined by an individual’s adopter category. In general, individuals who first adopt an innovation require a shorter adoption period (adoption process) when compared to late adopters. 

Within the adoption curve at some point the innovation reaches critical mass. This is when the number of individual adopters ensures that the innovation is self-sustaining.

Adoption strategies

Rogers outlines several strategies in order to help an innovation reach this stage, including when an innovation adopted by a highly respected individual within a social network and creating an instinctive desire for a specific innovation. Another strategy includes injecting an innovation into a group of individuals who would readily use said technology, as well as providing positive reactions and benefits for early adopters.

Diffusion vs adoption

Adoption is an individual process detailing the series of stages one undergoes from first hearing about a product to finally adopting it. Diffusion signifies a group phenomenon, which suggests how an innovation spreads.

Adopter categories

Rogers defines an adopter category as a classification of individuals within a social system on the basis of innovativeness. In the book Diffusion of Innovations, Rogers suggests a total of five categories of adopters in order to standardize the usage of adopter categories in diffusion research. The adoption of an innovation follows an S curve when plotted over a length of time. The categories of adopters are: innovators, early adopters, early majority, late majority and laggards. In addition to the gatekeepers and opinion leaders who exist within a given community, change agents may come from outside the community. Change agents bring innovations to new communities– first through the gatekeepers, then through the opinion leaders, and so on through the community. 

Adopter category	Definition
Innovators	Innovators are willing to take risks, have the highest social status, have financial liquidity, are social and have closest contact to scientific sources and interaction with other innovators. Their risk tolerance allows them to adopt technologies that may ultimately fail. Financial resources help absorb these failures.
Early adopters	These individuals have the highest degree of opinion leadership among the adopter categories. Early adopters have a higher social status, financial liquidity, advanced education and are more socially forward than late adopters. They are more discreet in adoption choices than innovators. They use judicious choice of adoption to help them maintain a central communication position.
Early Majority	They adopt an innovation after a varying degree of time that is significantly longer than the innovators and early adopters. Early Majority have above average social status, contact with early adopters and seldom hold positions of opinion leadership in a system (Rogers 1962, p. 283)
Late Majority	They adopt an innovation after the average participant. These individuals approach an innovation with a high degree of skepticism and after the majority of society has adopted the innovation. Late Majority are typically skeptical about an innovation, have below average social status, little financial liquidity, in contact with others in late majority and early majority and little opinion leadership.
Laggards	They are the last to adopt an innovation. Unlike some of the previous categories, individuals in this category show little to no opinion leadership. These individuals typically have an aversion to change-agents. Laggards typically tend to be focused on "traditions", lowest social status, lowest financial liquidity, oldest among adopters, and in contact with only family and close friends.

Failed diffusion

Failed diffusion does not mean that the technology was adopted by no one. Rather, failed diffusion often refers to diffusion that does not reach or approach 100% adoption due to its own weaknesses, competition from other innovations, or simply a lack of awareness. From a social networks perspective, a failed diffusion might be widely adopted within certain clusters but fail to make an impact on more distantly related people. Networks that are over-connected might suffer from a rigidity that prevents the changes an innovation might bring, as well. Sometimes, some innovations also fail as a result of lack of local involvement and community participation.

For example, Rogers discussed a situation in Peru involving the implementation of boiling drinking water to improve health and wellness levels in the village of Los Molinas. The residents had no knowledge of the link between sanitation and illness. The campaign worked with the villagers to try to teach them to boil water, burn their garbage, install latrines and report cases of illness to local health agencies. In Los Molinas, a stigma was linked to boiled water as something that only the "unwell" consumed, and thus, the idea of healthy residents boiling water prior to consumption was frowned upon. The two-year educational campaign was considered to be largely unsuccessful. This failure exemplified the importance of the roles of the communication channels that are involved in such a campaign for social change. An examination of diffusion in El Salvador determined that there can be more than one social network at play as innovations are communicated. One network carries information and the other carries influence. While people might hear of an innovation's uses, in Rogers' Los Molinas sanitation case, a network of influence and status prevented adoption.

Heterophily and communication channels

Lazarsfeld and Merton first called attention to the principles of homophily and its opposite, heterophily. Using their definition, Rogers defines homophily as "the degree to which pairs of individuals who interact are similar in certain attributes, such as beliefs, education, social status, and the like". When given the choice, individuals usually choose to interact with someone similar to themselves. Homophilous individuals engage in more effective communication because their similarities lead to greater knowledge gain as well as attitude or behavior change. As a result, homophilous people tend to promote diffusion among each other. However, diffusion requires a certain degree of heterophily to introduce new ideas into a relationship; if two individuals are identical, no diffusion occurs because there is no new information to exchange. Therefore, an ideal situation would involve potential adopters who are homophilous in every way, except in knowledge of the innovation.

Promotion of healthy behavior provides an example of the balance required of homophily and heterophily. People tend to be close to others of similar health status. As a result, people with unhealthy behaviors like smoking and obesity are less likely to encounter information and behaviors that encourage good health. This presents a critical challenge for health communications, as ties between heterophilous people are relatively weaker, harder to create, and harder to maintain. Developing heterophilous ties to unhealthy communities can increase the effectiveness of the diffusion of good health behaviors. Once one previously homophilous tie adopts the behavior or innovation, the other members of that group are more likely to adopt it, too.

The role of social systems

Opinion leaders

Not all individuals exert an equal amount of influence over others. In this sense opinion leaders are influential in spreading either positive or negative information about an innovation. Rogers relies on the ideas of Katz & Lazarsfeld and the two-step flow theory in developing his ideas on the influence of opinion leaders.

Opinion leaders have the most influence during the evaluation stage of the innovation-decision process and on late adopters. In addition opinion leaders typically have greater exposure to the mass media, more cosmopolitan, greater contact with change agents, more social experience and exposure, higher socioeconomic status, and are more innovative than others.

Research was done in the early 1950s at the University of Chicago attempting to assess the cost-effectiveness of broadcast advertising on the diffusion of new products and services. The findings were that opinion leadership tended to be organized into a hierarchy within a society, with each level in the hierarchy having most influence over other members in the same level, and on those in the next level below it. The lowest levels were generally larger in numbers and tended to coincide with various demographic attributes that might be targeted by mass advertising. However, it found that direct word of mouth and example were far more influential than broadcast messages, which were only effective if they reinforced the direct influences. This led to the conclusion that advertising was best targeted, if possible, on those next in line to adopt, and not on those not yet reached by the chain of influence. 

Research on actor-network theory (ANT) also identifies a significant overlap between the ANT concepts and the diffusion of innovation which examine the characteristics of innovation and its context among various interested parties within a social system to assemble a network or system which implements innovation.

Other research relating the concept to public choice theory finds that the hierarchy of influence for innovations need not, and likely does not, coincide with hierarchies of official, political, or economic status. Elites are often not innovators, and innovations may have to be introduced by outsiders and propagated up a hierarchy to the top decision makers.

Electronic communication social networks

Prior to the introduction of the Internet, it was argued that social networks had a crucial role in the diffusion of innovation particularly tacit knowledge in the book The IRG Solution – hierarchical incompetence and how to overcome it. The book argued that the widespread adoption of computer networks of individuals would lead to much better diffusion of innovations, with greater understanding of their possible shortcomings and the identification of needed innovations that would not have otherwise occurred. The social model proposed by Ryan and Gross is expanded by Valente who uses social networks as a basis for adopter categorization instead of solely relying on the system-level analysis used by Ryan and Gross. Valente also looks at an individual's personal network, which is a different application than the organizational perspective espoused by many other scholars.

Recent research by Wear shows, that particularly in regional and rural areas, significantly more innovation takes place in communities which have stronger inter-personal networks.

Organizations

Innovations are often adopted by organizations through two types of innovation-decisions: collective innovation decisions and authority innovation decisions. The collective decision occurs when adoption is by consensus. The authority decision occurs by adoption among very few individuals with high positions of power within an organization. Unlike the optional innovation decision process, these decision processes only occur within an organization or hierarchical group. Within an organization certain individuals are termed "champions" who stand behind an innovation and break through opposition. The champion plays a very similar role as the champion used within the efficiency business model Six Sigma. The process contains five stages that are slightly similar to the innovation-decision process that individuals undertake. These stages are: agenda-setting, matching, redefining/restructuring, clarifying and routinizing.

Extensions of the theory

Policy

Diffusion of Innovations has been applied beyond its original domains. In the case of political science and administration, policy diffusion focuses on how institutional innovations are adopted by other institutions, at the local, state, or country level. An alternative term is 'policy transfer' where the focus is more on the agents of diffusion and the diffusion of policy knowledge, such as in the work of Diane Stone. Specifically, policy transfer can be defined as "knowledge about how policies administrative arrangements, institutions, and ideas in one political setting (past or present) is used in the development of policies, administrative arrangements, institutions, and ideas in another political setting".

The first interests with regards to policy diffusion were focused in time variation or state lottery adoption, but more recently interest has shifted towards mechanisms (emulation, learning and coercion) or in channels of diffusion where researchers find that regulatory agency creation is transmitted by country and sector channels. At the local level, examining popular city-level policies make it easy to find patterns in diffusion through measuring public awareness. At the international level, economic policies have been thought to transfer among countries according to local politicians' learning of successes and failures elsewhere and outside mandates made by global financial organizations. As a group of countries succeed with a set of policies, others follow, as exemplified by the deregulation and liberalization across the developing world after the successes of the Asian Tigers. The reintroduction of regulations in the early 2000s also shows this learning process, which would fit under the stages of knowledge and decision, can be seen as lessons learned by following China's successful growth.

Technology

Peres, Muller and Mahajan suggested that diffusion is "the process of the market penetration of new products and services that is driven by social influences, which include all interdependencies among consumers that affect various market players with or without their explicit knowledge".

Eveland evaluated diffusion from a phenomenological view, stating, "Technology is information, and exists only to the degree that people can put it into practice and use it to achieve values".

Diffusion of existing technologies has been measured using "S curves". These technologies include radio, television, VCR, cable, flush toilet, clothes washer, refrigerator, home ownership, air conditioning, dishwasher, electrified households, telephone, cordless phone, cellular phone, per capita airline miles, personal computer and the Internet. These data can act as a predictor for future innovations. 

Diffusion curves for infrastructure reveal contrasts in the diffusion process of personal technologies versus infrastructure.

Consequences of adoption

Both positive and negative outcomes are possible when an individual or organization chooses to adopt a particular innovation. Rogers states that this area needs further research because of the biased positive attitude that is associated with innovation. Rogers lists three categories for consequences: desirable vs. undesirable, direct vs. indirect, and anticipated vs. unanticipated.

In contrast Wejnert details two categories: public vs. private and benefits vs. costs.

Public versus private

Public consequences comprise the impact of an innovation on those other than the actor, while private consequences refer to the impact on the actor. Public consequences usually involve collective actors, such as countries, states, organizations or social movements. The results are usually concerned with issues of societal well-being. Private consequences usually involve individuals or small collective entities, such as a community. The innovations are usually concerned with the improvement of quality of life or the reform of organizational or social structures.

Benefits versus costs

Benefits of an innovation obviously are the positive consequences, while the costs are the negative. Costs may be monetary or nonmonetary, direct or indirect. Direct costs are usually related to financial uncertainty and the economic state of the actor. Indirect costs are more difficult to identify. An example would be the need to buy a new kind of pesticide to use innovative seeds. Indirect costs may also be social, such as social conflict caused by innovation. Marketers are particularly interested in the diffusion process as it determines the success or failure of a new product. It is quite important for a marketer to understand the diffusion process so as to ensure proper management of the spread of a new product or service.

Mathematical treatment

The diffusion of an innovation typically follows an S shaped curve which often resembles a logistic function. Mathematical programming models such as the S-D model apply the diffusion of innovations theory to real data problems. In addition to that, agent-based models follow a more intuitive process by designing individual-level rules to model diffusion of ideas and innovations.

Complex systems models

Complex network models can also be used to investigate the spread of innovations among individuals connected to each other by a network of peer-to-peer influences, such as in a physical community or neighborhood.

Such models represent a system of individuals as nodes in a network (or graph). The interactions that link these individuals are represented by the edges of the network and can be based on the probability or strength of social connections. In the dynamics of such models, each node is assigned a current state, indicating whether or not the individual has adopted the innovation, and model equations describe the evolution of these states over time.

In threshold models, the uptake of technologies is determined by the balance of two factors: the (perceived) usefulness (sometimes called utility) of the innovation to the individual as well as barriers to adoption, such as cost. The multiple parameters that influence decisions to adopt, both individual and socially motivated, can be represented by such models as a series of nodes and connections that represent real relationships. Borrowing from social network analysis, each node is an innovator, an adopter, or a potential adopter. Potential adopters have a threshold, which is a fraction of his neighbors who adopt the innovation that must be reached before he will adopt. Over time, each potential adopter views his neighbors and decides whether he should adopt based on the technologies they are using. When the effect of each individual node is analyzed along with its influence over the entire network, the expected level of adoption was seen to depend on the number of initial adopters and the network's structure and properties. Two factors emerge as important to successful spread of the innovation: the number of connections of nodes with their neighbors and the presence of a high degree of common connections in the network (quantified by the clustering coefficient). These models are particularly good at showing the impact of opinion leaders relative to others. Computer models are often used to investigate this balance between the social aspects of diffusion and perceived intrinsic benefit to the individuals.

Criticism

Because there are more than four thousand articles across many disciplines published on Diffusion of Innovations, with a vast majority written after Rogers created a systematic theory, there have been few widely adopted changes to the theory. Although each study applies the theory in slightly different ways, this lack of cohesion has left the theory stagnant and difficult to apply with consistency to new problems.

Diffusion is difficult to quantify because humans and human networks are complex. It is extremely difficult, if not impossible, to measure what exactly causes adoption of an innovation. This is important, particularly in healthcare. Those encouraging adoption of health behaviors or new medical technologies need to be aware of the many forces acting on an individual and his or her decision to adopt a new behavior or technology. Diffusion theories can never account for all variables, and therefore might miss critical predictors of adoption. This variety of variables has also led to inconsistent results in research, reducing heuristic value.

Rogers placed the contributions and criticisms of diffusion research into four categories: pro-innovation bias, individual-blame bias, recall problem, and issues of equality. The pro-innovation bias, in particular, implies that all innovation is positive and that all innovations should be adopted. Cultural traditions and beliefs can be consumed by another culture's through diffusion, which can impose significant costs on a group of people. The one-way information flow, from sender to receiver, is another weakness of this theory. The message sender has a goal to persuade the receiver, and there is little to no reverse flow. The person implementing the change controls the direction and outcome of the campaign. In some cases, this is the best approach, but other cases require a more participatory approach. In complex environments where the adopter is receiving information from many sources and is returning feedback to the sender, a one-way model is insufficient and multiple communication flows need to be examined.