Thursday, December 31, 2009

The development cost of informality and low debt enforcement

There is a huge literature trying to understand why total factor productivity is much higher is some countries than others. The literature is huge because this is a hugely important question, but also because this is something no one has been able to really model efficiently. There is a lot of punting, especially with reduced-form cross-country regressions that can only highlight correlations, if that, but not causation,

So it is refreshing to see a paper that puts some structure in all that. Hernan Moscoso Boedo and Pablo D'Erasmo build a model (you know, a theory with more than a linear equation...) where firm adopt technologies, some inefficient, and react to various incentive stemming from informality and debt enforcement. The latter two are aspects that have been long identifies as potential sources of underdevelopment. The paper shows that this mechanism can explain up to 60% of total factor productivity differences. This is definitely an interesting way to approach this question.

Wednesday, December 30, 2009

Life expectancy, quality of the environment, and mutliple equilibria

The recent debacle in Copenhagen over a climate change treaty has highleghted a large rift between developing and developed economies over what should be done and how. The way it was presented, the issue was about a right to develop like the currently rich ones did, by polluting your way to wealth. Thus, the rich should either allow the poor to pollute, or compensate them for avoiding the pollution they would entitled to.

But reading a paper by Fabio Mariani, Agustín Pérez-Barahona and Natacha Raffin got me thinking that there is another reason. Think about why we care about the environment. It is because we live in it. Now, life expectancy is markedly shorter in developed economies, thus it would make only sense that they would care less about the environment. What the paper highlights is that there is a potential for multiple equilibria; As people living in polluted environments have shorter lives they care less about the environment, which is then more polluted. This makes it even more necessary to provide them with a transfer to entice them out of this loop.

Tuesday, December 29, 2009

Wages in high-end prostitution

I reported earlier on the literature trying to understand why prostitutes are so well paid. I concluded that this was because of the risk, but this could not explain the full wage premium. The rest must have to do, for example, with foregone marriage opportunities due to the stigma of prostitution.

Lena Edlund, Joseph Engelberg and Christopher Parsons look at a prostitution market where there is no risk, the high-end escort service industry. These workers do not work on the street and thus have a better control on who they do business with. Also, they are less visible, which should help a little with the stigma.

One is to expect that the price of an escort decreases with age. But it appears to do so very little. In fact, there is a clear hump at the very ages where the probability of marriage is the highest in the general population. Thus, foregone marriage opportunities are clearly important. Furthermore, Edlund, Engelberg and Parsons find that those escorts whose activity has no impact on the marriage market (does not offer sex, transsexual) do not have such a hump. Finally, in places where most of the business is with travelers, the premium is lower.

Monday, December 28, 2009

Are wages really that rigid?

The New Keynesian theory has come under increasing assault because its basics assumptions, price and wage rigidity, look more and more tenuous in the data. Now that we have much better data sets, for example, we realize that prices of everyday goods fluctuate a lot. This may be a recent phenomenon, as these data sets come from the databases that retailers use nowadays for scanners, and all this information technology has considerably reduced the cost of changing prices. So much for the now obsolete menu costs.

What about wages, then? Wages are typically set for at least a year, and collective bargaining sets wage schedules for about three years on average. But people change jobs, get promoted, get bonuses, so it is difficult to measure well wage rigidity. Still, there is some consensus that there is at least some nominal downward rigidity, as it is believed that there is some psychological barrier to reducing nominal wages. I am not that convinced, as the current recession has shown plenty of examples of nominal wage decreases. But I need more than anecdotal evidence.

There now also a study of wage rigidity across European firms, where one would suspect the most evidence of this given the labor market institutions. Martina Lawless, Jan Babecký, Philip Du Caju, Theodora Cosma, Julián Messina and Tairi Rõõm show that there is rigidity, and that it can be related very closely to the various theories that have been put forward to justify these rigidities: efficiency wage theory, insider-outsider theory, and collective bargaining. What I take from this: wage rigidity is for real, at least in Europe, but you cannot just assume it in a theory, you need to properly model its origin. Indeed, as this paper shows, rigidity is flexible as economic conditions change.

Thursday, December 24, 2009

Sex choice and poverty

In many cultures, there is a strong preference for male offspring. While the human rights movement and the emancipation of women has in many cases curtailed preferential treatments, at least the most visible ones, new technologies like ultrasound have allowed this practice to flourish in some parts of the world. China and India, in particular, report unusually high male/female ratios. This surplus of males must have consequences on the marriage market, especially for the less desirable ones: the poor.

Lena Edlund and Chulhee Lee study this with the background of Korea. Sons are appreciated because they have sons, thus a married son is preferred to a married daughter, who is preferred to a single son. When the country was poor, however, single sons were still appreciated because they could provide old age support to their poor parents. As the country, and its poor, got richer and with the introduction of an old-age pension system, the value of the single son drops significantly and the sex ratio gets closer to normal.

What puzzles me in all this is why the poor did not favor daughters. They were relatively rare, thus could garner a substantial bride price. Thus there should have been a surplus of male children in rich families and of female children in poor ones. The paper does not provide any evidence of this in the data, but it seems to be a natural consequence of the model to me.

Wednesday, December 23, 2009

Drinking and Sex

Is alcohol abuse tied to risky sexual behavior? If so, and alcohol abuse is widespread, all the sex education you do is for naught, as people incapacitated by alcohol tend to do silly things with adverse consequences.

Ana Isabel Gil Lacruz, Marta Gil Lacruz and Juan Oliva Moreno use Spanish data to estimate the relationship between too much drinking and risky sex. While they cannot estimate the relationship directly, they find for indirect ways to do so. While each method can be criticized, they all point in the same direction: alcohol leads to risky sex. This shows that alcohol abuse prevention programs are particularly useful, as they have the side benefits of reducing the incidence of sexually transmitted diseases and unwanted pregnancies.

In conclusion, be careful with the bottle during the end-of-year festivities, or you will end up with more headaches than a simple hangover.

Tuesday, December 22, 2009

Why the Catholic Church should not abolish celibacy for priests

Priests in the Catholic church have to make a vow of celibacy, a tradition that is currently under pressure because it is a serious hindrance to the recruitng of new priests. Indeed, such a vow implies a serious commitment that men are less willing to make compared to Malthusian times where population control was a matter of survival and being a priest was a good economic choice.

Men-Andri Benz, Reto Foellmi, Egon Franck and Urs Meister claim the Catholic Church should resist the calls for the end of celibacy. Their reasoning is again about commitment. It allows the Church to signal to its believers that its priests are more conservative, and this triggers more donations. While it reduces the pool of candidates for priesthood, the celibacy vow selects the right ones for the task of showing conservative values. All this, of course, assuming that conservative values will remain strong, at least among Church donors.

Monday, December 21, 2009

Divorce and labor division in the household

Marriages can be a volatile affair, especially when the spouses have little incentives of staying together. Traditionally, marriage has offered one big economic advantage over celibacy: specialization. And once spouses are locked into their specific tasks, divorce becomes very costly as the husband was not good at household tasks while the wife would not have fared well on the labor market.

But with the dramatic increase in female labor market participation in the past century, this has changed. As women have better opportunities on the market, they do not feel tied to marriage as much. The conjecture is then that the higher the income share of the bread-winner, the more stable the marriage is. Kornelius Kraft and Stefanie Neimann study this using the ever-giving data-set, the German Socio-Economic Panel, and confirm these conjectures except for one. The income proportion theory is not gender-neutral: female bread-winners are more likely to divorce than male ones.

I find this particularly interesting because it gives a good explanation for the increase in divorce rates across all countries. And do not tell me it is because divorce laws changed. These laws were modified under pressure.

Saturday, December 19, 2009

Two years of blogging

It is now two years that I am blogging here. While two years seems like a re rather short time, it adds up to about 450 posts. All in all, imagine reading 400+ papers and provide your opinion about them. In retrospect, this is a huge task!

But I enjoy doing it, and it appears a growing readership does, too. While it obviously hampers the time I can devote to my own research, I still enjoy it. Again, I would hope this would generate a bit more discussion, and it has improved over last year. But still, do not hesitate to discuss my opinions or offer your own about the papers. And I especially encourage the discussed authors. Few took the opportunity so far.

Speaking of comments. The increase in popularity of Economic Logic implies also that it appeared on the radar of spam commenters. I try to keep up with them, but I have only so much time. Hence I have now started moderation of comments on older posts. Comments are still welcome, but given that for non-current posts the signal-to-noise ratio was becoming really low, I had to intervene.

Finally, consider a donation. I could be doing consulting work or writing more papers instead of this blog. There is a clear opportunity cost for me. So if you were pondering giving something to the lady that brings your daily junk mail, go for me instead...

Thursday, December 17, 2009

Local authorities under-invest in disaster prevention

In the United States, the individual states and local authorities are supposed to be in charge of disaster prevention and protection, while the federal government provides insurance against disaster occurrence. And as this insurance is fully with perfect commitment, prevention is sub-optimal.

Timothy Goodspeed and Andrew Haughwout look at the second-best insurance contract where the states provide prevention in a non-cooperative fashion and cannot be monitored. It turns out it is really difficult to coax states to provide appropriate prevention. Fundamentally, this is because of the time consistency problem of the federal government and its soft budget constraint. Once disaster has happened, it is difficult to say no to immediate aid. This is not unlike the problem of humanitarian aid, that keeps going to the same places because they provide no effort for prevention as they know they are insured. Or the banking system.

As long as the insurer wants good things for people, this time-consistency problem will remain. But it can be mellowed by applying a hard budget constraint. This takes strong commitment, which is unlikely in a democracy, as politician cannot afford to refuse emergency aid. Then, why not let the federal government be in charge of prevention investment as well?

Wednesday, December 16, 2009

Is education bad for growth?

Despite the fact that models usually show that education is good for national income, the empirical evidence is mixed. The typical reason provided is that there are inefficiencies in the provision of education, or that raising the funds for public education is distortionary.

Rossana Patrón focuses on the latter using a growth model with an informal sector where households allocate their time to education, formal and informal work. Formal labor income is taxed to finance public education, along with indirect taxes in the formal sector. The economy may end up on the wrong side of the Laffer curve because any increase in the tax rate discourages labor, and in particular formal labor. Thus a government should only raise taxes if the distortionary effect is swamped out by the effect on human capital accumulation.

Now this is all very intuitive, and we would not really have needed a complex model to figure this out. Where such a model becomes really useful is that it allows to quantify things, in particular when there are ambiguities such as the one above. With realistic parametrization, it may turn out that we are far from an ambiguity and that raising taxes for education is a no-brainer (or not). But theory that tells you rather intuitive results and that anything can happen somewhere in the parameter domain is not useful.

Tuesday, December 15, 2009

The gold standard as a commitment technology

The Gold Standard is now part of economic history, and the only times your hear it proposed as a viable monetary regime is on delusional websites put together by people who seem to have found the solution to all of the world's problems in monetary policy. And there are those that believe that gold is the safest asset out there and thus money should be based on it (and one should first question why gold has any value in the first place). So, the Gold Standard is basically a non-starter in the profession nowadays.

Thus, one should highlight the courage of Elisa Newby for looking at the Gold Standard as a possible monetary regime in modern times, and for doing some serious work. Her idea is that the Gold Standard can act as a commitment device, which is particularly useful when monetary policy needs to be significantly relaxed for a while, like during a war or a major economic crisis. As long as it is clear that the monetary authority will return to the Gold Standard, economic agents will continue to trust the local currency even if its gold parity has been suspended. But if the old standard is not reestablished, then the monetary authority has completely lost credibility, and thus will endogenously choose to adhere to the old parity. Note that this also solves the time consistency problem.

Does this mean the Gold Standard is a perfect monetary policy? Note that in this example, it is really effective when it is not applied. But in normal times, it is still subject to all the flaws that lead to its demise.

Monday, December 14, 2009

Should old women pay for the health of old men?

Several years ago, Richard Posner conjectured that old women should pay for the health care of old men. The reason is that old women tend to live longer and appreciate the company of men, thus they would be happier if they lived longer. This is a purely theoretical argument as in all industrialized economies health care is state provided, at least in retirement. But note it leans on one important assumption: old women are happier if married.

Christoph Wunder and Johannes Schwarze test this using the German Socio-Economic Panel, an endless source of insights. And they find that widows are just as happy as married women quite rapidly after the loss of their husbands. I would conjecture that retirees are quite prepared for such eventualities, and the loss of a partner affects them less than earlier in life.

However: what about the men? Would they like to live longer? Is the marginal utility of an additional year of life at age x higher for a man than for a woman? This will never be measurable, but this should be the real question to ask.

Friday, December 11, 2009

Gay couples are different, even on the labor market

When people get married, their labor supply tends to decrease. This may come from the fact that this provides opportunities for specialization in market and home production, in particular through child rearing. When looking at unattached vs. partnered or married individuals, the prediction, and the observation, is thus that the latter work less.

Amélie Lafrance, Casey Warman and Frances Woolley verify this for homosexual individuals. For lesbians, no difference with the rest of the population, but for gays, surprise. Attached or married gays work more. This runs counter to any intuition, except if there is some particular selection into marriage. Puzzling.

Thursday, December 10, 2009

Why is Argentina poorer than Canada?

Up to the 1930's, Argentina and Canada were very similar countries: rich, sparsely populated, income mostly from natural resources and agriculture, lots of immigrants, similar GDP per capita. Then after World War II, the economic fortunes of those two countries drifted apart. What happened?

Germán González and Valentina Viego think that Canada benefited from a rich and large neighbor that was a nice complement to Canada. Argentina, however, did not have this advantage and fell into a trap that made it more and more reliant on its core products and prevented it for following a "normal" development path towards industrialization. This conclusion comes from a fairly standard growth accounting exercise that highlights how Argentinian economic efficiency did not keep up with Canada's starting in the 1930's, primarily due to higher technology adoption in Canada. The latter is clearly helped by the vicinity of the US, while Argentina compounded things by adopting an ill-advised import substitution policy.

Wednesday, December 9, 2009

File sharing is welfare enhancing

Intellectual property for music is rapidly eroding, and the big music labels are complaining loudly about this. They argue that file sharing and other illicit duplication is eroding their revenue and thus the artists' (and some other people's) income. We have shown previously that less copyright is better for artistic creation, and thus welfare, But let us abstract from this and ask whether file sharing in itself is bad for society.

Jean-Jacques Herings, Ronald Peeters and Michael Yang address this using a model where consumers can choose the medium of the music they acquire every period, and music label are forward looking in their pricing strategy, as consumers lock into their medium choice, to some extent. There is thus an incentive to keep CD prices low, both to attract current sales, but also to entice consumers to buy CDs is the future as well. Also, file sharing keeps monopolistic behavior of the music industry at bay. The results: while file sharing reduces the music industry's profits, it increases the amount of music enjoyed by the population, and thus welfare. We should do not the same with our research in Economics. Wait, we already do

Tuesday, December 8, 2009

What intertemporal policy objective to take?

How should policies take into account future generations? This is a tough question to answer because future generations are not present to offer their opinion, and because there is uncertainty about what the future holds. This is especially true with climate change, the availability of natural resources, and the environment in general.

Humberto Llavador, John Roemer and Joaquim Silvestre try to tackle this tricky issue and explore several social welfare criteria. Typically, we use some discounted utilitarian function, which can, under certain circumstances, advocate the end of the world in finite time, and thus forget about some future generations as long as current ones gain sufficiently. Given uncertainty about future outcomes, this seems to be a dangerous route. I prefer more Rawlsian arguments, which dictate that one should optimize the outcome of the worst off generation, whichever that may be. This obviously prioritizes sustainability, as it would under most circumstances put some constraints on generations very far away under catastrophic scenarios. But this is what policy should achieve: foremost an insurance against the worst outcomes.

Llavador, Roemer and Silvestre also discuss other criteria. Not a simple read, but quite obviously an important topic in the current context.

Monday, December 7, 2009

The changing selectivity of US colleges

In the United States, there is this general impression that it is getting harder and harder to get into college. In particular, universities crow how the average SAT scores of entering classes keep increasing cohort after cohort. How is it in reality?

Caroline Hoxby shows that this increased selectivity is only true for top colleges. Half of the colleges have become less selective. And why these changes? Students have become more mobile and strive more to get into the best colleges. They care less about local option and want the best.

Still, it is an old tradition for Americans to move afar for college. Europe is just now moving in that direction, in particular thanks to the Erasmus initiative. While the quality of tertiary education institutions is much more uniform than in the US, the increased mobility could lead to dispersion not unlike the one we see now in the United States.

Saturday, December 5, 2009

The fuss about retirement plan choices in academia

When you start with an academic position at a US state college, you usually get a day to acquaint yourself with local authorities and procedures. You hear from a lot of important administrators, sign a lot of forms, and try to understand what you got into. One of those forms determines which retirement plan you chose to contribute to: the state defined-benefit plan for all state employees, or the alternative defined-contributions plan with TIAA-CREF for teachers. Not knowing really what each plan delivers, you typically go for the second one, as you may not get tenured and value the fact that TIAA-CREF is also available in other states. But that decision was not well-informed, rushed and, most importantly, irrevocable.

Over the following years, as you learn more about the retirement plans, you wonder whether you made the right choice. But you were fine with it as long as the stock market was doing well and your retirement funds were accruing nicely. Now is a different story, given the big losses on the stock market. At several universities, faculty are remembering that they did not really make a choice when they selected their retirement plans and are asking for the opportunity to switch plans, and in some cases to buy contribution years in the state plans.

This sounds like a case of trying to game the system to obtain a better retirement package. This is particularly true as those complaining the most are now tenured, thus ex-post it is optimal for them to be in the state system. But if they were truly making ill-informed decisions when they signed up, they may have a point. But try to prove it.

Where they may be more successful is when the state will realize that these faculty will now retire much later as their retirement account is now worth much less. If fact they may never retire. This means that faculty will become much older and expensive relative to new hires. Administrations may actually view offering state retirement packages as a cost efficient way to renew faculty. Or they may use golden parachutes to essentially replenish the depleted retirement accounts. Thus, faculty may not even need to complain...

Friday, December 4, 2009

Television, the root of the crisis?

Plenty has been blamed on TV, so why not the current crisis? Let's see. TV encourage consumerism by bombarding the viewer with ads about must-have items. "as see on TV" is considered a label of quality. Infomercials push you to buy products you do not need. Soap operas and prime time shows anoint consumerism. There are channels entirely dedicated to shopping. You see were I am getting at, TV is accused of encouraging (too much) consumption, and by extension consumption over one's means and excessive debt. And such behavior certainly a component in the current crisis. But let's not get ahead of ourselves with assertions heard on TV and taken as a fact.

Matthew Baker and Lisa George look at the survey of Consumer Finance and exploit the gradual diffusion to study whether households with earlier access to television ended up with higher indebtedness. And it turns out to be true, in particular for debt resulting from durable good purchases. This is essentially based on data from the 1950s and 1960s. As the marketing industry has perfected its sales pitch since, this impacts should have become more important, and perfected the drive to consume beyond means.

Thursday, December 3, 2009

We need public data on general trustworthiness

Trust is important for transactions, but can easily be exploited. So it is important to understand what creates it. I reported before that to create trust one must constantly remind people what is expected of them. But what consequences does trust have? It is well known that an economy with higher levels of mutual trust will perform better. What about individual trust and individual performance?

Jeffrey Butler, Paola Giuliano and Luigi Guiso find, using the European Social Survey, that the relationship is non-monotone. People who consider themselves little trustworthy think the same of others, transact less and end up with lower income. However, people think they are very trustworthy think others are as well, end up being cheated more than average and have lower income income as well. Only the middle-of-the-road guys get it tight. Butler, Giuliano and Guiso thus argue that this is really an issue of information about the general level of trustworthiness in an economy. If being were better informed, they wold do better. We should publish a trustwothiness index n a regular basis, just the the CPI or consumer sentiment.

Wednesday, December 2, 2009

Do rising top incomes mean higher growth?

Does more inequality increase growth? Theoretically, the relationship is ambiguous. Let us take to effects to illustrate this by focussing on the incomes of the richest. If these increase, the aggregate savings rate gets higher as the richest have typically a below average marginal propensity to consume. The higher savings rate leads to more capital accumulation, and thus higher wages for everyone and higher GDP. However, the same rise in top incomes puts more pressure on increasing redistribution, and we know that more taxation leads to more inefficiencies, say through diversion of resources into tax avoidance and through lower incentives to work. Which effects dominates, and there are others, is an empirical matter.

The literature is largely inconclusive on this. Cross-country regressions are particularly ill-suited for this, because the level of inequality in an economy can have many reasons that maybe correlated is some way with growth. Time-series studies are also problematic because of the possibility of a Kuzents curve: As an economy develops, on can expect inequality to rise and then fall. And in both cases, the measurement of inequality is always problematic.

Dan Andrews, Christopher Jencks and Andrew Leigh claim to do this better by focussing on just the top incomes (easier to measure than, say, a Gini coefficient) and by exploiting the pannel feature of their data. They conclude that a rise in top incomes, at least after 1960, has a positive impact on the growth rates in 12 OECD countries. Specifically, a 1% increase in the top income share leads to a 0.12% increase in the growth rate. If this income change is permanent, the growth rate change is permanent as well. On theoretical grounds, I find this hard to believe and that may be a result of the rather short period they are looking at (40 years in 5 year intervals). Imagine what this means in the context of a Solow growth model: The permanent shock means that the aggregate savings rate is higher. That leads to a higher capital level, but not a higher steady state growth rate. It looks like there is still a lot of work left in this literature.

Tuesday, December 1, 2009

The loss aversion of economic forecasters

Macroeconomic forecasting is tricky business, not just because it is difficult to predict the future. As a forecasters, you are risk averse and do not want to be caught dead wrong when you make a forecast that deviates from the consensus. Suppose you model (or your gut) tells you that GDP goes the other way from all other forecasters. If it turns out you were right, you win big, but the others have the excuse that they were the consensus. If you are wrong, you lose much more, as you deviated from the consensus. The best strategy is then to go with the consensus, whatever you actually found.

Is there really such an asymmetry in the forecaster's loss function? Jörg Döpke, Ulrich Fritsche and Boriss Siliverstovs explore this looking at 17 forecasters in Germany. They do not quite study the game I describe above, rather whether there is asymmetry in the under- and over-estimation of inflation and the growth rate. I found my question more interesting, but anyway, they find little evidence of asymmetry. They also find that forecasters work rationally, i.e., their forecasts are unbiased and they use all the information available. Overall encouraging results that should give very little space for playing the game I mentioned first.

Monday, November 30, 2009

Optimal unemployment insurance monitoring

Setting up a good unemployment insurance system is awfully difficult. You need to take into account that there may be significant moral hazard, as workers may shirk their effort to find a new job or hide job rejections. But you still want to provide some level of insurance. Hugo Hopenhayn and Juan Pablo Nicolini have realized in 1997 that "one dimension" is not sufficient to get closer to first best. In addition to benefits that decline with unemployment duration, they devise a tax and subsidy scheme once you have a job, a scheme that depends on your unemployment duration.

Ofer Setty adds a third dimension, monitoring. Specifically, the idea is to monitor the job-search effort with a probability that depends on some observables. Monitoring is costly, by provides a somewhat informative signal, on which insurance benefits depend. In other words, if a case worker thinks you are lazy, he can spy on you and depending on what he observes, he may penalize or supplement you. Knowing this, you provide more effort to look good. The result: significantly better insurance, measured by the variance of consumption that is divided by three, and half the cost of insurance. Not bad.

Saturday, November 28, 2009

About books

A week ago, I argued that journals are dead. What about books? There are three types of books I want to distinguish.

Textbooks. They have turned into an abomination. They are expensive, too frequently revised, encourage both teacher and student to be lazy in class. I would do away with I were allowed.

Academic books. In economics, they rarely push the frontier of research. Over the last five years, I must not have read more than five. Were they to disappear, it would not be a big loss.

Entertaining books. By that I mean literary pieces in fiction mostly. This is a medium that is not going to disappear. Nothing beat being taken by a book and not be able to put it away. There is something physical about it that a Kindle cannot replicate. Something like what the following video describes.

Friday, November 27, 2009

Why third generation immigrants earn less

It is well known that second generation immigrants fit better in the host country. This is particularly true with respect to human capital, with the first generation being either less educated than the second, or not being able to exploit fully its existing human capital. What happens to further generations? If the second generation has converged to the local population, there should nothing interesting to see, right?

Wrong, according to Vincenzo Caponi. He observes on Mexican immigrants to the US that the third generation has significantly lower wages than the second. The way I understand it is that there is selection in migration decisions: only those with higher than average abilities (not necessarily realized human capital) go. Their children inherit some of those traits, and thus have higher than average abilities and human capital. While the first generation was not able to fully exploit this, while the second does, wages go up. But abilities of the third generation continue regressing to the mean, and the selection effect erodes. This generation ends up with lower human capital than their parents and thus lower wages.

Thursday, November 26, 2009

How people pick a good wine

How do you pick your wine when you go to the store? DO you come with a list of recommendations? Do you ask personnel? Other shoppers? Do you come with a guidebook? Do you pick at random? Or do you always buy the same bottles?

Luiz de Mello and Ricardo Pires say that the average customer is mostly influenced, except for the price, by the shape of the label. Next most important factor is the color of the label. Isn't that disappointing? with the educated small talk people have about their preferred wines, all that matters in the end is the label?

How can we rationalize this? For one, many customers are not that sophisticated and just want a decent wine. Given the competition, a particular cru needs to distinguish itself. Somehow, having a distinctive bottle design is frowned upon, but the label is where free expression can attract a shopper's eye, like the banner ads with dancing girls. For the sophisticated wine drinker, the label will not matter anyway.

Wednesday, November 25, 2009

What do Economics graduate students think?

David Colander has made a series of illuminating surveys of graduate students in Economics that have given us a very interesting picture of our profession, or at least how these students view it. Much of his work was, however, performed with surveys sent to the top US PhD programs. He follows up now with a survey of what he compassionately calls the "median" range, the other US graduate programs.

David Colander, Tiziana Dominguez, Gail Hoyt and KimMarie McGoldrick report a few interesting results. Compared to top programs, median ones have proportionally more Americans, who are more likely to have chosen the program for geographical than prestige reasons. Students from median programs seem to be more interested in various fields of Economics, probably a reflection of the fact that they are on average two years older and have more of sense of purpose in their studies. I am pleased to read that about half the students consider Economics to be a tool set. It is also interesting to note that whether in a top or median program, students appear to have similar views of policy and of assumptions in Economics.

All in all, students in top and median schools do not look that different. Their expectations in terms of jobs are different, as they should be, as well as the way they get funded. Lower ranked schools cannot fund them as well as research assistants or provide them with fellowships. Colander and co. interpret the fact that more are teaching assistants at median schools as a choice by students, it seems more a funding constraint to me. No real surprises in this survey.

Tuesday, November 24, 2009

Policy inertia through educational elites

Some economists speak sometimes a language that is even difficult to comprehend by other economists. This happens in particular when they draw from other social sciences. An expert in this is Gilles Saint-Paul, whose major research agenda is to understand why France has chosen not to adhere to free market principles despite repeated evidence it could do better with less government intervention.

In his latest piece, he suggests that there is very strong institutional inertia that is fed by the institution itself. I see two major points in his discourse. The first is that there is an educational elite that is biased in some way and makes it thus impossible for the general public to really understand what is going on, "learn the parameters of the model." And in France this elite is anti free market. The second is that because policy choices are consistently made with a government intervention bias, people never have the opportunity to learn how good free markets actually are.

Saint-Paul certainly has a point with cultural elites being very influential in France. Where else can philosophers become TV stars? It is also true that this elite lives in some sort of utopia where the world can be perfected by intervention (and unlimited budgets). This borders sometimes on the naïveté elementary school kids display when they feel they solved the Darfur problem by writing a letter to the President (my kid did). It is also true that the French are repeatedly shown the problems of free capitalism, like in the US. And the exact reverse happens in the US, where free markets are taught and thought to be perfect, and any government intervention is evil.

Not that free markets or government control are perfect, but, as so often, there is a middle ground. And with Sarkozy, the French are getting more of a taste of free markets. And on the other side of the pond, Obama is putting options on the table that should alleviate some of the ill effects of free markets. Maybe we are now seeing this inertia crumbling.

Monday, November 23, 2009

On the optimality of longevity?

There are times where you come across an interesting title and a somewhat appealing abstract, and then you read the paper and you cannot believe the rubbish that is being presented. It is all elegant math, neat proofs, sometimes there is even good intuition, but the relevancy or the modeling assumptions are completely out of this world. The latest opus by Luciano Fanti and Luca Gori is one them.

So the purpose of this paper is to study how public expenditures for health impact savings and the current account through changes in longevity. That seems like a reasonable question, especially the longevity angle, as many studies before, some cited on this blog, have looked at the direct interaction between health expenses and savings, or at the indirect effect through changes in interest rates. From here it goes downhill, though.

First, prices are fixed. While may make sense for the interest rate, a small open economy is assumed after all, it makes no sense for the wage, as the whole point is to look what happens when population and aggregate savings change and thus should have an impact on the marginal product of labor. Second, aggregate capital is not defined, and thus the current account is not defined. Third, the paper claims that longevity is endogenous, but in fact it is just a function of health expenditures, which are exogenous. Fourth, when lifetime is endogenous, one cannot describe utility solely with consumption and assign zero utility when dead. As a consequence, any welfare measure is invalid.

Ironically, the cover page of the working paper series says "adhibe rationem difficultatibus", a quote from Seneca translating to, roughly, "let reason conquer your obstacles."

Saturday, November 21, 2009

Journals are dead

You way have noticed that I have not reported about a journal article on this blog for months. In fact, it has been a while since I last opened a journal. Should I take this as a sign that journals have become irrelevant?

It is true that journals are considerably lagging behind the research frontier, at least in Economics. Our working paper culture makes that you rely on such pre-publications to keep up with what is going on. In other fields, conferences is the place to go to stay current. Journals are then just a confirmation about your evaluation of your readings. In this regard, I am eager to see how the papers I discuss here will be published (see the IDEAS reading list for this blog).

But back to the topic. Why do we keep insisting on sending our papers to journals and suffer through the tyranny of referees who cannot appreciate our work or just have personal agendas? We can get the recognition we need from citations, especially now that RePEc does citation analysis from working papers, much faster than ISI could ever do. Unfortunately, tenure and promotion committees want to see peer-reviewed publications, because of inertia.

And what if blogs like mine could take the role of peer review? They establish a reputation, and then (positive) mentions can become an asset. But for this to happen, we need more blogs like that, and especially more specialized ones that can better dissect papers. And we need more readership so that research blogs actually get a chance at become reputable. From what I see from my readership and the amounts of comments, we still have a way to go, although some others listed at Econ Academics (link corrected) appear more successful.

Friday, November 20, 2009

Are school uniforms useful?

Urban schools are often tempted to impose school uniforms on the presumption that this resolves some discipline problems linked to clothing and gangs. The counterpart of this supposed benefit is that those uniforms are costly. Thus, the improvement in discipline better be worth it, including indirect effects on student performance.

Scott Imberman and Elisabetta Gentile look at a school district where some schools have adopted uniforms. And it turns out the gains are minimal: none in elementary school, and only slight improvements in attendance and language skills in higher grades. And these small positive impacts are limited to female students. Is this worth the cost of the uniforms? I do not think so.

Thursday, November 19, 2009

Are ethnic differences across nations relevant?

It is well know that ethno-liguistic diversity is bad for the development of an economy, for example because it leads to leaders favoring their ethnicity, thus members of an ethnicity only vote for their own, and the political and economic process only is about rent seeking. I am exaggerate, but in some countries this unfortunately close to the truth. The negative impact of ethno-linguistic diversity has been shown over and over in cross-country regressions.

Could ethno-liguistic similarity across countries also matter? For one, one could imagine that it could foster closer ties and thus lower trade barriers, which is good for development. It is also likely to has spurred fewer interethnic wars, thus leading to more trust that is necessary for commerce. On the other hand, civil unrest can spill over to a country with ethnic or linguistic affinity. In any case, before this can be studied, one needs a good measure of ethno-linguistic similarity.

Olaf de Groot delivers this by measuring the percentage of shared identity characteristics of two individuals randomly drawn from two different populations. And using this measure to study conflict spillovers, it appears to be a very good predictor. Let's see whether this measure will be useful for other studies.

Wednesday, November 18, 2009

Do big boxes displace mom-and-pop stores?

When Wal-Mart moves into town, is this good or bad? It is commonly perceived that this is bad for local businesses, and especially for small "mom-and-pop" stores. In reality, that depends on whether big-box stores like Wal-Mart are complements or substitutes. Intuitively, they should be largely substitutes with respect to the shops they directly compete with, while there may be complementarities with other shops as they attract more customers to town.

John Haltiwanger, Ron Jarmin and C.J. Krizan confirm this intuition. Surprisingly, this was not a clear result from the previous literature. The difference here is that establishment level data is used, and that employment dynamics within a metropolitan area are studied.

That being said, what is so bad about seeing mom-and-pop stores closing? These are high inefficient retailers, and if similar retailing services can be provided at lower cost, we should go for it. If people value a different retailing experience, they should be willing to pay for it, and visibly they are not. Banning big boxes only provides rents to existing inefficient businesses.

Tuesday, November 17, 2009

Play with your colleagues, and write a paper about your experience

Who has not dreamed of playing a crank on one's colleagues? And then get a paper out of it? This paper is not quite about a crank, it is about an experiment that João Ramos and Benno Torgler played on their colleagues. Many departments have a common room for people to get coffee, chat and hang out. Ramos and Torgler used their common room at Queensland University of Technology to play a game unbeknown to their colleagues, namely test the Broken Window Theory.

The theory states that if a building has a broken window, it will soon have more broken windows, because the first one signals neglect and thus breaking a window has no consequences. The particular experiment is interesting because participants were unaware they were being observed. It went as follows: usually the common room is cleaned every morning, with all dishes washed in a dishwasher. It is expected from everyone to put dirty dishes in the dishwasher. The experiment is to put a controlled number of dirty dishes in the sink and mess up further the place with newspapers and sugar packs.

In the tidy common room, 18% of users littered, defined by not putting their dishes in the dish washer. With the messed up common room, 59% littered. Older faculty tend to litter more, surprisingly, and there is less littering when more people are present (peer effects) and on Mondays (habit from not littering at home over the week-end).

Oh, how I wish I had the idea of hanging out in the common room for a full month and get a paper out of it...

Monday, November 16, 2009

The international movement of euro coins

We know rather well how frequently bank notes change hands, simply by computing the velocity of money from the money supply and some aggregate measuring transactions (although not all are done with cash nowadays). But as they change hands, how much do they travel?

Franz Seitz, Dietrich Stoyan and Karl-Heinz Tödter follow € coins. Each country participating in the European Monetary Union issues its own coins, and they are valid currency everywhere. So they eventually cross borders as people themselves cross borders. They look at German €1 coins and find that they exit the country at a rate of 4 to 5% a year. And Germany is the largest participating country, so I find this to be a surprisingly large flow. In the long term they expect the proportion of German coins in Germany to be around 50%.

Saturday, November 14, 2009

The new Dutch car tax is great!

The Netherlands just decided to revamp their car tax. First the taxes on the acquisition of cars, currently 25% of the sales price) and the yearly car tax are scrapped. This is replaced by a base tax of €0.03 per driven kilometer, an amount that is increased for gas-guzzlers, heavy vehicles and rush-hour traffic. Distances and times are determined by GPS in every vehicle.

I absolutely love this system. It is almost exactly how cars should be taxed. The current system does not penalize enough for the externalities of driving (pollution, road wear and congestion) because the marginal cost is fixed (not zero, because there is also the gas tax). This system allows to vary the cost according the intensity of the externality. Only small flaw I see: one should still have a periodic tax on cars, to account for the public space they take by being parked. Or even better, have parking fees levied by GPS as well.

Friday, November 13, 2009

On the impact of religion on social trust

All religions I know of advocate that one should care and trust others. But "others" needs definition: in many cases it means others from the same religion, to the exclusion of other religions. Thus, if religiosity is higher, does this lead to higher social trust? It is not obvious as more religious people may trust more their own and less the others. To give a parallel in internation trade: are free trade unions good? Yes, because they reduce tariffs, but no if they increase tariffs for trade outside of the "club."

Niclas Bergren and Christian Bjørnskov study the religiosity and social trust question using survey data that, among others, asks to questions: "Is religion an important part of your daily life?" and "Can people in general be trusted?" They perform cross-country regressions using 105 countries and all US states. The outcome: reliogisity reduces social trust, both internationally and with the US states. Why? I can only speculate here, but humans are social beasts that operate at the level of clans. Religious affiliation is one expression of this. And for a religious person, anybody who does not share the same values is suspicious.

Does this mean the world would be better without religions? For one, less resources would be spent in demonstrating how my god is netter than yours. Also, this study shows that we would have more trust, an essentail ingredient of trade. But as Malthus said, I paraphrase, materialism is not the only element in happiness, spiritualism can be important, too.

Thursday, November 12, 2009

Are school lunch subsidies useful?

I have always found it puzzling that so many American children qualify for school lunch subsidies. It seems that in the richest country of the world at a time where the world was never this rich, no children should go hungry. Yet many apparently are. And it seems that these school lunch programs are doing them good, both in terms of putting something in their stomach and something healthy in their regimen. Which is important in the context of the obesity "epidemic."

This is what I understand from the paper by Larry Howard and Nishith Prakash. In particular, they observe that pure fruit juice, fruit and salad intake increases for those who are subsidized. This implies in particular that parents are not substituting away from these foods when they are supplied in school. Encouraging. Now, what about removing hamburgers, pizza and fries from school cafeteria menus for everyone?

Wednesday, November 11, 2009

Do remittances help growth back home?

As Robert Lucas has highlighted, it is a puzzle why capital does not flow in much larger quantities to poor countries. There, capital is scarce and has high returns. A counterpart of this is that labor should be moving away from poor countries to where it is mopre scarce. This is indeed happening, although rich countries put restrictions to this flow. But when it happens, it turns out that rather large remittances are sent back home by migrants workers, to the point that it now surpasses other capital flows. It becomes then important to understand whether this capital influx is put to good use.

Michael Gapen, Adolfo Barajas, Ralph Chami, Peter Montiel and Connel Fullenkamp study te impact of remittances on economic growth. It is weel known that they have a positive impact on poverty alleviation or consumption smoothing at the household level, but the macroeconomic impacts are not well understood.

It turns out remittances have no positive impact, and it may even have a negative impact on growth. The authors obtain this result performing panel growth regressions on 84 countries. How would this result be obtained? Remittances can have a positive impact, through relaxing credit constraints, providing more resources and insurancing macroeconomic stability. However, they are probably directed towards households with a high propensity to consume, and thus not contribute to investment. And for other households, it may also increase consumption significantly if remittances are perceived to be permanent income. Finally, remittances may adversely affect labor force participation and total factor productivity.

One important consequence of this is that one should not take remittances as a substitute for foreign direct investment. Also, remittances can have positive and negative effects, and policy makers should find ways to direct them towards positive channels, like improving credit markets and building collateral for productive loans.

Tuesday, November 10, 2009

Program evaluation: estimation vs. simulation

Simulations are a tool that is more and more used to evaluate policies. This is in particular important when these policies have never been implemented before and thus there is no historical data to draw on. How good are such simulations? One way to check this is to do an ex-ante simulation of a policy change that has actually been implemented thereafter, and then estimate ex-post its effect.

Fabian Bornhorst does this with the PROGRESA program in Mexico. There, some families receive transfers if their children go to school. Bornhorst first draws a model of occupational choice and then estimates it using data that was available before PROGRESA was implemented. He then looks at outcomes if PROGRESA is applied in this model economy. This is then compared to actual outcomes. How well does the simulation fare? Not bad at all, but not perfectly either. It tends to indicate somewhat stronger outcomes than those actually observed. Also, it does not capture some differences across groups, but this can mainly be attributed to the level of heterogeneity within the simulated model, so this is fixable. Overall, very encouraging.

Monday, November 9, 2009

How to forecast inflation in Sudan

We tend to get interested in large developed economies because this is where we live and where loads of data are available to make interesting observations and run empirical exercises. But there are also lots of issues elsewhere that need to be studied and that are relevant, at least locally. Those are harder, because data is scarce and also because theory that could guide us may not be available.

Take as an example a study by Kenji Moriyama and Abdul Naseer that tries to forecast inflation in Sudan. This is very important in an economy as disrupted as this one, because the lack of efficient financial markets and banking leaves only currency as a tool for savings. If inflation is high or uncertain, using it for savings is not likely either. The problem is that there is very little data available for Sudan. The authors use ARMA techniques, which at least rely on a limited number of series but require rather long samples. But they can rely only on eight years of monthly data.

Another way to work this out would be to have a structural model, but this requires quite a few additional data series, which are not likely to be available. Maybe then, letting theory guide us could be a solution. This is particularly important in a country where shocks are very important and regime changes are likely. The Lucas Critique has a lot of bite here, and you want to go as deep as possible in the structure in order to study the reactions of agents and markets to situations that may never have happened before. But do we really have a good theory to describe Sudan, with its civil war, population displacement, humantarian aid, etc.? This is the kind of theory that needs development, as this is where the marginal return of theory to real-world well-being is the highest. And this is not just about inflation in Sudan.

Friday, November 6, 2009

Many people do not plan ahead

It is a well know story: people do not save enough for retirement, which is inconsistent with standard theory. Hyperbolic discounting comes here to the rescue, justifying this with the twisted preferences people have: they just value the present a lot. And what if people are just not planning ahead?

John Bone, John Hey and John Suckling conduct an experiment that allows to separate preferences from planning ahead. In particular, players should be anticipating what other players are doing. It turns out about a third do not. And asking them to pre-commit does not change this.

What should we take from this? The conclusion of the three Johns may only apply to the experimental environment, but not when it really matters, like planning for retirement. But there is plenty of evidence that many do not plan. While it may be rational for some (who do not expect to stop working or live long enough), many are still caught empty-handed at retirement. Should government then plan for them?

Thursday, November 5, 2009

Are children a source of happiness or not?

I think that in every model with fertility choice, children are modeled as beneficial but costly. The number of children enters positively in the utility function, and there is some cost, either monetary or in time, of raising them. Yet, it appears that quite consistently empirical studies on the happiness of people reveal that the number of children has a negative impact on happiness indicators. Then why would people have children? Social pressure, bad luck with contraception or stupidity? What if the empirics are flawed?

Leonardo Becchetti, Elena Giachin Ricca and Alessandra Pelloni find that the typical way the empirical studies are conducted is flawed. Among the controls, there is usually income. But this make it difficult to disentangle the monetary for the non-monetary impact of children. Using equivalised household income (income adjusted for the number of people in the household) allows to focus only on the impact on happiness, and children now have a positive impact. Decomposing their sample (the German Socio-Economic Panel), they find that opportunity costs do matter. Theory is saved.

Wednesday, November 4, 2009

Is crime a habit?

Why are there repeat offender and career criminals? The obvious answers would be that this is where there comparative advantage is, or that they have nothing to lose once they served the first sentence. But what about crime being addicting?

This is what Vladimir Kuhl Teles and Joaquim Andrade explore what would happen if utility exhibit habit formation. Note surprisingly, it affects positively criminal activity. Note sure that this is very convincing. But the authors also embed an interaction with capital: Higher capital increases the rewards of crime, but also increases the opportunity cost of crime, the latter less apparently. Thus one should see more crime in capital-intensive locations, say cities, where habit formation is also easier. We should thus see more career criminals in cities. And I thought it was all about the anonymity that cities provide.

Tuesday, November 3, 2009

Growth leads to savings, not vice-versa

Fast-growing countries, like currently China, have very high savings rates. Data indicates that causality runs from growth rates to savings, and not the reverse. In theory, this is puzzling. Such high growth rates originate in rapid productivity improvements. This leads to high returns for capital and thus one should see high investment (and savings). However, returns for savings in such countries are very low. Why are people savings so much then?

Yi Wen finds one way to justify this: precautionary saving. We know that whenever there is a motive for precautionary savings, this can be rewarded with interest rates below the discount rate. And this is triggered by borrowing constraints. And it is well known that the Chinese financial sector is still severely underdeveloped.

The actual mechanism at play is obscure to me. The paper reasons that when permanent income increases, it is savings that increase instead of consumption, because of the borrowing constraint. The only way I can see this happening is when the uncertainty increases faster than incomes, or if utility is twisted in some way. But I do not seem to see either. While the author claims to have made a model that is tractable and analytically solvable, it does not appears to help in any way to understand what is going on. And Yi Wen does not seem to offer any explanation either.

Monday, November 2, 2009

Houses are a poor way to share risk

Owning a house is a terribly risky investment, not only because of the volatility of its value, but also because of the high correlation between house value and local economic conditions which also determine labor income. In other worth, owning a house you live in is among the worst things one can do in terms of diversification. Two recent papers revisit some aspects of this.

Dmytro Hryshko, María José Luengo-Prado and Bent Sørensen show that houses still provide substantial consumption smoothing ability to households suffering from a job loss. Obviously, when there is job loss and house equity loss, things look bad, but home owners still do better than renters. What this means is that the fact of holding some equity is more important that the lack of diversification. But it remains that better diversified households would still do better.

Todd Sinai and Nicholas Souleles argue that the risk is not that bad once you consider that when you sell a house you need to buy another one. So if you have to sell low, you are likely to buy low as well. This works obviously if you move locally, but appears also to work quite well for moves to another metropolitan area, as house prices across such areas in the US have an expected correlation between 0.35 and 0.60. So things are not as bad as one would have thought.

Saturday, October 31, 2009

The poor living quarters of economists

Having now visited a good number of universities, I have made an observation that plenty of others have also made: Why are so many Economics departments housed in such lousy facilities? Ugly buildings, run-down, even inappropriate facilities, smelly restrooms, antiquated seminar rooms, dark hallways, 1950's or 1960' architecture, etc. While there are universities that are generally in bad shape, Economics departments surprisingly often get one of the worst draws on campus for their quarters, as long as they are not part of a business school. In the latter case, the situation is completely reversed.

So why are Economics departments that are not part of business schools so badly housed. My hypothesis is that economists really do not care. They are too obsessed with their work to notice where they are. They are all about efficiency, and a fresh coat of paint does not make a difference in that respect. Compared to other departments, it is also surprising to find how little economists bicker to obtain the best offices on the floor. It is just not that important. We achieve prestige in other ways, like a very competitive labor market. And this is where Deans allocate their money to.

Friday, October 30, 2009

Longevity and the cost of health

It is well known that life expectancy in the US is lower that what it could be, especially when comparing it to Europe and the Far East, and that it has even been declining recently. One can emit a series of hypotheses for the reasons of this phenomenon: lack of preventive care, lack of universal health coverage, strong iniquities in health provision, too strong reliance on Medicare, and bad eating habits.

Pierre-Carl Michaud, Dana Goldman, Darius Lakdawalla, Adam Gailey and Yuhui Zheng report that the difference between the US and Europe is mostly due to the declining health of Americans approaching retirement age, that is just before they become eligible for Medicare. In other words, seeing that they will soon get free health care, almost retirees either drop their guards and indulge in unhealthy behavior or postpone necessary health procedures for a few years. If Americans were in the same shape as Europeans come retirement, Medicare could save about $1.1 trillion over the next five decades, and there would be no difference in terms of life expectancy.

And how would get Americans to be more healthy when they retire? Making sure they do not postpone required care is certainly necessary, and the various options debated in Washington currently will help in this regard. This also means that these options may turn out to be less expensive than initially thought, given the cost reduction for Medicare.

Thursday, October 29, 2009

Model uncertainty and portfolio management

Asset management is difficult because you do not know a lot of things about assets. You have to infer risk and volatility from past behavior, and this may lead to systematic biases. For example, if you actively manage a portfolio to reduce price volatility, you will select stocks that have had low volatility in the past. But the fact that you thus sampled from the tail of the distribution of volatilities makes it very likely that you are underestimating the true volatility of your portfolio.

Peter Shepard makes this important point and devises a measure of risk that takes this kind of bias into account, which is a second order risk. Most interestingly, the bias adjustment depends only on the number of stocks and the number of periods used in the estimation. And it performs remarkably well in simulations.

Wednesday, October 28, 2009

Want more babies? Reduce public debt

Western economies face three major challenges: a major drop in fertility, public debt and climate change. It turns out the first two are linked. Fanti Luciano and Spataro Luca show this using an overlapping generation model with endogenous fertility, as parents value the number of children (but not their welfare).

One would want to have more children if that allows to increase the burden of future generations for immediate gain. But this effect should not be significant for public debt, as it is diluted among many people. However, having high public debt, and thus high future taxes, may reduce sufficiently the welfare of future generations that one would want to have fewer kids, as it becomes more difficult to bequest them with sufficient funds to pay the taxes.

This argument is only valid if parents care about their kids, but this is not the case in this paper. Instead, it is all about the cost of raising kids and how it influences fertility choices through the relationship between the interest rate and the fertility rate. But this all assumes that children are normal goods. Things are not that simple. Rich people do not necessarily want more children, they want better children, we know this at least since Becker. Tractability may be lost, but realism is gained.

Tuesday, October 27, 2009

Calvo pricing is a costly assumption

I have railed before against the bad practice to use Calvo pricing to represent price rigidities, and here is more support. Fang Yao demonstrates that the tractability that Calvo pricing buys is more than overtaken by the lack of proper dynamics that results from it. The point of comparison is the almost as old and antiquated Taylor wage-contract model.

Now imagine the size of the gain in realism and dynamics one would have in a model where agents would actually decide whether to change prices or not. Calvo (and Taylor) essentially assume that no matter what the circumstances, firms will patiently wait for their turn before adapting prices, even if this means they are foregoing significant profits and know it. That is silly. And we have nowadays ways to overcome the tractability issue with numerical simulations.

Monday, October 26, 2009

Isolation and development

Geographic isolation is generally thought to be an impediment to growth. While I do not give too much credit to cross-country regressions, they have consistently shown that being landlocked or not have direct access to navigable waters is bad for national income. The reason is that being cut off from trade routes, you do not benefit from technological advances as early as others.

Quamrul Ashraf, Oded Galor and Omer Ozak argue that this logic does not hold for development in prehistoric times. They compute an isolation index by measuring the average time it takes to travel from a capital to any other location in the known world (excluding the Americas and Sub-Saharan Africa). It ranges from 5.5 weeks in Georgia to 12.1 weeks in Malaysia. In the premise that Malthusian economies strive to increase population, not per capita income, they then look at the impact of this isolation index on population density in the years 1, 1000 and 1500. They find that the effect is there, and in fact it is still present when using these antique isolation measures on modern day income per capita.

The big question is now to understand why in old periods isolation was beneficial, for example for China. Is it because isolation made one less susceptible to war and envy? Is it because isolation prevents slavery? Or is it because of a fluke in the data? Note that population density is used as a measure of development, which make for example that Egypt scores particularly low. But population is extremely dense around the Nile... In any case, this paper raises more questions than it answers, which is good.

Saturday, October 24, 2009

What a strange academic market this year

The US academic market is extremely cyclical, because state funding for universities itself is overly cyclical. The reason lies in constitutional constraints that prohibit many states from incurring deficits in their yearly operational budgets. In the current recession, this is compounded by the fact that many private universities have lost a substantial part of their endowment and thus need to tighten their belts. The situation now is that many if not most universities have hiring freezes. Newly minted PhDs will thus have a really hard time finding positions. There may be more visiting positions than normal, though, as departments do not have authorizations for permanent hires, but still need to cover classes. But I cannot see this compensate for the acute lack of new assistant professor positions.

Strangely, it appears that the market for more senior positions is more active than one would expect. Ads for these positions are less numerous than previous years, but not much. But more interesting is the fact that many departments are "informally" seeking to fill positions. From what I could gather from many conversations is that many have the authorization to look but not yet to hire. Basically, if they can land someone interesting, they can hire. And this opportunistic attitude seems quite widespread. For one, universities authorities are letting departments compete for positions with candidates instead of some proof of need. Then, many universities seem to look to poach from more distressed colleges, say in California, Arizona or Florida. Finally, public universities cannot openly hire, despite huge teaching needs, in the face of hiring bans.

In other words, the phone bills in many departments are going to be much higher than usual...

Friday, October 23, 2009

Competition, property rights and credit

Better property rights should improve credit availability. The reason is that collateral is more credible and better secured. This a weel accepted reason for which many authorities have encouraged developing economies to assert better property rights. And now Timothy Besley and Maitreesh Ghatak come and tell us we may be all wrong.

Indeed, when there is little competition on credit markets, better registration of property rights allows creditors to foreclose more easily, too easily. If authorities are unwilling to curtail this market power, the focus on better property rights is not warranted. As so often, development issues boil down to market size and competition.

Thursday, October 22, 2009

Shorter copyrights stimulate artistic creation

As I have expressed before on this blog, I am no big fan of patents and copyrights, and monopoly power in general. I am particularly annoyed, on a personal level, by copyrights on music that have been menacing Internet radio for a while now. I have always believed that the fact that artists have a free medium that allows them to be discovered is much better for them than being fed on commercial radio what the big labels deem good for the general public.

So it is refreshing to see that there are other arguments that show that copyrights are bad for artists. Francisco Alcalá and Miguel Gonzalez-Maestre model the artist market taking into account that it is close to a winner-take-all tournament, that the number of artists worth listening to depends on the number of them starting out (in other words, there is hidden talent that reveals itself with time), and promotions matter a lot. They find that lengthening copyrights, while increasing profits of superstars, does not necessarily encourage more people to become artists. And increasing the pool of talent is what we really care about. The key intuition here is that with longer copyrights, superstars will provide more effort in the form of promotions in order to capture a larger share of the markets. Less is left ofr other talent, who then do not bother starting a career.

Wednesday, October 21, 2009

Dealing with pet overpopulation

A lot of western families nowadays have pets at home, and they spend a considerable amount of money on them. Pet animal are a great source of fun and comfort, hence their popularity. But despite this high demand, there is also and oversupply, because demand is picky on the breeds and features of the animals, and older animals are sometimes rejected. Pet are unusual goods, as one cannot dispose of them easily (they have implicit some rights to humane treatment), and they multiply rapidly while spaying or neutering them is expensive. The consequence: an overpopulation of pets.

Stephen Coate and Brian Knight argue that there is also an externality from breeding new pets, as the cuties crowd out older pets. They claim the solution is to tax young pets and subsidize spaying. Welfare gaisn from this policy are substantial, they estimate, in the range of 16 to 21 billion US$ a year.

Tuesday, October 20, 2009

A new look at the Laffer curve

The Laffer curve became fashionable among US Republicans in the 1970s and 1980s, leading to the 1981 tax cut that proved that the US was still on the right side of the curve. But since, tax rates have increased overall, as well as in other countries, where they were higher to start with. So are all these countries still on the good side of the Laffer curve?

Mathias Trabandt and Harald Uhlig study this problem using a neoclassical growth model and new estimates of tax data. And the US is still far from the slippery slope, but not surprisingly closer for capital income tax than for labor income tax. Even for Europe, countries are generally on the right side of the curve. Exceptions: Denmard and Sweden for capital income taxes.

Note that the whole argument here is about the maximization of government revenue. That is usually not the objective. And there are also ways to raise significant revenue while improving a country's welfare, like taxing negative externalities and sins. But at least this paper should put to rest the argument that taxes need to be lowered to raise more revenue.

Monday, October 19, 2009

Stock spams work

We have all received these spam emails touting some obscure stock as the next one to surge. And have you not wondered who would fall victim to such shenanigans and why we still keep getting such emails?

According to Taoufik Bouraoui, these emails actually have an impact in that they increase the volatility of the stock. And under such circumstances, money can be made, unfortunately only for the originator of the spam emails. Unless you are among the very first to get the emails and are able to quickly buy stocks, you are out of luck...

Saturday, October 17, 2009

Friday, October 16, 2009

Why are bad mortgages not renegociated?

As everybody is well aware of, there are plenty of delinquent mortgages in the United States. It is also quite obvious that a home loses substantial value as soon as it is foreclosed, because of homeowner neglect and the fact that it needs to be sold rapidly. Then, why do banks not renegotiate mortgage terms to keep foreclosures from happening. It seems to be in the best interest of banks.

Manuel Adelino, Kristopher Gerardi and Paul Willen wondered about this as well and and a hard look at the data. Specifically, they analyze detailed data on mortgages from Lender Processing Services (LPS). They first reject the standard explanation: whether a mortgage has been securitized or not has no impact on renegotiation.

It turns out that the risk of default after a renegotiation of terms is very high. After all this is why there was renegotiation in the first place. Given the cost of finding new terms, banks simply do not find it worth the trouble. This is similar to the adverse selection problem in insurance. Also, those homeowners who are temporarily in difficulty and will get back on their feet will escape default anyway, and new terms would not change anything.

Thursday, October 15, 2009

Why it is foolish to tax outsourced goods

Suppose the production of some good gets outsourced. Outraged, locals ask their government to retaliate, and one obvious policy is to impose a tax on the firms doing this outsourcing. Is this a good policy?

Subhayu Bandyopadhyay, Sugata Marjit and Vivekananda Mukherjee study the case in which this good is an input. Quite obviously, if the incriminated firms are particularly labor-intensive, this tax will actually hurt wages, which plays against the initial intentions. But they show this can hurt local wages even if the sector is capital-intensive if the outsourced good is an intermediate input. The reason is that the final good sector may be labor intensive and the higher costs of inputs hurts it.

Does this actually matter? I have a hard time coming up with a relevant example. One would need to find a country where a capital intensive intermediate good was outsourced and imported to be used in a labor-intensive sector. Usually, one outsources the production of labor-intensive goods, to import them for use in capital-intensive sectors, i.e., the exact opposite of what Bandyopahya, Marjit and Mukerjee have in mind. So why write this paper?

Wednesday, October 14, 2009

Better incentives for CEOs, and mutual fund managers, too

It is believed that the best way to provide proper incentives to CEOs is to compensate them with option on the stock of the firm they are leading. Options are highly sensitive to the stock's performance, and they are oriented towards the future. Can this be beaten?

Alex Edmans, Xavier Gabaix, Tomasz Sadzik and Yuliy Sannikov claim it is possible with "Dynamic Incentive Accounts." These are essentially escrow accounts that are rebalanced to make sure the equity share is high (and increasing) so as to track firm perfomance also after the CEO has left. Their advantage is that they can be set to follow firm performance further in the future than options can, they cannot be sold like options and they can also track relative poor performance, something options cannot do once they are out of the money (below the exercise price). I am sold. And it should also apply to fund managers. That would work much better than the now oft-criticized bonus system.

Tuesday, October 13, 2009

Technology shocks and hours: it is the identification, stupid!

There has been an endless debate in macroeconomics about what exogenous variable is supposed to trigger business cycles. While real business cycle models showed some success in matching business cycle features, Jordi Galí used VARs to show that total factor productivity shocks cannot possibly be the right source. It took a few years for the RBC people to recuperate from that blow, but they seem to have found the weak spot in Galí's argument: the data sample is desperately small or it is impossible to go from model to VAR and vice-versa. In other words, the statistical approach is ill-advised.

José-Víctor Ríos-Rull, Frank Schorfheide, Cristina Fuentes-Albero, Raul Santaeulalia-Llopis and Maxym Kryshko now come with yet another argument. The problem is not the econometrics, it is the identification. To be more precise, it all hinges on the labor supply elasticity. And that one is a difficult one, given that macroeconomists and microeconomists do not seem to be able to agree what its ballpark value should be. In particular, they argue that if one uses an elasticity as calibrated in the literature, TFP shocks can explain anything between 1% and 150% of business cycles. However, if this parameter is carefully estimated within a DSGE model using household level data, these shocks explain less than 10%. Will this settle the debate. Surely not. But I am looking forward to more fireworks. I have my popcorn ready.

Monday, October 12, 2009

Low labor market attachment and disability insurance, some expected relationships

Insurance fraud is a constant problem, and we have addressed this in the case of employment insurance before. Now it is the turn of invalidity insurance. We occasionally read stories in the press about gross fraud by healthy people, but what about those at the margin? Of course, they are impossible to measure individually, but maybe something can be measure collectively.

Joshua Angrist, Stacey Chen and Brigham Frandsen look at Vietnam Veterans. The latter benefit from dedicated disability insurance, if they use such a facility more frequently then non-veterans, it must be because of war-related conseuqnces, right? Angrist, Chen and Frandsen use the 2000 census, which has birth date information, to identify who likely went to Vietnam, as birth dates were linked to draft status. It turns out that invalidity declared in the census is no more likely for Vietnam vetarans. Well, allmost all, because those with low skills, who typically have lower employment prospects, report higher invalidity incidence than comparable men who did not go to Vietnam. The authors argue that this cannot be due to a higher incidence of war injuries for low skilled soldiers. So it can only be that they view disability insurance as a good alternative to employment.

Friday, October 9, 2009

Traffic safety, obesity, and ... organ donations

There are times where you really wonder why authors would even think that some variables could be correlated and how they then come up with a story that can explain this statistical relationship coming from seemingly nowhere. The paper by Jose Fernandez and Lisa Stohr is one of these.

To quote their abstract, "this paper uses variation in traffic safety laws and obesity rates to identify substitution patterns between living and cadaveric kidney donors." Despite reading this sentence ten times, I could not make any theoretical sense of it. But reading through the paper, a good story can be made. Tightening traffic safety laws reduces the number of fatalities, and thus the number of cadaveric organ donors. An increase in obesity increases the demand for organs, in particular kidneys. Thus one can instrument for supply and demand using these measures. With this in mind, one can then study how variations in the supply of supply of cadaveric organs (which are of poor value) and demand can motivate living donors to come forward, as they trade off the usefulness of their donation with the personal harm it will inflict upon them. Fernandez and Stohr find that donors respond indeed to cadaveric supply and to the increase in demand due to obesity.

But finding such ways to interpret data is difficult, you need the talents like those of John Donohue and Steven Levitt.

Update: I just came across another paper making essentially the same points, by Randolph Beard, John Jackson, David Kaserman and Hyeongwoo Kim.

Thursday, October 8, 2009

Climate change and non-committal governments

As I reported yesterday, gas taxes are the best way to reduce carbon pollution. However, that will only be effective if governments can commit to future gas taxes as well. If they can, investment in energy efficiency will happen in an ... efficient way. If they cannot, energy efficiency is out of the window.

In that case, Alistair and David Ulph study how the policy should be altered. The major consequence is that current governments need to overdo in some way current policy in order to make sure future outcomes are coherent with current wishes. In other words, the potential time inconsistency of public policies makes that current government want to lock in future governments. One way to do this is to invest in green technologies, as obviously the private sector would not do it. This can also be attained with investment credits.

I think this opens a ethical question about current governments deciding for future generations. While it is obvious that you do not want to put future generations in a disadvantage due to current choices, it is less clear that it would be advisable to force the choices of future generations to conform with the preferences of current ones. There is a distinction between solving a commitment problem and forcing the hand of future governments.

Wednesday, October 7, 2009

Rents differ markedly from user costs in the US

Economic theory tells us that at least in the long run and under perfect competition, marginal revenue should equal marginal cost. With free entry, one should even observe that price equals costs, as profits are driven to zero. So it is puzzling when when one observes persistent deviations from this equality.

Randal Verbrugge notes that this is the case for housing rents in the United States. Now housing is a capital good with fluid markets in the US, so one should see even less deviations. Yet they exist, in part due to large fluctuations in costs. There do not appear to be opportunities for additional profits: transaction costs are high, and fluctuations are impossible to predict. So there are no arbitrage opportunities, even if arbitrage appears to be rather slow.

Tuesday, October 6, 2009

Gas taxes are still the best option to reduce CO2 emissions

I have advocated numerous times on this blog that high gas taxes are required in order to take into account the various negative externalities of gas consumption. Yet, in the real world, not only are gas taxes low, other means to reducing gas consumption are applied, such as fuel-efficiency standards and special taxes on gas-guzzlers. How do they really compare.

Rüdiger Pethig looks at combinations of the three and finds that gas taxes dominates them all. The reason is that a gas tax is the closest you can get to a CO2 emissions tax. And to reduce the emissions of CO2, nothing beats the price mechanism. The other two means just increase the price of cars, but do not impact the price of gas, and thus the marginal effect of gas consumption: you just end up driving more and consuming only slightly less gas.

And this without even considering that gas taxes can replace labor distorting labor income taxes, while standards provide no revenue.

Monday, October 5, 2009

Are women really more generous?

They is a widespread belief that women are more generous, and this is due to their maternal instincts. Experimental evidence confirms that women are indeed more generous, but has not been able to explain why. An interesting question here is whether by more generous in innate or whether it cost with the social context. This seems difficult to measure, but one could try to devise experiments that can get a hint of an answer.

Anne Boschini, Astri Muren and Mats Persson do the usual dictator games used to study generosity but with a few interesting twists. Instead of asking for demographic information at the start of the experiment, they ask about it after for some people. Or they do not mix genders in the experimental lab. The results are intriguing: women are only more generous when gender is asked before the experiment, or when the participants are of mixed gender. In fact, women are consistently generous, it is the men who change behavior. When they are reminded of their gender, or when women are present, they act tough, even though experiments are conducted anonymously. Pure machism.

Friday, October 2, 2009

More Economics research blogging

There few of us blogging on research in Economics, as most economist bloggers prefer to concentrate on current events, data releases and arguing with each other who started personal attacks. So when some newcomer decides to start with a blog really dedicated to research, this is a welcome addition.

Some NEP editors are starting an experiment with blogging about new papers in their respective fields. According to the post on the RePEc blog, each participating editors will select one paper a week for discussion. Two blogs are already up, Open Macroeconomics and Dynamic General Equilibrium, with hopefully more to come. There are only few comments so far, but they just started. As I hope Economic Logic demonstrates, a blog can be good even without big discussions (although I would obviously prefer it).

At this point, the blogs cater to a niche market, but I can see them develop into a meeting place for people working in those areas, in particular with the proposed weekly posts, which is a pace more appropriate for academics. That may be more successful than my blog, which is more dispersed and has so far five posts a week (I just have so much to say and share...).

If you are curious about other research blogs in Economics, there is a compilation over at Econ Academics. And by the way, NEP is a terrific source of new research in Economics, which I draw heavily on.

Thursday, October 1, 2009

Measuring the peace dividend

How costly can a conflict be? While one can measure the expenses poured into a conflict and the physical destruction that ensued, there are important indirect costs that are much harder to get to. Think about the fear, the uncertainty, and the costs of migration. Taking the example of Northern Ireland, Timothy Besley and Hannes Mueller measure violency by conflict related death in eleven regions and look at their impact on house prices, which are supposed to capitalize all costs, and in particular incorporate both immediate suffering and risk as well as the likelihood of future violence. Indeed, a casualty is often a signal about future violence to come, and thus house prices capture also the learning process about conflict violence.

Besley and Mueller model this with a Hamilton regime switching process. Whenever an event occurs, it changes the likelihood that a region is in a violent regime. And this likelihood impacts hose prices. They find that the peace dividend corresponds to about 4-12% in Belfast and 0.8-2.5% over all regions. They also find a migration effect: when violence increases in Belfast, surrounding areas gain, and this effect is even stronger than the learning effect about the region's own violence process. Thus, it looks like every region reacts differently.

Are these effects big? I would say so given that the violence has directly impacted a very small fraction of the population. In fact, the cost of conflict can be even much larger. Indeed, the study only looked at differences across regions in Northern Ireland. There can be substantial costs for the region as a whole, costs that are washed out by trends and fixed effects. For example, the recent housing price boom in the area may have reflected the new peace (along with reduced conflict related expenses by authorities).

Wednesday, September 30, 2009

The efficient allocation of slaves in Korea

As the subtitle of this blog indicates, there is economics in everything. Even in activities that are illegal, immoral or banned. Slavery is one such activity, but at some time it was considered legal and moral in many parts of the world. The slavery market is in fact akin to a financial market, as a slave is an investment good that yields dividends in the form of labor, and depending on the country, also in the form of offspring. Now what is the first thing a financial economist would check when he encounters a new market? Verify whether this market is efficient.

This is what Elise Brezis and Heeho Kim do for the slave market in Korea in the 18th and 19th century, the period during which the existence of money and slavery overlapped. They compile data from several markets and deflate nominal prices using the price of rice, a proxy for the general level of prices. Given that slaves were typically farm workers, and thus their yield is probably correlated with the price of rice, this may not be the best choice for a deflator. But there may be no other price data to draw on consistently.

Brezis and Kim then use the arbitrage asset equation and find that the market is efficient most of the time, the exception being towards the end. The authors claim this is because monitoring costs became too high and hiring free workers became more economical. I wonder though whether the looming repeal of slavery may have something to do with this.

Tuesday, September 29, 2009

Fair labor income tax and human capital accumulation

The big problem with labor income taxation is that it discourages effort. What you would really want to do it tax luck (being born intelligent and rich) and encourage effort no matter your abilities (or even encourage it more if you are abler). There is a tax scheme that does the latter, the so-called ELIE taxes suggested by Serge-Christophe Kolm: taxing people on, say, IQ, is not distorting and brings more equality.

But removing the distortions on the labor supply may not be the only impact of ELIE taxes. There may also be an impact on the accumulation of physical and human capital. David de la Croix and Michel Lubrano build an overlapping generation model with people of heterogeneous skills and show that if markets are complete, ELIE taxes indeed reduce inequalities but reduce growth because less human capital is accumulated. The reason is that the taxes cannot solely be based on exogenous elements, and the endogenous parts is ties to education, which is then discouraged. Now prevent people from borrowing for education, and the growth penalty becomes less severe because the taxes redistribute resources towards those that are borrowing constrained. Of course, one can get education (and growth) back to the desired level by subsidizing education. Thus, tax the intelligent, but make education free, which is mostly used by the intelligent anyway.

Monday, September 28, 2009

Terrorism reduces crime

One could consider terrorism to be the ultimate crime, yet an argument can be made that terrorism is the best thing that could happen to reduce crime. Why? Eric Gould and Guy Stecklov argue that terrorism increases police presence and keeps people at home. They use data from Israel and analyze various types of crime and show that property crimes and assaults, even domestic assaults, are down after a terrorist event. But would this be the same in Europe or even the United States.

The type of terrorism Israel faces is a different threat than the one Western countries face. It is what I would call "petty terrorism", the bomb carried by a single person to areas otherwise of no particular interest. It appears Western Europe and especially the United States faces a more organized terrorism towards high-profile targets. A threat in the latter case would thus draw police away from the neighborhoods to the airports and landmarks, thus leading to higher crime.

Imagine if all those airport security personnel were cruising the bad neighborhoods in the US. Far fewer people would die violently.

Friday, September 25, 2009

Hurricane insurance needs to be government run

Insurance is a difficult business in the presence of moral hazard. While an insurance company can make a profit by exploiting the risk aversion of its policy holders, this profit may be annihilated if moral hazard drives the insured to increase the risk. And if policies cannot discriminate by risk category, then only bad risks can be insured, at a loss. But I do not see where there could be moral hazard in the case of hurricane insurance, as policy holders cannot influence the path of a hurricane. If they fail to strengthen their house, this is something that is easy to inspect and price into a policy. So why did private insurance companies leave the hurricane insurance market in Florida?

Mario Jametti and Thomas von Ungern-Sternberg describe how the state of Florida had to step in and provide coverage to all homeowners at a cost ultimately much lower than what private companies offered. While the state may be able to better diversify over the area of the whole state, it is not like it does not face substantial risk. A hurricane can have severe consequences for a significant part of the state. Private companies can diversify with other geographic areas or coverage types, they can even re-insure, two means that are not available to the state. But the latter can make up any loss with federal help or, gulp, taxes. And it cannot simply declare bankruptcy if it takes a big hit, like a poorly covered insurance company would.