Tuesday, August 31, 2010

The mysterious rise of absenteeism in Norway

Labor markets have local particularities that are sometimes rather difficult to explain. For example, US workers get little vacation, yet often do not even use it fully, while their European counterparts use all of their much longer off-time. Or, Italians have the right to strike, which they interpret as an obligation in the transport industry, where if in a particular year there are strike days left, they quickly find a reason to be unhappy before New Year. Where these quirks originate is difficult to tell, so it is of particular interest to study one that recently appeared.

Erik Biørn, Simen Gaure, Simen Markussen and Knut Røed absenteeism in Norway has notably increased in the past two decades. Nowadays, 6.5% of hours are lost, and this despite better health and no change in the legal or policy environment. Studying this requires excellent data, which is not available. The authors use data on long-term (more than 16 days) absentees, which should help uncover part of the story. They find that absenteeism rises with age, except for a hump for women in their twenties (pregnancies?), which should not be a surprise. Once adjusted for age, they also find that absenteeism has increased within individuals, and this even more than in aggregate. This means that the aggregate outcome is not due to new and lazy cohorts. Also, workers that had higher tendencies towards being absent have been sorted out of the labor force. Unless the short-term absentees dramatically reverse these results, the puzzle about this rise in absenteeism remains.

Monday, August 30, 2010

Are New Economic Geography models any good?

The New Economic Geography Model pioneered by Paul Krugman has revolutionized our thinking about the location of factors of production, yet there has so far been little empirical support for this theory. Empirical tests suffer from massive endogeneity problems, and simulations seem to replicate very poorly the data, in part because they use very sparsely the data. But combining both approaches coax out their advantages while not revealing too many of their disadvantages. One attempt was by Kristian Behrens, Giordano Mion, Yasusada Murata and Jens S├╝dekum, who estimate a structural model and then simulate border effects.

Eckhardt Bode and Jan Mutl take a somewhat different approach. They take a fully specified structural model, take a Taylor expansion around the empirical steady-state, and then estimate the resulting reduced form. And the model is soundly rejected on US county data, mostly because migration does not vary in the way the model would want. Not imposing theoretical restrictions improves the estimates considerably, which is not reassuring.

Does this mean the NEG models can be dumped now? Not yet. They still gives us good insight, and if they fail on migration, they appear to be holding rather well with regard to the links between wages and good prices. And the empirical methods can certainly be improved, especially regarding spatial autoregression.

Saturday, August 28, 2010

My jaw drops at all the jaw dropping

Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis with a previous life as a prominent economic theorist, made a statement a few days ago that raised a surprising amount of controversy on the blogosphere. He said:

Long-run monetary neutrality is an uncontroversial, simple, but nonetheless profound proposition. In particular, it implies that if the FOMC maintains the fed funds rate at its current level of 0-25 basis points for too long, both anticipated and actual inflation have to become negative. Why? It’s simple arithmetic. Let’s say that the real rate of return on safe investments is 1 percent and we need to add an amount of anticipated inflation that will result in a fed funds rate of 0.25 percent. The only way to get that is to add a negative number—in this case, –0.75 percent.

To sum up, over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation.

This lead a few bloggers to questions his sanity: Employment, Interest and Money (I), Angry Bear (I), Economist's View (I, II, III), Nick Rowe (I, II), and even Paul Krugman (I). Surprisingly, Kocherlakota has few defenders: Steve Williamson (I) and only a few comments in the posts mentioned above.

Kocherlakota is clearly taking about a long run. And if the Fed wants to maintain low nominal interest rates, it can only do so, again this is a steady state, by have a negative inflation rate. This is not only the Fisher equation, but also the result of countless monetary models whose optimal monetary policies are the Friedman rule. In fact it is damn difficult to avoid the Friedman rule even in models with price rigidities. And remember, Kocherlakota was taking about the long run, and in the long run, money in neutral. Not superneutral, though, as the Friedman rule shows.

Friday, August 27, 2010

How to solve the Kyoto and Copenhagen climate gridlocks

The Kyoto Protocol to reduce greenhouse emissions has not been widely adopted or followed and the Copenhagen climate summit ended in a fiasco. Why is it that the world community cannot cooperate on an important issue? And even if one doubts about global warning, one has to agree that this is a potentially large issue, and thus at least some coordination is required. People will immediately point out that there is a huge free rider problem, and they are right. As emissions are global, everyone benefits from the efforts of the others but little from one's own. Hence the need for cooperation.

Peter Cramton and Steven Stoft write that this cooperation problem becomes even more difficult depending on what the central coordination mechanism is. The argue that cap-and-trade makes things especially difficult, because it makes objectives of the negotiating parties even more divergent. If the rule of the game is that everybody needs to have individual and binding emission ceilings, then everyone will try harder for low (developed economies) or high (developing ones) emission caps. One solution out of this quagmire is to adopt a global emission ceiling that is enforced through a market-based mechanism, with the sale of pollution permits. We have known for a very long time that prices are very powerful enforcement mechanisms, and in the context of this public-goods game it is even better because it will foster more cooperation in the negotiation of the emission ceiling and lead to an agreement having a better chance of actually happening.

Thursday, August 26, 2010

The falling college premium in Spain

The college premium, the difference between the wage of a worker with a college degree and one without, has been steadily increasing in the United States despite a large increase in the proportion of college graduates in the population. And the US college premium is substantial, more than 70% nowadays. The standard explanation is that this is due to an even larger increase in the demand for college graduates on the labor market. It appears that this experience cannot be generalized.

Florentino Felgueroso, Manuel Hidalgo and Sergi Jiménez-Martín show that the college premium in Spain has actually been decreasing, especially for males, and is at about 70% to 95%, depending on the definition. Why is this evolution so different from the United States? First, there seems to be a much more prevalent mismatch between skills and occupations. Higher education in Spain is much more specialized, which is a disadvantage when you cannot find a job in your specialization. This would indicate the drop in the college premium is a composition effect. But the premium also decreased for well-matched workers. Second, job rotation has increased and temporary jobs have become more prevalent. Shorter experience in a sector depresses wages, and this evolution seems to have been particularly strong for educated workers.

Interestingly, it appears that this trend started with the last major labor market reform in Spain, when employment subsidies were introduced along with employment promotion contracts that are supposed to reduce unemployment among the young but came with the cost of a surge in temporary contracts. Shorter tenures are not necessarily bad, especially when firing costs are too high, and a neither is a decline in the college premium. But one would have expected the US story to be even more true in Spain, as industry adapts faster than workers and its fast modernization would have outpaced the supply of skills from the workforce. Apparently not with those particular labor market reforms.

Wednesday, August 25, 2010

How can very small economies survive?

I find very small countries fascinating. They are link small scale representations of the economies we usually study, to a scale that would correspond to an experiment we would want to perform. But these very small countries are not perfect replicas of the larger ones. Because of their size, they are less diversified, need more per capita overhead for governing, their capital accounts are more vulnerable, but they can play very well with tax competition.

Patrice Pieretti, Skerdilajda Zanaj and Benteng Zou, fittingly based in Luxembourg, set up a linear, small open economy where government set tax rates (and thus productivity enhancing public amenities) and household firms locate à la Hotelling around the country border. The result is that there are three possible paths, as so often in dynamic systems: the economy either collapses, explodes or finds its way towards a steady-state along a saddle path.

But do we really learn something from this exercise? The entities here are really P.O. box firms that can move from one country to the next on a whim, except that each firm takes a worker with it. What if there are moving costs? Concave production? People who stay in the country when capital leaves? I bet you would easily find multiple, stable equilibria, some with low taxes, low returns and ovecrowding, some with high taxes, high returns and high amenities. And now things become really interesting and more realistic.

Tuesday, August 24, 2010

Why road pricing is so difficult to impose

As an economist, don't you hate it when a policy that should so obviously be enacted is either perverted by special interests in the legislative process or immediately dismissed as politically unfeasible? The problem is often that politicians are economic laymen yet believe that they know best. Or they do not think about the common good. Anyway, congestion pricing is one policy that makes perfect sense to an economist, but that is often rejected by policy makers because it would be unpopular. And this despite the success of the congestion charge in London. Why this negative attitude?

Bruno De Borger and Stef Proost look at the political economy of congestion pricing. They observe that in the successful cases, revenue was used for public transportation. Also, there was a majority opposed ex-ante, but no majority to revert ex-post. De Borger and Proost claim this is consistent with people being uncertain about outcomes, which means they would also be against experiments. Thus, I conclude that politician need to show leadership and impose congestion pricing.

Monday, August 23, 2010

The economics of piracy in Somalia

Piracy off the shores of Somalia has come to the front news after a few spectacular cases, prompting an international response, mostly in the form of military surveillance on the waters, which has not prevented pirates from extending their hunting grounds. But some people have argued that this patrolling is just treating a symptom. Short of establishing a lawful state in Somalia, which has proven impossible so far, providing alternative livelihoods for the pirates would work better.

Sarah Percy and Anja Shortland doubt this would work. They claim a stable state and economic growth would actually help piracy. Indeed, piracy is a business and any business becomes more difficult in unstable conditions. The way to think about it is that pirate get income from piracy, and they invest locally. The better the return on that investment, the more you want to conduct piracy. Naval operations are useful here because they raise the costs of operations of pirates, but they imply also that attacks are more likely to turn violent, in particular for hostages. But I digress. Another in which local stability would be detrimental is that the whole region may be destabilized, not only Somalia.

An alternative would be to buy off the pirates and turn them into coast guards who enforce fishing rights. This deters them from piracy and would allow the fishing industry to come back to life. But this could also backfire by creating a better trained and equipped pirate force. This is a really difficult situation. Percy and Shortland think things will improve once the stakes for insurance companies and shipping companies become higher: ransoms are getting larger, and violence is becoming more commonplace. At some point they will start intervening with more conviction.

Saturday, August 21, 2010

The AEA is missing a golden opportunity

The American Economic Association is asking its membership to approve a drastic restructuring of its dues. There are two reasons for this. One, the AEA is swimming in money (despite last year's fiasco with the Economists calendars) and would have difficulties maintaining its non-profit status with fiscal authorities. Two, by default members get hard copies of the journals and need to opt out to reduce their membership fee. By making the default membership without journals, the AEA hopes to save on printing costs and thus can lower the average membership fee even more.

I will vote against the change not because I dislike a decrease in the fee, but because I believe the AEA has missed here a tremendous opportunity of putting its journals in open access. This is a society with a sound financial basis that could set an example for the rest of the publishers by showing that good research should not be gated. Would this be a money losing proposition? I do not think so, first because the AEA will always have good income from its meeting registrations, and second because it would not need to maintain anymore a whole infrastructure to keep outsiders away from its journals. The AEA could probably cancel membership fees altogether and still make it work.

NB: I realize that the Journal of Economic Perspectives was recently partially put in open access. This shows that the AEA is open to the concept.

Friday, August 20, 2010

The strange dynamics of faculty merit pay

In many US universities, faculty performance is rewarded with merit bonuses or increases, the initial idea being to prevent other universities from poaching the best performers. But seeing how this is approached in a very heterogeneous way across institutions, one sometimes wonders whether the merit process is done optimally.

Finn Christensen, James Manley and Louise Laurence had access to much relevant data in a large public university. There, merit pay is distributed in each department by a committee of tenure faculty. The outcome is that about two thirds of all faculty reach the highest merit scale, three fourths among tenured faculty. Now this outcome could be justifiable with additional data, which the authors have for a particular college in this university in the form of various output measures that should matter for evaluation. It turns out that untenured faculty is as productive, but still gets less merit pay. Even worse, it appears that the output measures explain about 10% of the variation in merit.

What is going on? Christensen, Manley and Laurence show theoretically that given the institutional structure, one should not be surprised by these results. I can believe that, and this is probably compounded by compression: as new faculty commands higher pay than old, the old compensate with higher merit. The authors find little evidence of this. Internal politics also certainly play a role, as you want to avoid offending someone who may be determining your merit later. But what is clear is that there is, at least at this place, very little transparency in merit attribution.

Thursday, August 19, 2010

Homosexuals and savings

Do homosexuals save more or less than heterosexuals. As gays typically do not have children, one may think that they care less about the future and that this leads to lower savings. This is a prevalent intuition that even brought Hans-Herrmann Hoppe trouble over academic freedom with his administration. But is this idea true?

Brighita Negrusa and Sonia Oreffice claim it is true based on an analysis of the 2000 US census, showing that homosexuals couples accumulate significantly more retirement and social security savings. They save more than heterosexual co-habiting couples, who themselves save more than heterosexual married couples. The same can be concluded from mortgage to house value ratios.

Note that savings are not directly measured in those datasets. retirement and social security savings are inferred from retirement and social security income for retirees, and household wealth is inferred from the share of mortgage payments to the house value. And homosexual couples are also inferred by have to same gender adults in the same household. But even with all the measurement errors involved, the results are pretty clear and should at least give us to rethink some unfounded intuitions.

So why would homosexuals save more? The fact that they have fewer children, which would have accounted for the lack of altruistic bequests, may also mean that they cannot count on support from descendants. This is consistent with unmarried couples (who have less children) saving more than married couples. But why then do homosexual (unmarried, this is the year 2000) couples save more than unmarried heterosexual couples? The authors rule out discrimination on credit markets. An open question.

Wednesday, August 18, 2010

Women's rights and development

It is sometimes puzzling when someone in power relinquishes it, especially when this person can take advantage of institutions to stay in power. One such case is when males, who were the only ones to have property rights, gave property rights to females. Why would they allow this, given that males had monopoly on votes and government?

Raquel Fernández comes up with an elegant story. The important trade-off is between appropriating all rights to oneself and how descendants, who include daughters, get. Looking at history, there are two major effects. The first is a decline of fertility, which under a patriarchal system allows fathers to bequeath more per son. But this increases the disparity between sons and daughters, and thus reduces the advantage over equal distribution, through the concavity of utility. The second effect comes from the general increase in wealth, with a similar logic.

In both cases the father becomes better off sacrificing some wealth to his wife in order to force sons-in-law to be more generous with his daughters. The prediction is then that lower fertility and more advanced economic development both force earlier adoption of female property rights, something Fernández finds across US states, which have adopted such laws at various times between 1846 and 1920 (and four states still missing by then). And the theoretical prediction is obtained without assuming changes in altruism towards children, which I find remarkable.

Tuesday, August 17, 2010

The economics of compartments

Science makes progress through interdisciplinarity. Economists have long recognized this by venturing with their methods into other fields, something I have repeatedly documented on this blog. And Economists also borrow techniques from other fields to their advantage.

Fabio Tramontana and Mauro Gallegati looked at the biology literature and stumbled on the concept of compartments. The idea is to attribute populations to bins in such a way that they are rather homogeneous within a bin, define the transitions between the bins and then embed this into a model. Tramontana and Gallegati then proceed to demonstrate this with a model of a firm with linear technology and linear stochastic demand, and the firm needs financing from a bank and may go bankrupt. They assign firms to a whooping three size classes and then simulate something.

There is a clique in Ancona (Italy) that decided in 1995 that representative agent macro was inappropriate. That is correct, depending on the particular question. But subsequently, they decided to ignore all the work that was done on heterogeneous agents and continue to this day to claim that macro is all about representative agents. Yet, the current literature is full of models where agents are heterogeneous and, gasp, categorized in bins. From the top of my head, individuals have been distinguished by age, gender, marital status, employment, education, health, wealth, number of children, and nationality. Firms have been categorized by assets, access to credit, sector, leverage, labor intensity, and age. And I am surely forgetting some.

It looks like Tramontana and Gallegati should be peeking a little bit out of their rather hermetic compartment.

Monday, August 16, 2010

Laws and attitudes: which comes first?

It is said that laws reflect current morals and that laws cannot influence morals. I imagine that it is rather difficult to find more than anecdotal data to test such a hypothesis.

Niklas Jakobsson and Andreas Kotsadam claim to have found the right natural experiment. In January 2009, buying sex became a criminal offense in Norway. The explicit goal of the law was to change the attitude of the people towards buying sex. Looking at Norway and Sweden (where there was no such change on law), they find that attitudes did not change more in Norway than in Sweden, if anything, people become a little more liberal. Save for one case: Oslo. There, prostitution is more visible, thus people were more aware of it and responded the way the lawmakers wanted.

The analysis is based on survey data. It would be interesting to know whether the actual purchases of sexual services were also affected. Indeed, it does not matter much if someone who would not buy sex anyway now has a negative attitude towards it. The paper clearly shows that people who are not close to the problem are not affected. Those that are at the margin of changing a decision are those you would want to affect. And only market data can reveal their choices.

Saturday, August 14, 2010

About the state of European higher education

A week ago, I opined about the state of higher education in the United States. My outlook was rather grim. Europe looks better, but still faces challenges and they are largely of its own doing.

Let us first look at what Europe is doing right. Of course, each country is different, but there is a general sense that universities need reform to open up and become more competitive (both in the sense of becoming better and competing more). The most visible part of this reform is the Bologna process, that makes studies comparable and will thus increase competition. Also, as European universities are mostly publicly funded, they tended to be controlled tightly by the main funders. They have gained significant autonomy in several countries, notably Italy and France, allowing to recruit faculty better adapted to their needs. Some countries, notably Germany, have also introduced more flexibility in hiring and pay scales, which has made it possible to hire more "star" faculty who had better conditions in the US.

European universities do not face the fluctuating income of their US counterparts. Funding is pretty much guaranteed not matter what the economic conditions are, which allows for good planning. That said, overall funding is still rather low, as there is little tuition income that can give a university that extra edge for resources.

But European universities have still issues. They are still overcrowded. They are still a far cry from US universities in terms of research, at least in Economics. They try to emulate American universities, but in odd ways. One is that more and more four year undergraduate programs are created where three years would be sufficient. US students still need two years of general education before tackling their major. European students come much better prepared from high school and can specialize right away.

Also Europeans try to emulate the competition between US universities by means of evaluations. It is a good-hearted attempt to make funding depend on performance. But as so often, nothing beats the market system. US universities attract the staff that is best for them, and that is not necessarily measured by the number of publications or citations. For example, faculty that are very good at attracting and advising students carry a market premium that cannot be measured otherwise. And the sad part it that this European evaluitis is expensive and eats a substantial part of the funds to distribute. The solution is to give even broader autonomy to universities. They can hire whoever they want, at the price they want. And they need to deliver a product, education and grants, that is also allocated by a market. That means in particular that the government is also not in the business of allocating students.

PS: a recent development that worries me as well is that technical schools now also get the university label in Europe. That is again imitating the US, and this will drive up the proportion of the population that is university educated. That looks good on paper, but does not change anything in terms of outcomes, except for fooling people that all degrees are equal.

Friday, August 13, 2010

What makes a great journal in Economics?

If you are editor of an Economics journal that seeks to improve and come across a paper entitled "What Makes a Great Journal Great in Economics?", you read it expecting some great recommendations, for example on how to attract great papers, generate good readership that will cite the articles and how to get established authors interested in submitting.

I supposed this is what Chia-Lin Chang, Michael McAleer, and Les Oxley were out to do, and what a disappointment it is. They take Thomson Reuters ISI Web of Science citation data, torture it in all sorts of innovative ways and come to the conclusion that for the top 40 journals in Economics, looking at the 2-year impact factor gives a distorted picture. First, how does this answer the question in the title? Second, it is already well known that these impact factors are flawed and only appreciated by publishers. Indeed, they encourage self-citations by journals, whose editors strategically require from authors to cite other articles. The two year window is ridiculously short for Economics. And the choice of journals that are indexed is difficult to follow.

Thursday, August 12, 2010

How good is it to have a stable banking sector?

You know the feeling, it is only once you lost something that you realize how much you cared about it. Nowadays that we are affected by instability in the banking sector, we realize how good it was to have stable banks. How could we quantify this?

There is ample research on the impact of banking crises, but it treats data in a black or white fashion: either you are in a crisis or you are not. Pierre Monnin and Terhi Jokipii, however, use a continuous measure, the probability that banks would fail, in 18 OECD countries. Their panel VAR indicates clearly that bank instability leads to lower real GDP growth, more volatility of growth, and over-prediction of future growth. Looking at the numbers, the impact is not large, though: a one standard deviation shock to output increase the bank failure measure by 11% of its standard deviation, while it is 7% the other way around. While statistically significant, this does not strike me as economically significant. And one should not interpret too much these results, as VARs are only good to describe the data, but not good for understanding behavior and policy.

Of course, for such an exercise, details are also very important. For example, how do you measure the probability of default of a banking sector? Monnin and Jokinii model it as the probability that the whole banking sector would exercise an option to renege its debts. Why not use the Z-Score, which is available for individual banks and already widely used, and work from there? How sensitive are the results to the many choices the VAR econometrician has? There is always danger of data mining here, so having some theory to guide choices would be good.

Tuesday, August 10, 2010

The impact of political violence on tourism

Now that Lebanon and Israel are at it again, one can ask whether this can have an economic impact. The prime candidate (a part for the defense industry) is the tourism industry. Casual empiricism seems to indicate that tourist react very strongly to very small probabilities of danger and thus should be deserting those countries.

David Fielding and Anja Shortland look at the case of Egypt, which has suffered from Islamist fundamentalist violence for the last two decades, sometimes targeted at tourists. They find that tourists stay away when violence has occurred, but only when it was directed towards tourists. Violence among locals has no impact. And when the Egyptian government takes (usually heavy-handed) counter-terrorism measures, European tourists stay away, while US ones are not affected. Interestingly, there is substitution: Egypt's tourism industry benefits when things turn sours in Israel, at least if it does not mean local trouble.

Monday, August 9, 2010

Is live or Internet instruction better?

University administrations are big fans of instruction over the Internet, because it is a big money maker. There is virtually no limit to the number of students in a class, one does not need a class room, and the class can be repeated at will once the initial investment is made. Faculty are less enthralled, because they think the classroom interaction is crucial, they fear of becoming expendable and they get sucked into a technology they are not familiar with. But, of course, one should first have an idea whether this is a teaching technology that works as well as the standard classroom.

David N. Figlio, Mark Rush and Lu Yin have performed experiments with a microeconomics class, where students were randomly assigned to Internet or classroom lectures. It turns out live learning works slightly better, in particular for Hispanics, male and otherwise low achieving students. At least for the latter two groups, from my experience these are the once that have a lower attendance record, and it looks like watching lectures when it best suits you is not an advantage, it seems rather like people postpone indefinitely and learn less. Unfortunately, the study says nothing about the on-line viewing habits. It would be interesting to see whether on-line instruction encourages absenteeism or tardiness in covering classes, something live lectures clearly prevent.

With the considerable influx of students in US public universities, whose resources keep decreasing, teaching on-line has been at the forefront of solutions to prevent overcrowding. While it does not seem to be a better solution in terms of learning, it certainly beats starting to offer classes at 6:30am.

Saturday, August 7, 2010

About the state of US higher education

Yesterday, I gave some pessimistic outlook for higher education in the United States. Let me give here some more thoughts about it. Let me start by characterizing the current situation. US universities have a strong focus on research, neglect undergraduate education, and are very strong in graduate education. Professors are the best paid in the world and undergraduate students pay the highest tuitions in the world.

Inherently, there is nothing wrong with the best being paid the most, and students paying for their education by borrowing against future income. But are they really paying for an education? Most students do not care for their studies, they go to college for the "social experience." They do not go to class, work little for their courses, and learn little, in particular in their major. Faculty are complicit, accommodate this with few failing grades and could not care less. They only care about research, put as little effort into undergraduate education as possible, and delegate whenever possible such teaching to graduate assistants. Effort into graduate education is much higher, and the results show. The world's best students flock to the United States, which happily accepts them for lack of substantial local talent.

But is all this sustainable? While the current crisis will be over sooner or later, it will have a longer lasting impact on higher education. The reduced availability of credit and in particular the reduced willingness of households to take on debt while make that parents will question more the return they get for their university investment. Currently, in the past, they have been willing to pay for a substandard education because of a myth that a diploma is all that matters, and employers followed along. But they will (or at least should) realize that some people should simply not go to college or they will require much more from faculty. This means that the days of high pay and little time spent on teaching are over, because of lower enrollments and higher accountability.

I realize that the mission of a university is not only to teach undergraduates. Research is very important, but it has become too important, and at least in social sciences and business, with not much gain for society. The best that could happen is that graduate education and research will be concentrated among top institutions, where faculty will be able to justify teaching reductions. For the rest of us, reality has to settle in that we are here to teach undergraduates at reasonable pay.

How long will it take for these "predictions" to happen? In a sense, they are happening now. Even before the crisis, government support has been drastically cut. Some state universities get no state support. Government research grants are not going to be sustained given public debt. And tuition raises will soon not be sustainable anymore.

Ironically, Europeans are trying to emulate US higher education. It is ironic because European universities do a much better job at their mission for a lower cost. European undergraduates are much better educated and do not need graduate degrees to hold jobs in their field. Graduate degrees are not as strong as in the US, but that could easily change with some better structures. And in many cases, universities pool resources to create very decent doctoral programs. Once some European faculty return from the US, they will be competitive.

Friday, August 6, 2010

Does faculty quality matter for PhDs?

A reason people are obsessed with department rankings is, for graduate students, faculty quality reflects the quality of their education, and for faculty, it determines the quality of the students they will attract. The presumption here is that there is a strong correlation between quality of faculty, as measured by citations or article placement, and quality of students, as measured by potential or job placement. This correlation is, however, not that close to one, I can think of several top programs whose students turn out not to be that great. The student placement ranking by Rabah Amir and Malgorzata Knauff unfortunately does not compute such a correlation.

This introduction is a little bit of a stretch to the paper by Fabian Waldinger that looks at a stark natural experiment: the massive exodus of top mathematics faculty during Nazi Germany. Some top departments, the best in the world at the time, lost over half of their faculty within a year, giving us very clear identification. Measuring the likelihood of doctoral students to publish in top journals before and after the exodus, he finds that a one standard deviation in faculty quality, as measured by citations per faculty, increases the probability of publishing the dissertation by 13%. It also has a similar impact on the probability to become full professor, and gives 6.3 more lifetime citations (for an average of 11). One conclusion that Waldinger reaches is that few top departments with top faculty should concentrate on conferring doctoral degrees.

What could be the implications for today? The United States is now the most vibrant arena for doctoral studies in most fields. But the success of US universities is possibly not sustainable, which could lead to an exodus of faculty, a watering down of top doctoral programs and thus an important reduction in the quality of graduate education. Under such circumstances, the only way to save the preeminence of the US is to close many doctoral programs and concentrate the top researchers in the remaining programs.

Thursday, August 5, 2010

How high in the true US unemployment rate?

Everybody seems to agree that the official measure of the US unemployment rate is too low, but it is uncertain by how much. Indeed, the method of measurement is very poor, as it is based on a survey which is rife with errors. Follow-ups have uncovered frightening errors both on the side of the interviewers and interviewees. And even those reinterviews are not reliable, because they are too small, too infrequent and still full of errors. Thus they cannot be used as a standard for evaluating measurement error bias. But the survey is a short panel, meaning that interviewees are followed for a few months, which allows to improve the accuracy of the measures.

Shuaizhang Feng and Yingyao Hu do this by assuming that there are latent variables underlying the process, and these variables have some level of persistence and measurement error probabilities that varies across groups (race, gender, age). The resulting "true" unemployment rates are on average 35% higher than official ones, more during recessions. Right now, the unemployment rate would be close to 15%. Employment rates do not differ significantly, indicating that unemployed often claim not to be in the labor force, especially females.

Wednesday, August 4, 2010

Veiling bans can be counterproductive

Several countries are currently contemplating veiling bans, and some, such as France, have already adopted such measures. Their stated goal is to alleviate the oppression of veiled women within their communities, but it is also feared that it will only keep them away from public areas. Economists have always been suspicious of bans, as they are not efficient or can have adverse effects. They can contribute to the debate with some structured reasoning about this issue.

Jean-Paul Carvalho uses game theory to analyze veiling bans. The premise is that the recent rise of veils coincides with the Islamic renewal and is mostly voluntary. Indeed, veiled women are mostly new adoptees that started this despite oppositions from their mothers or husbands. They do it for three reasons: 1) they use the veil as a commitment device to remind themselves to avoid secular activities, 2) the veil is a signal to others that one is religious, 3) the veil is used to conform in a social group.

Now imagine that there are few religious people in the population. Then there is no veiling, as even the religious conform with the majority. With a larger religious population, their is veiling by that group only. And if that group is sufficiently large, everybody veils to conform. The interesting case is the middle one. If a veiling ban is imposed, if there is little return to deveiling, these women may segregate further by seeking reclusion in their group, where the returns from conformity become larger. The goal of the ban to expose them to more secularity would then fail completely.

Tuesday, August 3, 2010

Business research is as out of focus as Economics

There is quite a bit of soul searching in Economics, as the current crisis has highlighted that some research areas had been covered less than optimally. Political science also has its crisis, following severe cutbacks in US federal research grants. It turns out business research is also in introspection mode.

Maggie Geuens claims that business research is not useful anymore. Specifically, the author tries to make five points:

  1. The focus of research is other academicians, and not businesses.
  2. Publication is all about impact (within academics) and citations.
  3. Negative results never make it out.
  4. Having to craft a well polished paper is a crass misuse of a researcher's time.
  5. There is too much reliance on impact factors and citations.

This could also have been written for Economics. I really struggle with this obsession about getting prestige within the profession over making useful contributions, especially among the younger generation. And unfortunately, this is more pronounced in the top departments, and these are the ones that will give us the next generations. We really need a wake-up call in the profession that economic research should primarily be about improving global welfare, not a pissing contest among academicians.

Monday, August 2, 2010

On the dangers of penny auctions, an example

I have written before about the dangers of penny auctions. It is very worrisome that they have become even more popular since, and with additional bells and whistles that make them even more dangerous. I have stumbled upon an auction where the bidding will lead to the bankruptcy of at least one person.

Look at auction 19850 at BidHere.com. This is for a gaming computer, an Alienware Area-51 ALX Desktop with an estimated retail price of US$3999 (the true retail price is certainly lower, but that is not the point). The rules of the auction are: bid increments are $0.02, any new bid delays the conclusion on the auction by 15 seconds, every bid costs $0.60, automatic bidding is allowed, and the winner does not have to pay for his/her bids. This last rule is spelling doom.

As I write this, the bids are approaching $1500.00, which is not a bad price. But one has to realize that this implies that almost 75,000 bids have been placed, for a cost of $45,000.00. When I first noticed the auction two days ago, three bidders were bidding automatically. Yesterday evening, the same three were still at it. Today, two are left, the third one having probably maxed out all credit cards. The remaining two will be continuing until one is bankrupt. Indeed, they have each invested so much into this auction that they absolutely need to win it at any cost, given that the winner gets reimbursed for all costly bids. And the fact that automatic bids are allowed helps this madness.

Of course, this should remind us of the St. Petersburg paradox, where an infinite expected payoff can only be gained if one has infinite resources. I'll be watching the auction, which could be continuing well beyond the market value of the computer. And imagine if a last minute bidder snatches it away from both current bidders...