Posts
Now that Congress seems due to pass this horrible bailout bill, let us reflect a little on one provision that seems to have sweetened the deal: limits to executive compensation. CEO pay has been controversial for a while now, so it is natural to ask whether they are worth it.
This is what Marko Terviö does using an assignment model and data from 1000 publicly traded US firms. First about the assignment model: its idea is to match firms and CEOs with different characteristics. Outcomes depend on the distribution of those characteristics, and as they are in fixed supply, the price of ability does not necessarily reflect marginal productivity.
The market value of a firm is pivotal here, as it is not only dependent on its current characteristics (and CEO), but future ones as well. Also, a firm contains capital that can be transferred to others. The current surplus of a firm is the product of CEO ability, firm size, a growth factor and capital. This may seem oversimplifying, but you needs to keep managerial ability observable by deduction.
Matching this model with Compustat data, the top 1000 CEOs appear to contribute between US$21 and 25 billion in 2004 (about 0.15% of market capitalization), and they have been paid $7.1 billion for it, including option packages. CEOs seem to be of little impact, but still a bargain. But what if all CEOs were replaced with the best one? The surplus gain would be $3.2-3.4 billion, rather modest. The reason is that the best are already matched with the largest firms.
Tuesday, September 30, 2008
Monday, September 29, 2008
Polls are useless
We are getting poll results every day on the presidential election. Even at other times, polls are used on a regular basis to elicit which way the public leans on policy matters. Is it a good idea to do so?
John Morgan and Phillip Stocken would probably say polls are of very limited use. There are several issues at hand. First, there is the sample size, with many polls aggregating the opinions of 1000 people or less, the statistical significance of the result may be very low, especially for close outcomes. With small samples, polls work reliably only when the population is relatively homogeneous. But then you do not need polls.
Second, there is strategic behavior, especially in larger polls, where responses tend to follow ideology instead of truth-telling. Inferring outcomes from polls without taking into account strategic behavior can be very misleading. Luckily the authors provide estimators that correct for such biases. But this raises the question: If the polity knows such estimators are used, would it not adjust its strategy accordingly?
Third, poll results differ from referendum or election results. The problem is that in a limited sample poll, it is impossible for voters to convey credible information in equilibrium. We need referendums, as I called for the other day.
The critical point here is that the polled ones have information that the pollster does not have, and that it is costless to convey information in a poll. As an example, the article takes the case of Oregon, where it was contemplated whether to lower the minimum wage for tipped workers. To gain information about the economic effects of such a policy change, restaurant owners were polled. It is clear that it was in their best interest to act strategically instead of revealing what they really know about the industry. They faced no negative consequences if lying, and they knew they could influence policy their way by lying.
John Morgan and Phillip Stocken would probably say polls are of very limited use. There are several issues at hand. First, there is the sample size, with many polls aggregating the opinions of 1000 people or less, the statistical significance of the result may be very low, especially for close outcomes. With small samples, polls work reliably only when the population is relatively homogeneous. But then you do not need polls.
Second, there is strategic behavior, especially in larger polls, where responses tend to follow ideology instead of truth-telling. Inferring outcomes from polls without taking into account strategic behavior can be very misleading. Luckily the authors provide estimators that correct for such biases. But this raises the question: If the polity knows such estimators are used, would it not adjust its strategy accordingly?
Third, poll results differ from referendum or election results. The problem is that in a limited sample poll, it is impossible for voters to convey credible information in equilibrium. We need referendums, as I called for the other day.
The critical point here is that the polled ones have information that the pollster does not have, and that it is costless to convey information in a poll. As an example, the article takes the case of Oregon, where it was contemplated whether to lower the minimum wage for tipped workers. To gain information about the economic effects of such a policy change, restaurant owners were polled. It is clear that it was in their best interest to act strategically instead of revealing what they really know about the industry. They faced no negative consequences if lying, and they knew they could influence policy their way by lying.
Friday, September 26, 2008
Voting with your feet
Much of public economics relies on the assumption that people vote with their feet, following the idea of Charles Tiebout (Yes, there is link on IDEAS). Yet there not been a good test of it. While there has been empirical work, the problem lies with the scale of moving. Moving is costly, especially if it implies building new social networks, finding a new job and adapting to a new culture. Few people moves because Bush got elected. More people move locally when local amenities such as schools change in quality. Typical test where at the county of census tract level, which could be too coarse.
Spencer Banzhaf and Randall Walsh manage to test Tiebout's suggestion by using California data on neighborhoods defined as sets of half-mile diameter circles. They have demographic data (useful for controls) as well as data from the Toxic Release Inventory. This allows to study the response of households as air quality changes.
And yes, households move away when the air quality deteriorates. Public economics is saved.
Spencer Banzhaf and Randall Walsh manage to test Tiebout's suggestion by using California data on neighborhoods defined as sets of half-mile diameter circles. They have demographic data (useful for controls) as well as data from the Toxic Release Inventory. This allows to study the response of households as air quality changes.
And yes, households move away when the air quality deteriorates. Public economics is saved.
Thursday, September 25, 2008
Income and Democracy
There is an obvious correlation between GDP and democracy. Just think about OECD countries, all democratic, which are much richer that Third World economies, which are often not democratic. This correlation has often been a motivation for imposing democracy on some unsuspecting country, arguing it would improve its economy. But correlation is not causation. And even if there is causation, it could go the other way.
Daron Acemoglu, Simon Johnson, James Robinson and Pierre Yared use two strategies to try and find causality: First introducing country fixed-effects in a panel regression, which are supposed to take into account country-specific effect impacting jointly income and democracy. Second, use an instrumental variable approach, which gives sources of exogenous variation useful for estimating causation. In the first case, the correlation disappears, and in the second, no causal effect is found from income to democracy.
In the latter case, one can discuss forever whether the instruments are adequate, especially as their strength is not reported. Also, causation could actually go the other way (as advocates of imposing democracy onto other countries like to argue). Still it remains a puzzle why rich countries are democratic. The authors advance a few vague ideas (political and historical accidents, long term effects not identifiable in the short sample), but clearly much remains to be done here.
Daron Acemoglu, Simon Johnson, James Robinson and Pierre Yared use two strategies to try and find causality: First introducing country fixed-effects in a panel regression, which are supposed to take into account country-specific effect impacting jointly income and democracy. Second, use an instrumental variable approach, which gives sources of exogenous variation useful for estimating causation. In the first case, the correlation disappears, and in the second, no causal effect is found from income to democracy.
In the latter case, one can discuss forever whether the instruments are adequate, especially as their strength is not reported. Also, causation could actually go the other way (as advocates of imposing democracy onto other countries like to argue). Still it remains a puzzle why rich countries are democratic. The authors advance a few vague ideas (political and historical accidents, long term effects not identifiable in the short sample), but clearly much remains to be done here.
Wednesday, September 24, 2008
The electoral college and candidate attention
US kids are taught a myth in civics classes, that every vote counts. In presidential election this is certainly not true. The fact that the winner takes all electors when winning a state and some states consistently vote for one party (and if not, it is a landslide) makes that many states become completely irrelevant in the campaign. It is all about the battleground states.
There are two ways in which campaigns realize that not every vote is equal: they allocate unevenly their resources, both in time (candidate visits) and money (TV ads). Do they do this in a manner that would be predicted by a model of electoral competition? How would these allocations change if the electoral college were replaced with another system? These answers are answered by David Strömberg. The critical thing here is to measure the uncertainty that a state would vote for either camp and determine how visits (and TV ads) influence this likelihood.
It turns out the proposed model works remarkably well to explain the actual campaign decision. Or put in another way, the campaigns seem indeed to optimize following such a model. Now that we have estimated the components of the model, one can look at alternative election scheme. This is where it becomes really interesting. If one lets electors be attributed proportionally to the number of voters in each state or even switches to a direct vote, the battleground state become significantly less interesting. Large states do not benefit much, however, due to the decreasing returns of visits. It is the small states that are big beneficiaries of this system, both because of the higher return of a visit, but also because they have disproportionately many electors to begin with.
It is time to make all states relevant. There have been previous attempts to reform the presidential election. One other aspect that a reform would bring, as demonstrated by Strömberg, is that the likelihood of razor thin victories would decrease 40-fold. Not good for the 24-hour news channel, but good for the country.
There are two ways in which campaigns realize that not every vote is equal: they allocate unevenly their resources, both in time (candidate visits) and money (TV ads). Do they do this in a manner that would be predicted by a model of electoral competition? How would these allocations change if the electoral college were replaced with another system? These answers are answered by David Strömberg. The critical thing here is to measure the uncertainty that a state would vote for either camp and determine how visits (and TV ads) influence this likelihood.
It turns out the proposed model works remarkably well to explain the actual campaign decision. Or put in another way, the campaigns seem indeed to optimize following such a model. Now that we have estimated the components of the model, one can look at alternative election scheme. This is where it becomes really interesting. If one lets electors be attributed proportionally to the number of voters in each state or even switches to a direct vote, the battleground state become significantly less interesting. Large states do not benefit much, however, due to the decreasing returns of visits. It is the small states that are big beneficiaries of this system, both because of the higher return of a visit, but also because they have disproportionately many electors to begin with.
It is time to make all states relevant. There have been previous attempts to reform the presidential election. One other aspect that a reform would bring, as demonstrated by Strömberg, is that the likelihood of razor thin victories would decrease 40-fold. Not good for the 24-hour news channel, but good for the country.
Tuesday, September 23, 2008
Guarding the guardians
The June 2008 issue of the American Economic Review has a nice set of articles in political economy that are an interesting read with the current presidential election in the backdrop. I will be writing about them over the next few days.
The three lead papers are dedicated to the Nobel Prize lectures and give a good overview of mechanism design. I found the one by Leonid Hurwicz, entitled But who will guard the guardians? particularly interesting giving the recent failures of the safeguards in the US government. It turned out that the US Constitution could not prevent abuse of power when the executive and the legislative (and some argue also the judiciary) are dominated by the same party. Hurwicz's point is that whenever somebody may misbehave, you need a guard, and also somebody guarding the guard, etc.
Luckily, in the political arena, there is an ultimate guard: the people. But one needs to put an institution in place that actually lets people guard their government. This is currently not the case in the United States, as it is very difficult to recall a president or congressman. Tell this to Connecticut who seems to regret very much electing Lieberman, for example, but is stuck with him for another four years.
And a recall is not necessary in fact, as long as the people have a way to overturn a decision the government has taken. In this respect, I am a big fan of direct democracy, where people can take the initiative and put measures on the ballot. This is currently the case in several US states, most prominently in California. The champion in direct democracy is Switzerland, where every decision taken by the government is fair game with a relatively low hurdle in terms of support before it goes to a ballot. This means that the government needs to be awfully careful in its decisions. In fact, the Swiss constitution specifies that some laws face mandatory referendums.
Now imagine direct democracy applied at the federal level in the United States. People would be much more involved in politics, as they now have the power to overrule the politicians. Politicians become much more careful in they policy making. Long standing issues, like gun control, abortion, gay marriage, immigrant rights, public health care, size of the military, and the role of government in general could be settled once for all. Everybody could then finally move on and leave these poisonous issues behind.
The three lead papers are dedicated to the Nobel Prize lectures and give a good overview of mechanism design. I found the one by Leonid Hurwicz, entitled But who will guard the guardians? particularly interesting giving the recent failures of the safeguards in the US government. It turned out that the US Constitution could not prevent abuse of power when the executive and the legislative (and some argue also the judiciary) are dominated by the same party. Hurwicz's point is that whenever somebody may misbehave, you need a guard, and also somebody guarding the guard, etc.
Luckily, in the political arena, there is an ultimate guard: the people. But one needs to put an institution in place that actually lets people guard their government. This is currently not the case in the United States, as it is very difficult to recall a president or congressman. Tell this to Connecticut who seems to regret very much electing Lieberman, for example, but is stuck with him for another four years.
And a recall is not necessary in fact, as long as the people have a way to overturn a decision the government has taken. In this respect, I am a big fan of direct democracy, where people can take the initiative and put measures on the ballot. This is currently the case in several US states, most prominently in California. The champion in direct democracy is Switzerland, where every decision taken by the government is fair game with a relatively low hurdle in terms of support before it goes to a ballot. This means that the government needs to be awfully careful in its decisions. In fact, the Swiss constitution specifies that some laws face mandatory referendums.
Now imagine direct democracy applied at the federal level in the United States. People would be much more involved in politics, as they now have the power to overrule the politicians. Politicians become much more careful in they policy making. Long standing issues, like gun control, abortion, gay marriage, immigrant rights, public health care, size of the military, and the role of government in general could be settled once for all. Everybody could then finally move on and leave these poisonous issues behind.
Monday, September 22, 2008
Building trust
A fundamental building block of a developed economy is trust. You need trust to make transactions happen, to enforce contracts, to create a banking system, to use money. So how can you create trust?
Ernesto Reuben, Paola Sapienza and Luigi Zingales address this question with an interesting experiment: person A has $50 and can send it to person B. If this happens, person B obtains $150 and can chose to send any amount back to person A. If A trusts B to send more that $50 back, A should send $50 to B. If not, no transaction happens. The twist in this classic game here is that people playing B play twice. Once without any information, and once knowing that A expects something in return.
They conclude that people behave in a more trustworthy manner when more is expected from them. This is an important result. It shows that people need to be constantly reminded what we expect from them. For example politicians, bankers, plumbers and teachers.
Ernesto Reuben, Paola Sapienza and Luigi Zingales address this question with an interesting experiment: person A has $50 and can send it to person B. If this happens, person B obtains $150 and can chose to send any amount back to person A. If A trusts B to send more that $50 back, A should send $50 to B. If not, no transaction happens. The twist in this classic game here is that people playing B play twice. Once without any information, and once knowing that A expects something in return.
They conclude that people behave in a more trustworthy manner when more is expected from them. This is an important result. It shows that people need to be constantly reminded what we expect from them. For example politicians, bankers, plumbers and teachers.
Friday, September 19, 2008
Spite and development
One of the big lessons Adam Smith has taught countless generations of economists is that homo oeconomicus is all its selfish glory can be quite useful to society. Of course, there are circumstances were selfishness is not the best outcome for society, for example when an activity exerts negative externalities onto others.
In a recent article, Ernst Fehr, Karla Hoff and Mayuresh Kshetramade give an example of a situation where society would be better off if people were selfish: spiteful preferences. This happens when somebody desires to reduce another's payoff only to increase one's relative payoff, and doing so hurts oneself. Society would be better off if this person would just be selfish and not commit such acts of spite.
Two points here: first, we need to define what selfishness is. If it maximizing private utility, then if it is relative outcome that are relevant to one's preferences, then this is what we ought to accept as utility. Where it become problematic for society is if such preferences are widespread and people enter into spite tournaments and mutually hurt each other. But even if there is only one spiteful person, his actions exert a negative externality onto others that needs to be redressed.
Second, how widespread is such behavior? The authors of the article argue it is more widespread than you may think. They conducted experiments in India with a game where cooperation is a Nash equilibrium. They find that between 61 and 73 percent of players punish cooperators, and this is more prevalent among higher castes.
I am saddened by such results, as this is obviously bad news for economic development. If people are so willing to hurt themselves to prevent others to become richer, everyone is going to stay poor.
In a recent article, Ernst Fehr, Karla Hoff and Mayuresh Kshetramade give an example of a situation where society would be better off if people were selfish: spiteful preferences. This happens when somebody desires to reduce another's payoff only to increase one's relative payoff, and doing so hurts oneself. Society would be better off if this person would just be selfish and not commit such acts of spite.
Two points here: first, we need to define what selfishness is. If it maximizing private utility, then if it is relative outcome that are relevant to one's preferences, then this is what we ought to accept as utility. Where it become problematic for society is if such preferences are widespread and people enter into spite tournaments and mutually hurt each other. But even if there is only one spiteful person, his actions exert a negative externality onto others that needs to be redressed.
Second, how widespread is such behavior? The authors of the article argue it is more widespread than you may think. They conducted experiments in India with a game where cooperation is a Nash equilibrium. They find that between 61 and 73 percent of players punish cooperators, and this is more prevalent among higher castes.
I am saddened by such results, as this is obviously bad news for economic development. If people are so willing to hurt themselves to prevent others to become richer, everyone is going to stay poor.
Thursday, September 18, 2008
The brain drain and the financial crisis
While almost every economic or financial blogger has given his opinion on the current financial troubles, I have resisted because I do not think the consequences of the crisis are a s large as the press suggests. Recent events seem to precipitate the financial crisis, which does not yet means this would lead to a recession. However, the current alarmist tone teases me to react.
First, at this point the economy is sound. The financial sector is a mess, but the rest of the economy is remarkably resilient to what is happening. This may not last as credit is the lifeblood of entrepreneurship, and if this situation lingers for another year or so, we may get into a Japan-like slump. But we are not there yet. And if there is a longer lasting credit crunch because the US banks cannot lend, there are plenty of others, in particular in the Middle-East, that are flush with cash.
Second, the problem is not a lack of oversight or regulation. The institutions that are in trouble are all regulated institutions. Those that are not regulated are doing fine, for example hedge funds. If there is a lack of something, it is that various federal agencies should be intervening, not the Federal Reserve.
Where I think I see a problem is in terms of misplaced human capital. There are bright people in the financial world, but also some not so bright ones. Among the latter are people who learned to work with recipes and pre-established rules and cannot adapt to new situations. The bright ones have gradually moved to where the money is: hedge funds. This leaves investment banks, banks and in particular regulators lacking. This explains the incredibly stupid decisions we have seen, like developing the sub-prime market, venturing into markets investors did not understand. For example, Lehman Brothers is currently not able to price some of securities it holds. It bought only because it could sell them further. Call that a bubble.
This crisis will thoroughly shake the financial industry. It is showing who is really competent. It is in times of war that the real leaders emerge. But clearly regulators are not emerging as leaders here. And one should not expect them to be. They do not have the resources to stay ahead of the financial institutions. The answer to the crisis is not to increase (poor and poorly enforced) regulation. Rather, give more liberties (with proper disclosures) to regulated institutions, thus letting them get better returns and attracting back talent that understands the business.
First, at this point the economy is sound. The financial sector is a mess, but the rest of the economy is remarkably resilient to what is happening. This may not last as credit is the lifeblood of entrepreneurship, and if this situation lingers for another year or so, we may get into a Japan-like slump. But we are not there yet. And if there is a longer lasting credit crunch because the US banks cannot lend, there are plenty of others, in particular in the Middle-East, that are flush with cash.
Second, the problem is not a lack of oversight or regulation. The institutions that are in trouble are all regulated institutions. Those that are not regulated are doing fine, for example hedge funds. If there is a lack of something, it is that various federal agencies should be intervening, not the Federal Reserve.
Where I think I see a problem is in terms of misplaced human capital. There are bright people in the financial world, but also some not so bright ones. Among the latter are people who learned to work with recipes and pre-established rules and cannot adapt to new situations. The bright ones have gradually moved to where the money is: hedge funds. This leaves investment banks, banks and in particular regulators lacking. This explains the incredibly stupid decisions we have seen, like developing the sub-prime market, venturing into markets investors did not understand. For example, Lehman Brothers is currently not able to price some of securities it holds. It bought only because it could sell them further. Call that a bubble.
This crisis will thoroughly shake the financial industry. It is showing who is really competent. It is in times of war that the real leaders emerge. But clearly regulators are not emerging as leaders here. And one should not expect them to be. They do not have the resources to stay ahead of the financial institutions. The answer to the crisis is not to increase (poor and poorly enforced) regulation. Rather, give more liberties (with proper disclosures) to regulated institutions, thus letting them get better returns and attracting back talent that understands the business.
Wednesday, September 17, 2008
Who is going to Japan?
I received this letter the other day. Fill in [...] with a name I am withholding:
I must say I felt very honored about this nomination for [...] and was wondering who would have nominated [...]. So I called the local high school, who informed me that they nominate no one for such programs, especially a cat. Now I must say that my cat [...] is of an age that would qualify for high school, hence probably the confusion.
The high school also informed me that it does not give credit for such travel, which surely disappointed me, as my cat would have received a head start if I were to register it for next year's freshman class. That credit would have come at a steep price, though, about US$6000. So I think I'll pass on the opportunity and not use the personal invitation number.
Dear Parents of [...]
Congratulations! [...] has been nominated to journey to Japan as a People to People Student Ambassador in the summer of 2009. This is an opportunity to join high school students from your area on a fascinating educational journey.
[...] can experience 14 days of rewarding activities and meet the people of Japan, all while earning high school or university credit. Your local delegation will represent the United States overseas, experience new cultures, and make lifelong friends. Success and confidence await [...] in rewarding activities like these:Etc...
- Explore dramatic Mount Fuji, the spiritual symbol of Japan.
- Experience the depth of Japan's heritage as you enter Tokyo's Meji Shrine, Asakusa Temple, and Nakamise Market.
- Learn the art of the Japanese language and elevate your knowledge of Shinto when you ferry to a sacred island.
- Challenge your knowledge and viewpoint at Hiroshima's Peace Park, a memorial to World War II.
I must say I felt very honored about this nomination for [...] and was wondering who would have nominated [...]. So I called the local high school, who informed me that they nominate no one for such programs, especially a cat. Now I must say that my cat [...] is of an age that would qualify for high school, hence probably the confusion.
The high school also informed me that it does not give credit for such travel, which surely disappointed me, as my cat would have received a head start if I were to register it for next year's freshman class. That credit would have come at a steep price, though, about US$6000. So I think I'll pass on the opportunity and not use the personal invitation number.
Tuesday, September 16, 2008
Rest unemployment
Following up on yesterday's post on how little time unemployed people spend searching for a job, I claim that we need to model unemployment differently. We need to realize that there are some people who activily search, and others that consider an unemployment spell to be a vacation (or a temporary layoff).
This is the premise that Fernando Alvarez and Robert Shimer have in their latest paper. They extend the Lucas-Prescott island model to factor in work, search unemployment, rest unemployement and inactivity. The idea is that you search when you look for work in a different sector, while you rest when you just wait in your sector for things to improve. What this model points out is that rest unemployment is actually efficient: why waste resources searching when sectoral conditions will improve shortly?
One consequence of this is that unemployment insurance has an important role here: it allows unemployed workers to wait for the jobs to reopen and avoids forcing them to search. A somewhat similar argument has been made earlier by Daron Acemoglu and Robert Shimer, showing that unemployment insurance allows to wait and find better matches. But in this case, everybody searches all the time.
This is the premise that Fernando Alvarez and Robert Shimer have in their latest paper. They extend the Lucas-Prescott island model to factor in work, search unemployment, rest unemployement and inactivity. The idea is that you search when you look for work in a different sector, while you rest when you just wait in your sector for things to improve. What this model points out is that rest unemployment is actually efficient: why waste resources searching when sectoral conditions will improve shortly?
One consequence of this is that unemployment insurance has an important role here: it allows unemployed workers to wait for the jobs to reopen and avoids forcing them to search. A somewhat similar argument has been made earlier by Daron Acemoglu and Robert Shimer, showing that unemployment insurance allows to wait and find better matches. But in this case, everybody searches all the time.
Monday, September 15, 2008
What are unemployeds doing with their time?
When we model economic behavior with micro-foundations and are interested in unemployment, we need to take a stand about what the unemployed worker is doing with his time. Remember that work gets remunerated, and that is because work is not leisure, work is something would prefer not doing if there were no income from it. Thus we need to factor in that an unemployed person has more leisure than an employed one. But how much?
Indeed, when unemployed one may still do some work, like looking for a job. Luckily, the American Time Use Survey (still not saved from budget cuts) comes to the rescue. Alan Krueger and Andreas Mueller use it to draw some interesting conclusions. The average US unemployed worker spends 41 minutes a day looking for a job, 9 minutes a day on week-ends. While this seems to be very low, it is still much higher than in Europe. Note that these average numbers are drawn down by the large number of those who do not spend time searching at all. Conditional on search, the average time is 167 minutes a day which still leaves plenty of added leisure.
Taking characteristics of state unemployment insurance into account, Krueger and Mueller find that incentives work like they should: a more generous system leads to less search time. As documented abundantly for unemployment-work transitions, they also find a spike in searching during weeks 15 to 26 of an unemployment spell. Somewhat surprisingly, those eligible for unemployment insurance search a little more than those that ran out, even after controlling for demographic characteristics.
What I take from all this is that unemployed workers on average search very little, respond properly to incentives, but there is a puzzle about why they search less once they run out of unemployment insurance.
Indeed, when unemployed one may still do some work, like looking for a job. Luckily, the American Time Use Survey (still not saved from budget cuts) comes to the rescue. Alan Krueger and Andreas Mueller use it to draw some interesting conclusions. The average US unemployed worker spends 41 minutes a day looking for a job, 9 minutes a day on week-ends. While this seems to be very low, it is still much higher than in Europe. Note that these average numbers are drawn down by the large number of those who do not spend time searching at all. Conditional on search, the average time is 167 minutes a day which still leaves plenty of added leisure.
Taking characteristics of state unemployment insurance into account, Krueger and Mueller find that incentives work like they should: a more generous system leads to less search time. As documented abundantly for unemployment-work transitions, they also find a spike in searching during weeks 15 to 26 of an unemployment spell. Somewhat surprisingly, those eligible for unemployment insurance search a little more than those that ran out, even after controlling for demographic characteristics.
What I take from all this is that unemployed workers on average search very little, respond properly to incentives, but there is a puzzle about why they search less once they run out of unemployment insurance.
Friday, September 12, 2008
Teaching without textbooks
Classes have started, students have bought the assigned textbooks, and they have thoroughly complained about the cost of the textbooks. It is the same at the start of every term, yet publishers manage to exploit their market power without much of a challenge. Yet there are ways out.
I reported about one, POeT, which encourages comparison shopping by faculty while they select a textbook. There are cheaper, even open-access textbooks available. But there is even better: teaching without a textbook.
Why do we need a textbook? It is convenient for a teacher to have ones course structured by someone else, with ready-made teaching material like slides, exam questions and exercises. For students, it reassures them that they have a backup in case they did not understand what was going on in class.
It is, however, my experience that once there is a textbook, students start slacking off considerably: they do not pay attention in class, do not take notes or do not even show up in class, because "there is a textbook." One striking consequence is that the average student nowadays in incapable of taking notes beyond what is written on the board. Also, they are lost as soon as lectures deviate slightly from the textbook.
The logical consequence is to do away with the textbooks. While it may not be popular at first, it forces students to think and take notes while in class. One should keep in mind the original purpose of a textbook: support the teaching in class. Unfortunately, it has become the opposite: the teaching is supposed to follow a textbook. If this were the goal, one could in fact do away with the teaching, simply assign a textbook and then test people on it. Wait, this is already done with correspondence and online courses.
I put a lot of blame on the students, as they follow what they believe is the easier way by requesting a textbook for every class. But teachers are to blame as well. They often also take the easy way by choosing a textbook that is easy to teach from, but not necessarily easy to learn from. I have had colleagues select textbooks on the basis of the powerpoint slides alone...
I reported about one, POeT, which encourages comparison shopping by faculty while they select a textbook. There are cheaper, even open-access textbooks available. But there is even better: teaching without a textbook.
Why do we need a textbook? It is convenient for a teacher to have ones course structured by someone else, with ready-made teaching material like slides, exam questions and exercises. For students, it reassures them that they have a backup in case they did not understand what was going on in class.
It is, however, my experience that once there is a textbook, students start slacking off considerably: they do not pay attention in class, do not take notes or do not even show up in class, because "there is a textbook." One striking consequence is that the average student nowadays in incapable of taking notes beyond what is written on the board. Also, they are lost as soon as lectures deviate slightly from the textbook.
The logical consequence is to do away with the textbooks. While it may not be popular at first, it forces students to think and take notes while in class. One should keep in mind the original purpose of a textbook: support the teaching in class. Unfortunately, it has become the opposite: the teaching is supposed to follow a textbook. If this were the goal, one could in fact do away with the teaching, simply assign a textbook and then test people on it. Wait, this is already done with correspondence and online courses.
I put a lot of blame on the students, as they follow what they believe is the easier way by requesting a textbook for every class. But teachers are to blame as well. They often also take the easy way by choosing a textbook that is easy to teach from, but not necessarily easy to learn from. I have had colleagues select textbooks on the basis of the powerpoint slides alone...
Thursday, September 11, 2008
Who becomes a suicide bomber?
Following the axions of rationality and self-interest, it is diffcult to fathom why someone would be driven to suicide bombing. This is especially difficult once you realize who suicide bombers are. According to Alan Krueger and Jitka Maleckova, who studied the Hezbollah movement, they are relatively rich and educated, thus not the ones with no future we often hear about in the crime literature. Claude Berrebi shows that this applies as well for Hamas. Still, Edward Sayre demonstrates that labor market conditions matter. Efraim Benmelech and Claude Berrebi also argue that bombers with higher human capital have a higher success rate and are thus assigned bigger targets.
But how could suicide bombing be rational? Jean-Paul Azam argues that a little inter-generational altruism is sufficient. Karen Pittel and Dirk Rübbleke claim that terrorists provide an impure public good: a public good with a private good component (say, fame). Bryan Caplan thinks that terrorists must be somewhat selfless and somewhat irrational, especially suicide bombers, but they are still surprisingly close to homo oeconomicus.
What does this mean in terms of combatting terrorism? Explaining terrorists that they are mistaken may not help much, as does improving local conditions. Taunting them less would be more successful, especially as the Sayre study above shows also that the timing of suicide bombing by Palestinians is closely tied to Israeli moves.
But how could suicide bombing be rational? Jean-Paul Azam argues that a little inter-generational altruism is sufficient. Karen Pittel and Dirk Rübbleke claim that terrorists provide an impure public good: a public good with a private good component (say, fame). Bryan Caplan thinks that terrorists must be somewhat selfless and somewhat irrational, especially suicide bombers, but they are still surprisingly close to homo oeconomicus.
What does this mean in terms of combatting terrorism? Explaining terrorists that they are mistaken may not help much, as does improving local conditions. Taunting them less would be more successful, especially as the Sayre study above shows also that the timing of suicide bombing by Palestinians is closely tied to Israeli moves.
Wednesday, September 10, 2008
The Economics of toilet cleaning
This is the second installment in our continuing series on the Economics of toilets. After the issue of whether the seat should be left up, let us discuss toilet cleaning. We have all seen this: the toilets on your floor are a mess, the person in charge is gone for the day, and one cannot leave the restrooms in such a pitiful state because they are an embarassement. What is going to happen?
Marc Bilodeau and Al Slivinski have the response: the person who cares the most will end up cleaning, even if this is the department chairman. I concur, as I have seen this happen in two separate departments... Their argument is based on the all too familiar search for a volunteer for a job nobody wants to do: it is a war of attrition, were the one person who cares the most relative to the required effort finally gives in. Knowing this, this person volunteers right away. Interestingly, the authors show also that even if people care how well and by whom the job will be done, the outcome is not changed.
Such situations are not limited to toilet cleaning. In fact, department chairing itself is often a thankless job with a positive externality on everyone. When a new chairperson needs to be found, there is a war of attrition until a good soul volunteers, "because it is my turn" or "I owe it to the department." And if it turns out that the person who cares the most, taking into account how much effort it entails for this person, is the one that volunteers, we have another example of comparative advantage leading to an optimal outcome.
Marc Bilodeau and Al Slivinski have the response: the person who cares the most will end up cleaning, even if this is the department chairman. I concur, as I have seen this happen in two separate departments... Their argument is based on the all too familiar search for a volunteer for a job nobody wants to do: it is a war of attrition, were the one person who cares the most relative to the required effort finally gives in. Knowing this, this person volunteers right away. Interestingly, the authors show also that even if people care how well and by whom the job will be done, the outcome is not changed.
Such situations are not limited to toilet cleaning. In fact, department chairing itself is often a thankless job with a positive externality on everyone. When a new chairperson needs to be found, there is a war of attrition until a good soul volunteers, "because it is my turn" or "I owe it to the department." And if it turns out that the person who cares the most, taking into account how much effort it entails for this person, is the one that volunteers, we have another example of comparative advantage leading to an optimal outcome.
Tuesday, September 9, 2008
Economic Logic on IDEAS
It is possible on IDEAS to create reading lists. Economic Logic has now its own. It lists all papers discussed on this blog, along with alternative versions of them, in case readers cannot get access to a gated version. Also, the abstracts pages of the cited papers also have a link back to the reading list, thus allowing others to discover this blog.
Let's see whether this reading list will increase traffic here as much as Economic Logic's listing on Econ Academics did.
Let's see whether this reading list will increase traffic here as much as Economic Logic's listing on Econ Academics did.
Monday, September 8, 2008
Women in politics
A politician is supposed to represent others, the electorate, and not act selfishly. We know everyone will act selfishly in one way or the other, we are not angels. But there may be some ways to choose politicians that are more selfless than others. One interesting category of politicians in this respect are women.
It has been know for a long time that mothers and more generous to others than fathers. This is, for example, the reason why in many countries child benefits are paid to the mother. Also, women are more risk averse, as research reviewed by Catherine Eckel and Philip Grossman shows. Also, John Lott and Lawrence Kenny show that women's suffrage in the US has coincided with more liberal policies.
A particularly interesting experiment is the requirement in India that half (correction: one third) of village council seats be reserved for women (on top of slot for various castes), and half of council heads be women. Raghabendra Chattopadhyay and Esther Duflo document that while council members follow the interests on their own gender (and caste), those headed by women tend to favor infrastructure improvements.
Why would women want to provide more public goods? Uri Gneezy, Kenneth Leonard and John List compare matrilineal and patriarchal societies, where they conducted the classic experiment designed by James Andreoni: experiment participants decide how much money to distribute between a private and a collective fund. In patriarchal societies, women share more than men. In matrilineal societies, the reverse happens. It appears thus the dominated gender is more generous.
It has been know for a long time that mothers and more generous to others than fathers. This is, for example, the reason why in many countries child benefits are paid to the mother. Also, women are more risk averse, as research reviewed by Catherine Eckel and Philip Grossman shows. Also, John Lott and Lawrence Kenny show that women's suffrage in the US has coincided with more liberal policies.
A particularly interesting experiment is the requirement in India that half (correction: one third) of village council seats be reserved for women (on top of slot for various castes), and half of council heads be women. Raghabendra Chattopadhyay and Esther Duflo document that while council members follow the interests on their own gender (and caste), those headed by women tend to favor infrastructure improvements.
Why would women want to provide more public goods? Uri Gneezy, Kenneth Leonard and John List compare matrilineal and patriarchal societies, where they conducted the classic experiment designed by James Andreoni: experiment participants decide how much money to distribute between a private and a collective fund. In patriarchal societies, women share more than men. In matrilineal societies, the reverse happens. It appears thus the dominated gender is more generous.
Friday, September 5, 2008
On the dispersion in price rigidities
With the availability of rich data sets, new research has tried to establish how rigid prices really are and thus whether monetary models with rigid prices make sense at all. Currently, the two most interesting exercices are Martin Eichenbaum, Nir Jaimovich and Sergio Rebelo and Mark Bils and Pete Klenow, the latter being previously discussed on this blog. What this research highlights is that while some prices are rigid, others are not, and there is considerable diversity. Theory, like Mikhail Golosov and Robert E. Lucas, Jr. we discussed before, cannot account for this diversity.
Hirokazu Ishise and Nao Sudo devise a theory that brings dispersion in rigidities. They show that differences in good characteristics, along the dimensions of durability, luxuriousness and proportion of cash payments yields such dispersion. This is a model of limited participation: agents cannot rebalance their portfolio in the face of monetary shocks until it is their turn. One may argue that this should be endogenous and thus it could wash away any remaining rigidity, but it is a start.
What is particularly interesting is that the model yields responses to monetary shocks by different good characteristics like in the data: more durable, more luxurious and less cash intensive goods respond more to monetary impulses.
Hirokazu Ishise and Nao Sudo devise a theory that brings dispersion in rigidities. They show that differences in good characteristics, along the dimensions of durability, luxuriousness and proportion of cash payments yields such dispersion. This is a model of limited participation: agents cannot rebalance their portfolio in the face of monetary shocks until it is their turn. One may argue that this should be endogenous and thus it could wash away any remaining rigidity, but it is a start.
What is particularly interesting is that the model yields responses to monetary shocks by different good characteristics like in the data: more durable, more luxurious and less cash intensive goods respond more to monetary impulses.
Thursday, September 4, 2008
How to make soccer more exciting
Now that football (soccer) leagues are back in play, let us consider the old question of how to get more goals scored. As the play has become more defense oriented, it is obvious that attack needs to be encouraged, thereby increasing the risk. Quite obviously, to reward risk taking, it must be that the expectation of a return from wining and losing must be higher than that of a draw. This can be achieved by awarding three points instead of two for a win, a practice that is now almost uniformly adopted, and Isabelle Brocas and Juan Carrillo confirm from a theoretical point of view that this is a good way to increase risk taking.
The latter paper also recommends to have a 20-minute golden goal extra time in case of a draw: the first to score wins. I am not quite sure I follow the intuition there. Knowing that there is this extra-time, it gives less incentives to play offensively during the regular time. This is at least my observation of NHL hockey games.
What else could encourage offensive play? One could go the American football way, which is to basically regulate when a team can only play offense. But soccer is too fluid for that. But ice hockey can be very exciting when teams are short-handed due to a timed penalty. Having fewer players, even temporarily, is a disadvantage that can lead to have more goals scored. But more importantly, the fear of time penalties would lead defenders to be less aggressive (face it, yellow cards are not much of a threat), thus opening the play to attackers.
That said, one can still discuss whether more goals are really needed. If a game can be decided by a single goal, and this goal could happen at any moment and not necessarily be scored by the dominating team, this can also make a game exciting.
The latter paper also recommends to have a 20-minute golden goal extra time in case of a draw: the first to score wins. I am not quite sure I follow the intuition there. Knowing that there is this extra-time, it gives less incentives to play offensively during the regular time. This is at least my observation of NHL hockey games.
What else could encourage offensive play? One could go the American football way, which is to basically regulate when a team can only play offense. But soccer is too fluid for that. But ice hockey can be very exciting when teams are short-handed due to a timed penalty. Having fewer players, even temporarily, is a disadvantage that can lead to have more goals scored. But more importantly, the fear of time penalties would lead defenders to be less aggressive (face it, yellow cards are not much of a threat), thus opening the play to attackers.
That said, one can still discuss whether more goals are really needed. If a game can be decided by a single goal, and this goal could happen at any moment and not necessarily be scored by the dominating team, this can also make a game exciting.
Wednesday, September 3, 2008
How much did marketization of home production contribute to GDP?
GDP measures all activities taking place on the market place, and thus neglects and production in the home that never hits the market. With the increase of female labor participation, and consequently the increase of production of goods previously produced in the household, GDP growth exhibits so bias if it is supposed to measure total production in an economy: part of the growth stems from an accounting change. Affected are goods like meals, daycare, laundry services, cleaning services.
Christopher House, John Laitner and Dmitriy Stolyarov show that this bias is negligible and accounts only for a cumulated 2.5% of GDP, or 25% of women's measured earnings: 2.5% of today's GDP would have been produced at home fifty years ago.
There is no easy ways to figure these numbers out, as home production is not measured. The trick used here is to build a micro-founded model with home production, looks at the impact of changes in home production on other variables, measure the latter and reverse engineer the model to find what home production ought to be. There are clearly lots of margins for errors (model specification, calibration, measurement of observables), but the exercise is very carefully done and the results are strong.
Christopher House, John Laitner and Dmitriy Stolyarov show that this bias is negligible and accounts only for a cumulated 2.5% of GDP, or 25% of women's measured earnings: 2.5% of today's GDP would have been produced at home fifty years ago.
There is no easy ways to figure these numbers out, as home production is not measured. The trick used here is to build a micro-founded model with home production, looks at the impact of changes in home production on other variables, measure the latter and reverse engineer the model to find what home production ought to be. There are clearly lots of margins for errors (model specification, calibration, measurement of observables), but the exercise is very carefully done and the results are strong.
Tuesday, September 2, 2008
Soft budget constraints may be optimal
In many countries, local governments rely to some degree on the federal government to cover for deficits. This has been regarded as a poor policy, because it leads to severe moral hazard issues, the most serious example probably being Argentina. One such solution is that the central government impose a hard budget constraint (HBC) on local ones: no borrowing allowed. This is also the policy adopted by many US states.
HBC is not uniformly liked, though. As the US shows, recessions lead state governments under such a constraint to suddenly and severely curtail essential services, sometimes to even shut down completely. This obvious solution to accumulate a rainy day fund during good times never happens, mostly due to constant pressures to lower taxes.
It turns out there is another reason why HBC could be less than optimal. Martin Besfamille and Ben Lockwood show that HBC can lead to excessive effort to complete investment projects once started and avoid a bailout, and thus discourage starting projects in the first place. This does not happen with soft budget constraints, as local government are driven there to over-investment and lower effort. Between the two, HBC may lose in terms of efficiency.
Of course, there is also the question whether a government can truly commit to HBC. This article shows, however, that a full commitment to HBC may actually not be optimal.
HBC is not uniformly liked, though. As the US shows, recessions lead state governments under such a constraint to suddenly and severely curtail essential services, sometimes to even shut down completely. This obvious solution to accumulate a rainy day fund during good times never happens, mostly due to constant pressures to lower taxes.
It turns out there is another reason why HBC could be less than optimal. Martin Besfamille and Ben Lockwood show that HBC can lead to excessive effort to complete investment projects once started and avoid a bailout, and thus discourage starting projects in the first place. This does not happen with soft budget constraints, as local government are driven there to over-investment and lower effort. Between the two, HBC may lose in terms of efficiency.
Of course, there is also the question whether a government can truly commit to HBC. This article shows, however, that a full commitment to HBC may actually not be optimal.
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