Thursday, January 29, 2009

Commuting is critical for female labor participation

Much has been written about the increase in the female labor supply, attributing it to increases in productivity in home production, women's emancipation, a drop in fertility, availability of daycare, the increasing importance of brains over brawn and the narrowing of the gender wage gap. But what can explain the current disparities in female labor market participation across regions of the United States. Obviously the urban or rural nature of the region will matter. But there are larger disparities even across the large US metropolitan areas. For example, the participation rate for high school educated women is 52% in New York City while it is 78% in Minneapolis.

Dan Black, Natalia Kolesnikova and Lowell Taylor conjecture and verify that this has to do with commuting times. The evidence is overwhelming. Not only do cities with longer commuting times have lower female participation, this participation increased more slowly in agglomerations where commuting times increased faster.

These results highlight once more that the United States should reevaluate very seriously its transportation policy. Increasing commuting times not only reduce welfare because people have less time for leisure or work, but it turns out it basically prevents women from working. It appears that men compensate this by working more when their wife is not working, but this does not strike me as Pareto improving.

Wednesday, January 28, 2009

Competing schools are more efficient

Economists have long advocated that competition improves the efficiency of an industry. Elementary education, however, is typically a state monopoly, and where private education is offered, it is typically much more expensive as not subsidized. While there are locations where voucher programs allow parents to use the subsidy elsewhere, it is hard to find examples where public systems compete with each other.

David Card, Martin Dooley and Abigail Payne look at an example that comes close to this: Ontario, Canada, has a parallel state school system for Catholics. The later can choose where to send their children, and thus the spatial variation in the proportion of Catholics in the population can provide interesting insights in the efficiency of local schools.

The general idea is that in areas with a larger share of Catholics, non-catholic schools has larger incentives to improve to attract these children, especially if parents are not particularly attached to religious education. Using detailed data at the school and child level, this study finds that competition does indeed improve performance as measured by student achievement. One more example highlighting that school choice is good.

Tuesday, January 27, 2009

Heterogeneity is crucial for business cycle models

Following up on yesterday's post about the discrepancies of micro- and macro-estimates, another recent paper caught my eye. Sungbae An, Yongsung Chang and Sun-Bin Kim argue that for a representative household model to replicate the behavior of aggregates, on needs often unreasonable parameter values. This may be due to the fact that representative agents do not aggregate well, or because heterogeneity matters for aggregates. They demonstrate this for the second case, modeling heterogeneous households subject to credit constraints and indivisible labor, and find that this leads to imperfect aggregation.

Of particular interest here is that the departures from the representative agent economy can be shut down one by one to understand what matters and how. This counterfactual exercise shows that there is considerable bias in the risk aversion and uncertainty in the labor supply elasticity. Thus, heterogeneous agents cannot by properly summarized with a representative agent. And what all this highlights is that aggregation is the main issue, not, as surmised by some like Gregory Mankiw, Julio Rotemberg and Lawrence Summers, that the labor market does not clear or that preferences shift.

Monday, January 26, 2009

Labor supply elasticity: micro versus macro estimates

For decades now, there has been a debate about the measurement of the labor supply elasticity. Indeed, micro-estimates using household or payroll data indicate that the elasticity is about 0.1: a 10% increase in wages would increase the labor supply by 1%. Using aggregate data, macro-estimates obtain an elasticity around 1, an order of magnitude higher.

Finding the "correct" elasticity is important. Think, for example, about business cycle modeling. How much the labor supply responds to changes in wages is crucial in understanding what is happening on the labor market, and how policy can influence it. Much of business cycle theory nowadays works with micro-founded representative agent models. The representative household is defined by preferences and constraints which need to be measured in some way. The labor supply elasticity tells a lot about preferences about leisure, in particular the relative strengths of substitution and income effects.

For such a representative household, which elasticity should be used? The macro-estimate, because one is interested in the aggregate behavior of the economy? That could be defended if there were some good aggregation theorem that stipulates that this high elasticity at the individual level translates to the same at the aggregate level. Or should one use the micro-estimate because the model is calibrated to household data? But then, model results do not seem in line with aggregate data.

Riccardo Fiorito and Giulio Zanella add another twist to this debate. They use PSID data to estimate both micro and macro elasticities. PSID being a larger panel data set following the same households over extended periods of time, such dual estimation is possible. And they obtain the same, distinct estimates of previous studies, the difference being here that they used the same data for both. Interestingly they argue that the difference does not come from aggregation. It is because of a difference in data definition: individual data pertains to individual hours worked (intensive margin) while aggregate data pertains to total hours worked, which also includes the number of people working (extensive margin). And they find that the extensive margin explains most of the difference.

Does this help us in determining what elasticity to use in a business cycle model? No, but it highlights that a model where both extensive and intensive margins are present is required to explain appropriately what is happening on the labor market, and that in this case the micro estimate could be used.

Friday, January 23, 2009

Explaining heterogeneity in individual saving rates

The saving behavior varies markedly across individuals, in particular with respect to retirement. While some save very little, other save a lot, and this variation goes much beyond what can be explained by variations in income. In a pair of papers, Mariacristina De Nardi, Eric French and John Bailey Jones look at various explanations for this variation.

In the first one, they document that a very important factor in the savings for retirement decision of people is the expected (out-of-pocket) expenses in health care. This explains in particular why asset rich retirees run down their wealth so slowly in the United States, even with Medicare.

In the second one, they show that life expectancy is a major determinant of savings behavior. People have usually a rather good idea of their life expectancy, and they behave accordingly. What they exploit here is that there are some measurable characteristics that are known to influence, or at least to be correlated with, life expectancy, such as health, gender and permanent income. Basically, people are afraid of outliving their retirement assets and save accordingly. Viewed this way, those who save little do it rationally, knowing that they will not live long. And they should not be criticized by those who try to impose on them cookie-cutter retirement plans, like "you should retire with a million dollars in assets."

Thursday, January 22, 2009

Income makes happy after all

Do higher incomes make you happier? Are countries with higher incomes on average happier? Richard Easterlin made a career trying to document and answer these questions. His answers are known as the Easterlin paradox: within a country, people are happier with higher incomes, but across countries no such relation exists. This has very important implications: it means people only care about their relative standing within a country, but not their absolute income. Consequently, it is useless to implement growth enhancing policies.

Betsy Stevenson and Justin Wolfers revisit the aggregate evidence with new panel data that encompasses more countries, in particular developing economies, and find that the Easterlin paradox does not hold: richer countries are indeed happier on average. While one has always to be weary of survey data, especially when people are asked about subjective measures of their happiness, the results here are robust to all sort of variations in specifications and data sets.

Whew, we can focus on growth promotion again.

Wednesday, January 21, 2009

Google Knol is not Wikipedia

Google has recently announced that its Knol initiative has reached 100,000 entries in only six months. Knol is supposed to be Google's answer to Wikipedia, doing it better. How? By having entries managed by named people, instead of anonymously. And these editors can earn some share of advertising revenue. That sounds like a good concept, especially in the face of criticisms of Wikipedia, where anonmity and openness can lead to abuse.

The result? Knol is a huge disappointment. Witness the economics entries, which have been highjacked by lunatics. Despite appearances, incentives are wrong: There is no reward for correcting entries, or even maintaining them. All that matters is being the fisrt to start an entry. This leads to unnecessary duplication of entries, see for example those on Barack Obama (243) of which none comes even close to the quality of the Wikipedia entry.

Why is Wikipedia so much better even if contributions are anonymous? I think it encompasses all the benefits of the open source movement. People participate because they see an opportunity to contribute to the community. They want to share their passion without glorifying themselves. And they know that nobody is making money on their back. Imagine if Wikipedia started making portions of the site accessible only to subscribers. Contributors would leave en masse. Also, Wikipedia seems to have much better checks and balances in place, effectively subjecting entries to continuous peer review. Knol puts this in the hands of editors, who seem more interested in pusjing agendas than anything else.

Tuesday, January 20, 2009

Fairness, culture and selfish American men

Economic theory mostly assumes that individuals are self-interested, yet there is plenty of evidence that they also value fairness and incorporate the utility of others, including people they are not related to. So they may not be that self-interested or, put it in another way, their utility function has other arguments that pertain to other individuals or to aggregate measures. Sociologists and psychologists would argue here that at least part of this interest in others comes from education or societal pressure. Many studies have highlighted that some societies are more caring, and others more greedy. Much of this is based on surveys.

Economists do generally not like surveys because they do not reflect actual decisions. But controlled experiments or good data are very hard to come by. Bruno Frey, David Savage and Benno Torgler found an interesting data set: the passengers of the Titanic. There is a well established societal norm that women and children have priority in situation of life and death where a future reciprocity is not expected. It this norm really applied?

Take as an example the contrast between British and American customs: In Britain, people queue for everything and apply strictly the norm of :first come first served". In the US, the price is much more used as a selection mechanism, thus wealth matters more. In the context of the Titanic, this would mean: among Brits, a larger proportion of women and children than men should have survived; among Americans, the survivors should be more frequent in first class than third class. According to this analysis by John Henderson, this hypothesis would be correct: the survival rate in third class for British women is 47%, British children 35% and British men 12%. Americans in first class survived at a rate of 67%, 47% in second class and 28% in third class. Interestingly, 58% of Americans survived against of 33% Brits. Did Americans push their way to the lifeboats?

But the analysis is not that simple: there can be composition effects: American may have been proportionally more numerous is higher classes or with more females. Few staff survived, and they may have been disproportionately British. Thus, simple averages are not enough, some proper regression analysis is required using a variety of controls. This is what Frey, Savage and Torgler do and they confirm that women and children had higher survival rates, thus societal norms seem to have largely prevailed. Passengers from higher classes also had a higher survival probability, but this result is likely tainted by the fact that 1) they were better informed as early on few believed the Titanic would sink, 2) most boats were on the first class deck.

And even with all those controls, the British are more likely to die and the Americans are those most likely to survive. But this distinction is not visible among women. Ah, those selfish American men.

Friday, January 16, 2009

People overvalue their own homes

A lot of blame in the current financial crisis has been put on mortgage providers, who have been myopic and thought, erroneously, that house prices would always increase. Rationality would dictate that homeowners should have a better idea about the value of their own home and their capacity to service the mortgage (unless they were counting on foreclosure). So it is a natural question to ask whether home owners are rational: do they properly value their home? They can make errors, but they should not be systematic, as in the rational expectation hypothesis.

Hugo Benítez-Silva, Selcuk Eren, Frank Heiland and Sergi Jiménez-Martín answer this question by stating that homeowners overvalue by 5-10%. Interestingly, they also find that the homes tend to be undervalued when bought in hard times. Thus, by their own recognition, homeowners evaluate home prices with excess volatility. Why mortgage professionals were so myopic becomes an even bigger mystery.

Thursday, January 15, 2009

The economics major in a liberal education

David Colander has produced over the years an impressive series of papers (and books) discussing the economics profession and in particular the education of economists. In his latest report, with KimMarie McGoldrick, he assesses how the economics major fits within a liberal education, with a special emphasis on liberal arts colleges.

For undergraduate studies in the US, having an economics major does not mean that you are an economist. Typically, out of four years of study, little more than a year has actually been devoted to economics. This contrasts with most programs abroad where students concentrate on their major from the get-go. This is a reflection of different attitudes towards education, the US prefering a flexible, general education and, say, Europe favoring a specialized, but more rigid schooling.

Quite obviously, it then becomes difficult to claim that US economics undergraduates have reached their potential. There was simply not enough time to get them there. This is why graduate studies are nowadays essential to become a professional economist. But Colander and McGoldrick do not call for more depth in the major, rather for more breadth. Their point is that a well-rounded undergraduate education should not focus on research questions, but rather teaching questions. The latter are like "is capitalism good?", "should we accept consumer sovereignty?", or "what size should government have?" Faculty are too focussed on their research to address such questions.

I have no problem with addressing these questions in class, but I do not because there is too little time to address them. As Colander and McGoldrick correctly assess, an economics major will, by graduation, have spent less than a third of 1% of his time studying economics. You have barely touched the basics with so little time. I would prefer that high schools did a better coverage of general education so that colleges do not need to spend that much time on it. General education is important, but it should be concentrated in high school. There is no reason only college students should benefit from it.

Wednesday, January 14, 2009

Restaurants are not the cause of the obesity epidemic

There has been a healthy debate about the origin of the obesity "epidemic" in the United States (and elsewhere). Principal culprits are: cheap food, availability of medication to counter the impact of obesity, corn syrup, restaurants and in particular fast-food restaurants. For the latter, the suspicion is that eating out provides a more calorific meals than at home, both because of the fatter food and because of the larger portions.

Michael Anderson and David Matsa challenge this statement on the basis that the causality could run both ways: it could be that the availability of more restaurants made people eat more unhealthily (the prevalent explanation) or it could be that changes in food preferences lead to more restaurants open. The latter would indicate that restaurants are a symptom rather than the cause, which is important from a policy perspective.

Anderson and Matsa use an interesting strategy to study the impact of restaurant supply on the body-mass index of neighboring communities, as travel distance is an important factor in restaurant demand. In rural areas, there is a very large variation of restaurant density due to interstate highways: restaurants agglomerate on highway exits to satisfy travelers. This exogenous variation in restaurant density should lead to higher obesity rates close to highways, if the conventional wisdom is to be believed. It turns out there is no difference.

But what about the positive correlation between restaurants and obesity? The authors conjecture this has to do with a selection bias: those eating greasy food in a restaurant would also eat that at home. And people compensate for the large restaurant portion by eating less otherwise. I can certainly confirm the latter: as any good economist would do, I stuff myself at the fix-price, all-you-can-eat buffet, and then eat nothing else for the day.

This study highlights that restaurants may not be at fault. If one were to restrict restaurants in some way (say with a tax), one would thus reduce social and individual welfare with no health benefit. And besides, how do the French do?

Tuesday, January 13, 2009

Why you lost the office pool

Are you getting frustrated because you never win in the office sports pool despite being an expert? The problem is that office sport experts typically have some allegiance to a team or a country, and the subjective winning probabilities are higher for your idols than the objective probabilities. The receptionist, however, looks at rankings or seeds and objectively makes the best guesses.

Now think in more aggregate terms. Imagine the qualification for Euro 2008, the football tournament where countries need to play several games to reach the finals. People bet on those games and the market determines equilibrium odds. Are the markets odds the same everywhere? Sebastian Braun and Michael Kvasnicka claim that there are not, and typically the odds of the local country are too high. Thus there are clear arbitrage opportunities available, but not for long now that this is known.

Monday, January 12, 2009

For development, institutions matter more than endowments

There is an endless literature on the determinants of development trying to figure out what is more important: endowments (geography, climate, resources, diseases) or institutions (colonization, legal framework, corruption). Countless cross-country regressions have not been able to settle this question once for all. This may not look that surprising, given the quality of the data and the pitfalls of cross-country regressions (collinearity all over the place). This is why it is important to highlight some innovative approaches.

Raphael Auer still uses the cross-country regression approach, but puts the finger on one very important aspect: institutions are to some extend endogenous. In particular, endowments can have an impact on them. We highlighted earlier how slavery influenced institutions and then development even today, and that slavery was limited to accessible area. Thus geography matters in indirect ways. There are other examples.

Basically, Auer uses an empirical strategy to disentangle the impact of endowments and institutions. He notes that the impact of endowments on development is different in former colonies and non-colonies. This calls for including interactions in regressions. But you want to do that intelligently, for example by including an interaction for former colonies only. He does that by including a term that reflects the impact of endowments on colonial institutions.

The results indicate that both endowments and institutions are significant. Looking at the details, disease seems to be particularly important, not just because it impacts directly the economy, but also because it influenced colonization policies. Does this mean that disease eradication will solve all problems in Africa? Not necessarily, because disease has this impact also through colonial institutions, these institutions need to be addressed as well.

Friday, January 9, 2009

Brain drains can be beneficial

Immigration countries prefer educated immigrants. Quite obvious these immigrants are much more educated than the average population of the country they are leaving. This would imply that the (rich) immigration country is gaining human capital with the (poor) emigration country is losing human capital. This would be true if this were a zero sum game, but it is not as people react to migrations. In particular, the prospect of emigrating may increase human capital accumulation, and people may find easier access to higher education if many educated people have left. The problem with verifying these types of conjectures is that there is no clean data that would allow to see this.

Michael Clemens and Satish Chand found a clean natural experiment that allows to disentangle these effects: the massive and sudden emigration of educated people of Indian descent from Fiji after two military coups. The native population was mostly untouched, but the Indian population decreased by 40% in about 20 years. Interestingly, young Indians began investing massively in human capital as they expected local opportunities to dwindle for them. As not all left, an increase in local human capital resulted.

One direct implication of this result is the emigrating countries should not discourage emigration, to the contrary they should encourage it. If have written previously about an example of this in Finland. In that case, the hope is that some emigrants will return. And indeed, there is plenty of evidence that there is significant return migration.

Thursday, January 8, 2009

Lending to the borrower from hell

As usual, there were quite a few good papers (and some bad ones) at the ASSA meetings in San Francisco. Over the next days, I will write about some of them. Note that if you presented a paper and do not have some version up on the web, I will not write about it.

People puzzle these days why banks could have been so stupid to lend so much to risky borrowers. This is not the first time this happens, witness how Argentina could quickly borrow again after each of its numerous defaults. But the risk taking by banks seems much larger than previous seen. Not so. Mauricio Drelichman and Hans-Joachim Voth report on the proverbial borrower from hell, Phillip II of Spain, who accumulated debt up to 50% of his country's GDP and defaulted several times. Why was he still getting loans?

The obvious answer is that he is the king and can offer non-monetary rewards to lenders, such as not getting killed. Or that bankers were irrational, or that the king effectively used his monopoly situation to play the bankers against each other. Not so claim Drelichman and Voth after looking carefully at a large number of lending contracts. In particular, the bankers appear to have formed a very effective coalition through joint lending, cross-posting of collateral and inter-marriage. Whenever the king stopped to pay, he was unable to get any additional funds, as no bank was willing to break ranks. And this had a severe impact on the king as he typically faced large revenue and expense shocks. So he eventually had to settle with the banks, the latter essentially dictating the conditions.

Does this relate to the current situation? Not really, as the Spanish case illustrates a bilateral monopoly game with a weak player (the king). Today, we have a very competitive environment, where banks have been trying to undercut each other and may have overstretched themselves. But one lesson I learned from this paper is that aggregate data may be quite misleading, there is virtue in looking at the detail, the lending contracts in this case.