Saturday, October 31, 2009

The poor living quarters of economists

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

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

Friday, October 30, 2009

Longevity and the cost of health

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

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

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

Thursday, October 29, 2009

Model uncertainty and portfolio management

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

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

Wednesday, October 28, 2009

Want more babies? Reduce public debt

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

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

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

Tuesday, October 27, 2009

Calvo pricing is a costly assumption

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

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

Monday, October 26, 2009

Isolation and development

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

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

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

Saturday, October 24, 2009

What a strange academic market this year

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

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

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

Friday, October 23, 2009

Competition, property rights and credit

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

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

Thursday, October 22, 2009

Shorter copyrights stimulate artistic creation

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

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

Wednesday, October 21, 2009

Dealing with pet overpopulation

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

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

Tuesday, October 20, 2009

A new look at the Laffer curve

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

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

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

Monday, October 19, 2009

Stock spams work

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

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

Saturday, October 17, 2009

The best political cartoon in years

Friday, October 16, 2009

Why are bad mortgages not renegociated?

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

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

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

Thursday, October 15, 2009

Why it is foolish to tax outsourced goods

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

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

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

Wednesday, October 14, 2009

Better incentives for CEOs, and mutual fund managers, too

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

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

Tuesday, October 13, 2009

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

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

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

Monday, October 12, 2009

Low labor market attachment and disability insurance, some expected relationships

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

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

Friday, October 9, 2009

Traffic safety, obesity, and ... organ donations

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

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

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

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

Thursday, October 8, 2009

Climate change and non-committal governments

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

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

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

Wednesday, October 7, 2009

Rents differ markedly from user costs in the US

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

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

Tuesday, October 6, 2009

Gas taxes are still the best option to reduce CO2 emissions

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

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

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

Monday, October 5, 2009

Are women really more generous?

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

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

Friday, October 2, 2009

More Economics research blogging

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

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

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

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

Thursday, October 1, 2009

Measuring the peace dividend

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

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

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