Friday, January 29, 2010

Introduce real time electricity pricing?

Prices are a wonderful mechanism to allocate scarse resources, especially as it is a really cheap mechanism compared to command and control. But there are times where the price mechanism is not good enough. Take for example congestion pricing. In principle, charging higher tolls when many people are on the road, or raising public transportation prices during peak times, should entice those who have other options to travel at other times or in other ways, thus reduceing the need to accomodate peek demad with oversized infrastructure. But this is only going to work if consumers are sufficiently price elastic and congestion pricing is not too expensive to implement.

The same reasoning would apply to residential electricity supply. Hunt Allcott studies this and comes to the conclusions that consumers are not sufficently price elastic to justify the additional metering costs. While households react to higher prices in peak periods, they do not adapt during more inexpensive off-peak periods. Thus, their welfare decreased. But seeing how large parts of the world have differentiated pricing for electricity and have remarkably adapted to this, for example with heating systems that accumulate heat in off-peak periods, one has to wonder whether there are multiple equilibria. Uniform pricing with no incentive to start an industry that takes advantage of off-peak periods, and congestion pricing where such an industry is in place. Maybe with some initial costs, a switch to congestion pricing could be worth it in the long run.

Thursday, January 28, 2010

The debt that would not disappear

There are sometimes papers you just cannot put down only because they are so well crafted, even though your are not really interested in their topic. I just read one of those, by François Velde.

The French government is still honoring an annuity dating back from 1738, yielding annually €1.20 to be distributed to 58 people. That seems to be a very inconsequential amount, but this particular debt, which survived several kings and political regimes, just does not die. I do not want to reveal too much about the story here, as Velde does a remarkable job at trying to understand where this annuity comes from, how it survived various challenges and how its current amount was established. Along the way, we learn a lot about politics and economics through almost three centuries of French history. A true page turner.

Wednesday, January 27, 2010

Currency denomination does not matter for exports

Does it matter in which currency goods are denominated in international trade? If prices are fully flexible, it should not matter. If nominal prices are rigid, it could matter. Models typically assume either producer currency pricing or local currency pricing, with the truth lying somewhere in between.

Michael Dotsey and Margarida Duarte build a model of international trade that allows to move between the two pricing regimes. They find that the economies are essentially equivalent, save for the behavior of the terms of trade. But empirically, that is not helpful either, seeing that real exchange rates are random walks. This implies that one should not bother with complex pricing mechanisms and focus on the real side of the economy, at least when studying the United States. Outcomes may be different in economies that are more involved in international trade.

Tuesday, January 26, 2010

The proliferation of journals and desk rejects

Notice how journals seem to proliferate like bunnies? And that more and more journals implement a desk reject policy? Why would editors not even bother sending a paper to referees? Probably because the paper is an obvious misfit, for example because of a topic mismatch. It makes you really wonder why authors would that ill-informed about the topic of the journals they are submitting to. But the rise of desk rejection policies and the increasing number of journals be linked?

Damien Besancenot, Kim Huynh and Radu Vranceanu address this with tools from the labor search literature. The key variable in the matching function is the ratio of editors (journals) to authors. In particular, as the cost of publishing has dramatically decreased, the number of editors increases, thus making publishing easier for authors. However, a consequence of this is that submission fees must increase to maintain surplus sharing, as the authors put it but I fail to understand. I would have expected the reduction in costs and the increased competition to result in lower submission fees. It can only be because authors value more publication than before, and there is evidence for that as more and more universities reward published research.

Obviously, the model is a simplification of the true editorial process. But the fact that an editor can be handling only one paper at a time is a serious drawback. A rejection or a revise/resubmit becomes then very costly, while high rejection rates are generally regarded as contributing to the value of a journal. The observed crowding of some journals seems to me to be a more important determinant of the adoption of a desk rejection policy. But in the end, the model does not have an endogenous desk reject, and thus fails to answer the question initially posed.

Monday, January 25, 2010

Advertising and GDP

How does advertising contribute to social welfare? It raises the awareness about products, and thus should increase utility of people. But there is also some waste of resources when competitors outdo each other with advertising. Think for example of all the resources devoted by Coca-Cola and Pepsi to sway user between two essentially identical products. So, in the end, is advertising good or bad?

Benedetto Molinari and Francesco Turino point to a positive correlation between GDP and advertising in the OECD and try to rationalize this within the Neoclassical growth model. They find that the impact of advertising is rather through the labor supply. As individuals want to consume more, they need to work more to generate the necessary income. This increases GDP (8% for the US) and utility. And as advertising itself amounts to about 2% of GDP in the US, the net contribution to GDP remains strongly positive, at least at current levels.

Saturday, January 23, 2010

On the democracy of science

Should science obey to democratic principles? This is a question that I recently saw discussed on Scienceblogs, and that is also mentioned in the latest strip of PHD Comics.

Democracy is about letting people decide on their fate by choosing between objectives. Concretely, this has translated to choosing between policies, but that is another question. There is, however, a disturbing trend in the media to let people vote ("reader polls") on things they have no business deciding on and then present this as evidence. "Is this person guilty?" Leave that to the courts who have the full information and know the laws. "Is the theory of evolution true"? Leave that to scientist to figure out. "Is climate change real?" Idem. "Should the Feds bail out banks?" Leave that to economists. Etc.

While science is built on consensus, it does not mean consensus among people who do not know what they are talking about. The wisdom of crowds is often wrong. Even among economists, conventional intuition is sometimes wrong, this is what makes great papers in top journals. Instead of turning to the opinion of the people in the street to fill airtime, why not actually ask experts. And by experts, I do not mean political pundits.

Friday, January 22, 2010

Willingness to pay for bird conservation

There is a large literature on the willingness to pay for non-market goods, such as security, bio-diversity or pollution. The typical way to elicit these amounts is by survey, asking people what they would be willing to pay, as opposed to what the community should be paying.

Pamela Kaval and Matthew Roskruge do such a study for the preservation of birdlife in the Waikato region of New Zealand. A few striking results: everyone is willing to pay, older people want to pay more, and native Maoris less. Kaval and Roskruge conclude that there is willingness to tax more for bird preservation.

Why would everyone be willing to pay? I suspect there is a selection boas in that only those who care about birdlife accept to participate in the phone interview. I certainly only pursue phone interviews I care about. Why would older people want to pay more? They would have fewer expected years to benefit from it. Is it because birds were more numerous in their childhood and nostalgia matters more? And the Maori? Aren't they supposed to care more about nature?

Thursday, January 21, 2010

Why growth regressions are so scary

A lot of empirical research on growth and development has been done with cross-country regressions. This has been in particular favored by the availability of the Penn World Tables, which are a careful exercise of providing macroeconomic data that is comparable across countries. But it is obvious that for many countries, the data remains of poor quality, and the makers of the Penn World Tables label each data point with a quality grade. Unfortunately, nobody takes those labels into accounts.

Why would they matter? Because data of poor quality may be subject to major revisions, for example. And major revisions of some data points (which have a tendency to be outliers) can lead to changes in the empirical results. This is what Simon Johnson, William Larson, Chris Papageorgiou and Arvind Subramanian explore by trying to replicate dozens of studies using the Penn World Tables, using various versions of the database. The results are sobering. Essentially, the results of every study using the panel data can be reversed. Studies only using long-run averages are much safer, though. Do not use the Penn World Tables blindly, and do not believe results using them before scrutinizing them yourself.

Wednesday, January 20, 2010

After all, not that much moral hazard in unemployment insurance?

When it comes to unemployment insurance, it is well recognized that it suffers from moral hazard, as insured unemployeds may not do enough to search for a job or may turn down job offers. But quantifying how much of this happens is very difficult, as it is the undetected moral hazard that is the problem, and the undetected is not measurable. One can try to assess it indirectly with a well-controlled randomized experiment. Some people are randomly subject to tighter control about their job searching, and they know about it.

John Micklewright and Gyula Nagy performed such an experiment in Hungary. The result: the treatment had a strong effect (as measured by the hazard of the unemployment) only on one category, women over 30, which are the ones who have low attachment to the labor market anyway. Men and young women were unaffected. And for those "older" women, being married with a working husband is a clear determinant of moral hazard. Theory would tell use that is this is true, then unemployment insurance benefits should be lower for married women, but not married men. Try implementing that.

Tuesday, January 19, 2010

Borrowing constraints and (seasonal) famines

Imagine that local food crops have very strong and predictable seasonal fluctuations. The obvious way to smooth consumption and avoid famines before new crops is to store food. Suppose now that this is for some reason not possible. Then, you should trade food with another region that has countercyclical crops, or at least storable crops. What if even that is not possible? Then it should be seasonal migration that should bring people where there is food. And what if that does not happen? You have the rural northwestern districts of Bangladesh.

Shyamal Chowdhury, Ahmed Mushfiq Mobarak and Gharad Bryan performed there a randomized intervention by giving a monetary incentive for seasonal migration. While this would obviously improve outcomes, they varied the conditions for the payout to see what would work best: cash or credit, mandating group or individual migration, changing group size, imposing destinations, etc. For once a randomized intervention study tackles the efficiency of the intervention, a welcome change.

While seasonal migration in the control group was 13%, it was 40% in the intervention group, a significant difference, and much more efficient than just informing about wage opportunities elsewhere, which only triggers a 2% increase in migration. The fact that these payments have such a large effect highlights that the true problem is the liquidity constraint these people are facing.

That said, all this depends on the size of this cash payout. With a very large payout, it would not be surprising to see a large response. The financial incentive corresponded to US$11.50, or about 4 days worth of wages in the destination regions. That does not seem very high, and one could hope that with the normal improvement of conditions over time, this problem should be relatively easy to overcome.

Monday, January 18, 2010

Does voting for an inefficient government make sense?

Given a distribution of skills and interest in public service in the labor force, would it be best if the public-minded workers go into government or to the private sector? Essentially, this is what Esteban Jaimovich and Juan Pablo Rud ask. If the better ones go private, then the unmotivated ones go into government and wreak havoc: they seek rents, hire more public (low-skilled) employees, thus inflating their wages and depressing the returns of the most skilled private workers, which lessens their incentives to do better in terms of entrepreurship. Jaimovich and Rud also claim that this outcome is actually preferred by the (low-skilled) working class, because of the higher wage. They also support the outcomes of their model with observations from the data.

While it seems obvious that a government with more public-minded officials is better, the point about the wage inflation in the market for low-skilled workers is interesting. It also highlights once more that a good mechanism for the self-selection of workers into public and private jobs is essential. If public wages and side benefits (bribes included) are such that public-minded workers are better off going private, the whole economy suffers. That means, you need to pay civil servants well, but not necessarily better than private workers. But at least, remove incentives to complement wages with bribes.

Saturday, January 16, 2010

A libertarian dream?

Libertarians, at least the most extreme ones, dream of a world without a government. The only example of such a society nowadays is Somalia, and it certainly is not a shining example. However, I came across this BBC story about the Ivory Coast that could provide a second, better example of a society without a government.

The Ivory Coast went recently through a brief civil war with the outcome that the government has lost control over the northern part of the country, held by "rebels." Civil servants, including teachers, have left this area which is now not governed and does not received any tax-funded public goods. Didi this turn into Somalia? Not quite, as people spontaneously stepped in and started teaching in schools as volunteers, or provide some postal service and policing. Is this how a libertarian society would look like?

There is one big difference between Somalia and the Ivory Coast: a reunification and a return of government will happen in a foreseeable future in the latter. The volunteers have thus stepped in temporarily to bridge the lack of government. In fact, they may be hired in their current roles once things return to "normal." Consider this as a variation of the open source movement where people contribute freely to show their skills and the be hired for pay. Would the Ivorian volunteers have done this forever? Most likely not, as they would still need to make a living. I am afraid Somalia is still the most appropriate example of extreme libertarianism.

Friday, January 15, 2010

Girls are as competitive as boys

It is generally accepted that women are less competitive than man, and this could be one explanation for the lack of females at the top of the pyramid in most aspects of society. The important question is whether this difference in competitiveness is innate or acquired: whether somehow biology made women less competitive, or whether the cultural environment has something to do with it.

To establish whether biology matters, one needs an environment where women (and men) have not been influenced. Probably the best one can imagine is childhood in Sweden, where extra care is take to have the children be raised in an environment without gender prejudices. Anna Dreber, Emma von Essen and Eva Ranehill let 7-10 old Swedish children play several competitive sports (running, skipping rope and dancing) and see no differences. We learn from this that biology is not a factor at least for pre-teenage years. Whether the hormonal kick in puberty is gender neutral is less likely.

Thursday, January 14, 2010

Is it good to have a college in town?

Suppose the following experiment. A town has some open space and can choose to develop it following the pattern of the existing town or attract a college campus. Is the campus worth it? On the plus side, it should attract more educate residents and bring amenities the town does not have to pay for. On the negative side, and that is a big negative, the town will get no taxes directly from this college (the recent attempt of Pittsburgh to tax tuition has failed, sort of). And college students tend to be rowdy.

Donald Vandegrift, Amanda Lockshiss and Michael Lahr perform the kind of hedonic regressions that have been used to value various amenities and add college dummies. It turns out size matters. A college raises house values by 11%, but larger enrollments reduce house value. And in any case, the presence of a college increases the tax base by 24%. While college towns will always complain about the non0-taxable real estate, they should be happy about the general equilibrium effect from colleges, which are strongly beneficial.

Wednesday, January 13, 2010

Do not buy American

Whenever a major bump on the road to economic prosperity is hit, say a Great Depression or a Great Recession, governments resort to protectionism. During the Great Depression, it happened with import tariff wars, and it took decades with GATT and WTO to undo the damage. In the current recession, resisted tariff hikes, but still called for buying local, especially for any stimulus money expenses. Does this work?

Mario Larch and Wolfgang Lechthaler say no it does not, but government cannot resist to the temptation. They do this by looking at a macro model (which can look at fluctuations, instead of a trade model (which can only look at steady states), in other words a model à la Ghironi and Melitz. Temporary protectionist measures heart both the domestic and foreign economies (in aggregate) because they shifts production from efficient foreign firms to inefficient domestic ones, and the domestic consumer faces thus higher prices. But domestic, non-trading firms gains, and if the economy is sufficiently closed or if those firms have a strong lobby, politicians will still favor such policies. Once again, do not leave politicians in charge of running an economy.

Tuesday, January 12, 2010

Africa was underpopulated

There is a common perception that Africa is overpopulated. Historically, this was certainly not true, as there was such abundance of land relative to population that land had no value. In fact one traditional measures how well a society was developed in history by looking at population density, and it was very low for Africa.

I am mentioning this as I am reading a paper by James Fenske who is out to test some theories that, among others, the poor institutions of Africa originate in low population density. The logic is the following. If land has no value, it cannot be used as collateral or as a store of wealth. States could not tax land and thus had little means. Property rights were not defined as there was not property to give rights to. Wage employment was substituted by coerced labor and slavery.

Fenske tests this by using data from an ethnographic atlas and a model with endogenous institutions. And its predictions that land rights appear where population is more dense and/or where agricultural yields are higher holds true. He also looks at he Egba of Nigeria, who have abundant land but well established property rights. That institution emerged from their time of immigration, where land was scarce.

Institutions take a long time to change and Africa has poor institutions. Understanding where they come from can help in reforming them for the better. And by many accounts, Africa is still underpopulated. Following the results above, Africa still has a long way to go to reform its institutions.

Monday, January 11, 2010

Transcontinental experimental economics

There are a few papers in experimental economics that do an international comparison of how various groups perform in an identical experiment. There are always doubts about these comparisons because the conditions may not have been the same in the various locations. But as far as I know, never has there been people on different continents playing against each other on the same experiment. This is what Romina Boarini, Jean-François Laslier and Stéphane Robin do with students in France and India.

They play the standard ultimatum game, where one side make an offer on how to share a prize, and the other accepts or rejects, a rejection triggering no payout. Interestingly, the outcomes are not symmetric. When French students play first, the splits were typically unequal in their favor, but when Indian students played first, the splits were mostly equal. How should we interpret this result? Cultural differences with respect to equity and fairness? Different attitudes towards bargaining? Or does this have to do with the different buying power of the payout in the two countries?

Actually, the notion of equity here is rather complex. "Formal equality" would call for each to receive the same, out of principle. "Compensation equity" requires that more goes to the one with the highest marginal utility, India. And "local equity" calls for each to be able to get the same goods, thus more going to France where prices are higher. This means that if players equity into consideration, it can be consistent with any result. What is more interesting is how Indian players are more tolerant of low offers than French players. Somehow, they find the cost of refusing a low offer too high, and the French players exploit this. Income differences definitely play a role here. Would these considerations crowd out equity? I am afraid so, and one should not read too much into the results as to what kind of equity is at play.

Friday, January 8, 2010

How much to save for retirement

The conventional wisdom is that one should live in retirement with an income of about 70-80% of pre-retirement income. It is less than 100% because the tax rate is lower, because Medicare takes care of some expenses, and because employment related expenses disappear. But these 70-80% are really a rule of thumb that should clearly be differentiated in various ways.

John Karl Scholtz and Ananth Seshadri do this using life cycle models. The easy parts: if you previously had a particularly high income, a lower share can do easily, in part because taxes drop much more. Same if you had many children as they are, hopefully, out of the house by retirement. The more complex part: one should draw a life-cycle model where the goal is to equalize the discounted expected marginal utility of consumption across time, where health, incomes and lifetimes all are uncertain.

Scholtz and Seshadri find replacement rates that differ widely, with a median of 68% (or 57% considering the five highest years of income) and range of 47% to 90%, depending on the household category. For example, married couples need a higher replacement rate because of the higher expected lifetime of the survivor compared to a single person. Also, changes in taxation rates are very important for determining the marginal utility of consumption, especially if tax rates will be increasing instead of decreasing like in recent years. Finally, shocks to earnings are very persistent, thus whether they happen at the start or the end of a career can change dramatically the replacement rate.

Thursday, January 7, 2010

Prices are not rigid in the UK, too

In macroeconomics, there is a continuing debate on the rigidity of prices. If they are rigid, monetary policy matters, if not one of the key assumptions of a real business cycle model is met. It is obvious that there is some rigidity, but the qeustion is whether it matters at the macroeconomic level. I have reported previously on mounting evidence that prices are much more flexible than previously thought (1, 2, 3, 4)

Colin Ellis adds to this literature with a study of supermarket prices in the United Kingdom. And, surprise, they are just as flexible as recent studies have shown for the United States. It is time for everyone to realize that menu costs are a thing of the past. With current information technology, pricing is much more flexible than the production schedule (which gained tremendously in flexibility as well), and those New Keynesian models can safely be shelved now. They may be useful for historical studies, but I am not even sure of that.

Wednesday, January 6, 2010

Economists are less generous, but not by indoctrination

From many experiments, it is known that economists are more selfish than others. the interesting question is whether selfish people select themselves into Economics, or whether Economics students get indoctrinated by the material they are covering in classes.

Yoram Bauman and Elaina Rose use data from students at the University of Washington to elucidate this. There, students can donate to social programs each quarter. This is tracked along with their taking Economics classes. While Economics majors are indeed less generous, this does not appear to evolve over time. One can thus conclude this is a section effect. However, non-majors become more selfish once exposed to Economics. In other words, economists are quite convincing.

Tuesday, January 5, 2010

College fraternities and the labor market

I have always considered college fraternities to be a nuisance. They appear to be mostly about drinking and making a mess on campus, although they also organize some activities for the public good. As any social club, there may also be some value of being a member beyond the socializing.

Sergey Popov and Dan Bernhardt build a model of two-sided selection of fraternities and its members. Candidates may differ by ability, and membership in a fraternity may be viewed as a signal of ability by employers. The paper shows that anything can happen in terms of equilibrium: informative, uninformative, good students, bad students or no students in fraternities. But using data about student grades at the University of Illinois, Popov and Bernhardt show that the following equilibrium is most likely: The best students shy away from fraternities while the worst ones do not get in. Fraternities only have students with medium abilities. But would these students have better grades if they did not spend significant time in fraternity activities?

Monday, January 4, 2010

Charities: competition vs. the social planner

Charities need to raise funds, and it is costly doing so. As the number of charities increases, so do these costs. This raises the question whether there is an optimal number of charities and whether some sort of regulation can bring us closer to this optimal number.

Murat Mungan and Yoruk Barls should that free competition leads to a suboptimal number of charities, in particular because some donors are solicited by several charities. In this respect, is a regulated monopoly the solution? One would think this is not optimal because charities pursue very diverse goals. Mugan and Barls show that in a spatial model this charity "ideologies," some extent of competition is good for maximizing net charity revenues as long as the fixed costs is sufficiently low. That seems like a trivially simple result, but it one worth pointing out. The way charities are regulated is by restricting entry and then taxing or subsidizing them to get the "right" fix cost.

Friday, January 1, 2010

A look back at 2009

This is just a very selfish look back on the Economic Logic blog for 2009. Over the past year, I concentrated much more on discussing research, which has attracted, from what I can see, a larger and especially more loyal readership. And what was read the most?

  1. The evil empire strikes again
  2. Why so much teenage sex?
  3. Who buys online porn
  4. One more argument against banning child labor
  5. Labor supply elasticity: micro versus macro estimates

Those that get more traffic are those that get referenced on other blogs, get sent around through emails and get traffic from non-regulars though Google. It looks like sex still sells. As for comments, they are still low but more numerous that last year. Those that attracted the most discussion were:

  1. Journals are dead
  2. Do new drugs reduce medical costs?
  3. Development economics needs to refocus on theory
  4. Exploiting sunk costs
  5. A new look at the Laffer Curve
  6. The poor living quarters of economists

It is interesting that the intersection between both sets is empty. That can happen when one picks the top five or six over 231 posts, but still intriguing.