Wednesday, March 31, 2010

Measuring seasonality

When analysis business cycles, it is usual to factor out any seasonal influences from the data. Theoretically, this makes perfect sense if one can distinguish well long-term trends, fluctuations at business cycle frequencies and seasonal factors, both in separating them in the data and in the fact that they do not influence each other. In practice, the filtering is less than perfect, and there is at least some evidence that business cycles have an impact on trends.

Tommaso Proietti proposes a measure of the influence of seasonal cycles on the business cycle. Indeed, one does not observe the seasonally adjusted data, only an estimate of it. This means that there is some uncertainty about the true adjusted data, and thus any analysis of it should carry this uncertainty with it. This is of special importance when estimating the output gap, as it is of high policy relevance and it has been shown that policy makers needs to take into account the uncertainty about its measurement. The bandpass and HP filters both exhibit quite some uncertainty in the measurement of the cyclical components. This means in particular that one should carry the analysis from data that has not been seasonally adjusted, using a procedure suggested in the paper. I am not qualified to judge whether this is the best method, but this should at least make us more careful with the data.

Tuesday, March 30, 2010

The green paradox

The fear that oil is running out has been replaced by the fear that oil will pollute the life on earth out of existence. In both cases, the countermeasure is to find alternative sources of energy. This alleviates the first fear as it allows to stretch the use of oil over a longer period, one would hope. But what about the second fear?

Reyer Gerlagh makes the observation that things could take a turn for the worse. Indeed, if there is a sufficiently high probability that oil will be replaced by some alternative energy sources in the future, then current suppliers of oil have every incentive to dump all their supply on the market now. Oil consumption would dramatically increase and the pollution problem worsens. The solution, once again, is to tax oil to counter this effect. Americans, this is how you should be financing your health care reform.

Monday, March 29, 2010

Static innovation

Technical innovation is good. Monopoly is bad. What about technical innovation by a monopolist? Apparently, the literature on this uses partial equilibrium models, which is silly because general equilibrium effects can be quite important. In particular, it is not necessarily the case that whatever resources the monopolist requires after innovation are a net loss for the rest of the economy. Aggregate capital accumulation may be different, for example.

Shuntian Yao and Lydia Gan thus address the question with a model of R&D where production requires capital, there is a monopolist and a competitive sector, all this in general equilibrium, But the model is static. That is right, the process of innovation is static, innovation just happens spontaneously, and costlessly, I should add. The same applies to capital which drops from the sky when required.

Now, isn't there a literature that has general equilibrium in a dynamic setting? Yes there is: endogenous growth theory, born in the 1980's, which is right after when the literature review of Yao and Gan stops. Even undergraduates know about that.

Friday, March 26, 2010

Saving social security by allowing older workers to work more

In the face of increasing difficulties to retain the sustainability of pension systems in the face of demographic change, it seems quite obvious that the retirement age should be raised. As people grow older and hit retirement age in better health, this only makes sense. Also, the arguments that older people retiring would make room for unemployed younger workers is not valid. Another option could be to make people close to retirement work harder.

David Bell and Robert Hart argue that this tradition of giving longer vacations or shorter hours to older workers makes no sense. They are the most productive ones because they have the most experience. Bygone are the days where physical strength was the sole determinant of productivity. And older workers are typically happier at the jobs, as they took their time to settle in the "right one." Finally, one can not infrequently observe that workers close to retirement decide by themselves to work more, for three reasons. The first is to amass sufficient savings for retirement, the second is thanks to intertemporal subsitution of leisure, and the third come for rules in some pension schemes where the benefits are determined by the best income years. This all shows that it is possible to get these workers to provide temporarily more effort, as they are will to do it. So let them.

Thursday, March 25, 2010

Neoliberalism and the Church

When I talk to representatives of some churches, or to anti-globalisation advocates, they constantly blames all the evils in the world on neoliberalism, and us economists are the ones who have imposed neoliberalism on the world. Yet, I do not know what neoliberalism is.

I just read through Stan Duplessis' dissection of the Accra Declaration and I take this opportunity to highlight the disconnect between the Church and Economics. The Accra Declaration was adopted in 2004 at a meeting of the World Alliance of Reformed Churches. The Declaration first lists all the ills of the current world: poverty, famine, wars, limited access to drugs, environmental degradation, and pandemic disease. Then it argues without transition that they are "directly related to the development of neoliberal economic globalisation... an ideology that claims to be without alternative, demanding an endless flow of sacrifices from the poor and creation", and then argues that Neoliberalism "...makes false promises that it can save the world through the creation of wealth and prosperity, claiming sovereignty over life and demanding total allegiance, which amounts to idolatry". Wow. Neoliberalism appears thus to be a powerful cult, that could be thus be competing against established religions.

What are the tenets of Neoliberalism? Again, I need to refer to the Declaration, through the quotes in Duplessis' piece to get a definition:
  1. Unrestrained competition, consumerism and the unlimited economic growth and accumulation of wealth are the best for the whole world;
  2. The ownership of private property has no social obligation;
  3. Capital speculation, liberalization and deregulation of the market, privatization of public utilities and national resources, unrestricted access for foreign investments and imports, lower taxes and the unrestricted movement of capital will achieve wealth for all;
  4. Social obligations, protection of the poor and the weak, trade unions, and relationships between people are subordinate to the processes of economic growth and capital accumulation.

What this defines is complete anarchy, with no role whatsoever for the government. I cannot think of a single economist who would argue for such an agenda. Even, I would say that economists continuously grapple with many forms of market imperfections or failures and how to define policies (implemented by a government) that deal with these issues. It is true that economists point out that governments have weaknesses, and that markets and prices are powerful allocation mechanisms, but they have recognized limits. Liberalization has its place in some situations, and the resistance to it comes usually from some parties that lose rents from regulation. No one advocates liberalization at any cost, and transition costs are recognized to be often large.

Our world is rich, but unevenly so. I am particularly annoyed when people push for limits to the flow of this wealth across the world in order to satisfy entrenched interests. For example, those who have the most to gain from free trade are the poor of this world, because it gives them access to larger markets, allows them to obtain jobs and income that pulls them from their traps. The world economy is not a zero sum game, where whenever someone gains somebody else must be losing. The gains from exchange are substantial. Churches should learn this, instead of offering resistance to any change and accuse a supposed ideology of all the ills, many of which actually could be at least partitially be solved by opening up. Churches should give the poor a chance to participate in this world.

Wednesday, March 24, 2010

Binge drinking, drink type and dangerous behavior

Like many Anglo-Saxon countries, Australia has a problem of too frequent binge drinking. In this context, a discussion emerge on how to tax alcoholic beverages in order to reduce binge drinking while still preserving "normal" drinking. While obvious education campaigns can influence behavior, in many cases prices are more effective. The question is then how to best design such a tax. One way to do it to tax uniformly the alcohol content, following the reasoning that it is the alcohol that induces damages and negative externalities.

Preety Srivastava and Xueyan Zhao claim this is not necessarily a good idea if the likelihood binge drinking varies by alcoholic beverage. Using survey data, they find that heavy bingers (more than three times a week) indulge on beverages with higher alcohol content. Also, the more frequently one binges, the more often on engages in risky behavior like drunk driving or swimming, property damage and physical abuse. Srivastava and Zhao even highlight bing drinking while pregnant and while breast feeding is frequent. Additionally, drinking is mostly done at home, thus outside the reach of potential controls in public places. All this points to a beverage tax that should be progressive in the alcohol content, not proportional as proposed in Australia. this assumes of course that drinkers are responsive to price changes and this responsiveness is not substantially weaker for binge drinkers.

Tuesday, March 23, 2010

The trouble with single respondents in household surveys

Much of the development literature is based on the administration of household surveys, with typically one member of the household answering all question on the behalf of all members of the household. Of crucial importance here is whether is actually matters who answers.

Monica Fisher, Jeffrey Reimer and Edward R. Carr use survey data from Malawi and verify whether the estimates of the spouse's income by the head of household were accurate. It turns out not: they are statistically not reliable. While interviewing only one person may save time and cost, it makes a substantial part on a survey absolutely useless. Worse, they make important analysis unreliable. In their example, one cannot establish the determinants of poverty. I wonder how many results in the development literature need to be reexamined.

Monday, March 22, 2010

Compact cities a better for the environment, mostly

A large fraction of emissions of gases responsible for the green-house effect are coming from vehicle traffic: trucks transporting goods and cars commuting people to work and other activities. Quite obviously, one can reduce these emissions by reducing such traffic, for example by densifying cities. When activities are more concentrated, less traffic is necessary for the same amount of activity. Is it really that simple?

Carl Gaigné, Stéphane Riou and Jacques-François Thisse highlight that one needs to be careful. First, when densifying a city, land rents increase and may drive businesses and people to move elsewhere, where the problem starts anew. One needs thus plan cities beyond the agglomeration. Also, densifying a city in a monocentric way may actually increase commuting times. With a larger central business district, land for dwelling is pushed further away, increasing travel times for workers, making them less happy and possibly annihilating the environmental gains of the central city.

As a solution, Gaigné, Riou and Thisse propose for cities beyond a certain size a multicentric densification model. The idea is to create a city center with a number of satellites. This increases slightly the traffic of goods, slightly because the majority of goods traffic is between cities anyway. But this decreases massively the traffic of people, as workers reside closer to their workplace, and they can afford it as land rents are lower. A win-win situation fro everyone, both in terms of pollution and welfare.

Friday, March 19, 2010

Why criticize modern macro when you do not follow modern macro?

Economics and in particular macroeconomics have come under assault lately because they supposedly were not able to identify the housing bubble and warn about the dangers in the banking sector. It has thus become fashionable to bash the field. It perfectly fine to review the basic tenets of research, this is part of the scientific process. Still, this needs to be done with a good understanding of the current state of the field.

Richard Holt, Barkley Rosser and David Colander claim that neoclassical economics is now dead and a new era has now begun, which they call "Economics of Complexity." I think we all agree that an economy is a complex object, none the least because you have many different people interacting. Like in other sciences, we use models that are simplified abstractions of the reality in order to understand it. One could argue that one simplifies too much, but often the resulting basic intuition is enough to understand what is going on. Sometimes more complexity is necessary, and can certainly no accuse macroeconomics of shying away from complexity. The days of analytically solvable models, even representative agent models are long gone, there are frictions galore and market imperfections are frequent modeling features. But this is still done within models that are clearly of a mainstream neo-classical tradition.

So why do Holt, Rosser and Colander claim that the future economics "is a vision that sees the economy as so complicated that simple analytical models of the aggregate economy—models that can be specified in a set of analytically solvable equations—are not likely to be helpful in understanding many of the issues that economists want to address. Thus, the Walrasian neo-classical vision of a set of solvable equations capturing the full interrelationships of the economy that can be used for planning and analysis is not going to work"? While I can this in say, international trade and public economics, macroeconomics, which is the most under fire, has in fact made that step long ago.

What do they concretely see coming in economics? "Instead, we have to go into the trenches, and base our analysis on experimental and empirical data. From there we build up, using whatever analytic tools we have available. This is different from the old vision where economists mostly did the opposite of starting at the top and then built down." That is not economics they are talking about, this is statistics. Also, when talking more about theory, they say "combined, these changes can be summarized as a movement in economics from a textbook economics of rationality, selfishness, and equilibrium to a new economics of purposeful behavior, enlightened self-interest, and sustainability. What they are criticizing here is the Max U paradigm, but when you think about it, "purposeful behavior" is rationality with information problem, "enlightened self-interest" is selfishness with a some altruism, and "sustainability" is about multiple equilibria, which are common in heterogenous agent models. There is nothing new here, and such modeling features are routinely used.

Does this mean the "Economics of Complexity" of the future is already happening? Probably. It is just that Holt, Rosser and Colander have not noticed it yet, despite the fact that it has been pursed for to decades already. Consider this gem: "the thought that one could develop a micro foundation of macro without considering the feedback of the macro system on the individual is beyond belief." Did they read any macroeconomics paper published in the last twenty years?

Thursday, March 18, 2010

Family values and labor market regulation

You probably went through this situation at some point: a good job opportunity arises, but it involves some moving and you would end up away from family. If you value much being close to family, you likely decline this opportunity. In terms of labor market policy, what do such attitudes imply?

Alberto Alesina, Yann Algan, Pierre Cahuc and Paola Giuliano claim that in regions where the attachment to family is stronger, labor markets end up more regulated. The reason is that when people do not like to move, they force authorities to protect their current job by enacting various costs to firing. Also, because workers are then in a captive market, they are subject to the monopsony power of employers, thus they push also for regulation. This leads thus to two possible equilibria: one with laissez-faire, with high labor mobility, and the other with a heavily regulated labor market and immobile labor. Note that once workers do not move, family ties are reinforced, and regulation becomes even stronger.

This is all theory, but is anything of this happening in the data? the typical contrast one has when looking at labor market mobility and regulation is comparing the United States and Europe. The analysis is two-pronged. First Alesina, Algan, Cahuc and Giuliano show cross-country evidence that regions where people are surveyed to have strong family ties also implement more stringent labor market regulation. They also use household-level data: second generation immigrant to the US from countries with strong labor market regulation (thus implying strong family ties) are less mobile and face wage penalties, and they ask for more regulation.

Of course, how important family ties are is also dependent on mobility costs. As these are gradually reduced, both because transportation costs have a downward trend and especially because location becomes less important for jobs. So there is still hope that labor mobility will increase despite strong family ties.

Wednesday, March 17, 2010

Why Japanese farms are so small

Why are Japanese farms so small and so inefficient/ As usual under such circumstances, this is because they are protected through subsidies and zoning laws. But why? No matter what the country, agriculture enjoys protection. Some reasons, depending on the country, may include resistance to change, preservation of the landscape, preservation of traditions and securing wartime food for the country. All this can explain why the agricultural sector is subsidized and then inefficient, but that does not explain why Japanese farms are small. They could still merge.

Yoshihisa Godo finds an explanation from political economy. Japanese farmers can make more money from manipulating farmland regulation than from farming itself. In other words, they are extracting rents from holding a regulated asset. For example, as a land-owner, you get money if you preserve its agricultural purpose, and the more prone to conversion to other uses the location is, the more you get. That explains why you would find rice paddies in the middle of dense cities. But when an opportunity arises, farmers convince ("manipulate") authorities to convert the classification of the land to cash in on its market value.

Godo links this to a misunderstanding of democracy, in that people only care for themselves and do not see the consequences for the others. While it may be true that people in Japan a century ago may have been less selfish, the current problem is one of deficient institutions, not deficient people. That institutions cannot be changed may very well be an issue of lobbying and rent-seeking, but you cannot blame it on citizen having little regard on the duties in participatory democracy. Godo's main point is that people complain when a zoning change hurts them, and then exploit other zoning changes for their own gain. He also complains that those hurt ask for compensation. Yet, good economics would precisely ask for such compensation, a very Coasian argument. It would also ask for those who gain to pay for such privilege. This is where Japan is lacking, and once this is implemented, land would be used much more efficiently. Making this happen could very well be a political problem, but it has nothing to do with an implied lack of servitude of the average voter.

PS: I hate it when a paper starts on page 9.

Tuesday, March 16, 2010

Is birthright citizenship any good?

Some countries give citizenship to anybody born on their soil. For others, only the citizenship of parents matters (with various degrees of discrimination against mothers). Whether a kid is citizen or not may matter for his future in the country, in particular how he is integrated in the job market. That seems quite obvious. What about the integration of the parents?

Ciro Avitabile, Irma Clots-Figueras and Paolo Masella take the case of Germany, which recently switched to birthright citizenship. In turns out this change had a positive impact, in that parents tried more to make contact with locals and to use German (as measured by reading German newspapers). The first effect was especially true for parents with less human capital, while the second was stronger for those with more. In other words, once locals are more willing to accept immigrants (by granting their kids citizenship), immigrants return the favor.

Monday, March 15, 2010

Biases from returnees in experimental economics

Performing economic experiments in a laboratory setting is tricky business. You want to make sure to get an environment that is clear of any uncontrolled influences so that you can concentrate on what you want to test. You want participants to care about outcomes so that results have some meaning. And you want to make sure that each wave of participants gets exactly the same conditions. And what about participant selection?

It is quite difficult to get people to come and participate. To get them through the door, you promise some prize or payment, which you make dependent on performance to entice active participation. Who are you going to get, those that have a low opportunity cost of there time. This obviously biases the sample population. One may try to counteract this by dropping some, but one is usually just happy of getting the required number of people that one cannot afford to lose some.

But wait, you get another population bias for free! As Pablo Guillén and Róbert Veszteg report, returnees are not a random draw either. Rules may prevent them to come back for the same experiment, but they may attend a different experiment. Guillén and Veszteg find that males who have been successful in previous experiments and study social sciences are more likely to return. The experimental literature needs to find a way to control for this bias.

Saturday, March 13, 2010

Libel suits prevent publication of research

I just read in the Times about a disturbing development in the United Kingdom. A firm managed to get an article slated for publication in the International Journal of Speech, Language and the Law to be withdrawn because it would taint the reputation of this firm. In short, a Swedish professor got a an article accepted for publication that was pointing out that lie detectors are very unreliable. The manufacturer got a court order to get the paper removed from the website of the UK-based publisher, appealing to UK libel law.

It is well known that UK libel law has a very broad definition of libel, even leading to some libel litigation tourism. One can also claim that the chosen title of the incriminated article, "Charlatanry in Forensic Speech Science", may go a little bit far. However, there is such a thing called academic freedom, and if this article has been peer-reviewed, industry interests should not prevent it from getting published. In fact, there is every reason to publish it if it highlights a problem.

Imagine if economists could get sued when they say that monetary policy is flawed, or that immigration policy is not optimal, or that Microsoft is behaving monopolistically. Or, say, sociologists writing that Scientology is a cult. Research may sometimes be flawed, but there is a scientific process that deals with that, through peer-review and further research. What is important is that there is a debate. And publishers should not bow to pressure from industry or government, be it when the research is against the industry's interests, or for it (see the abominal case of Elsevier.

Thursday, March 11, 2010

How simultaneously borrowing and saving can be rational

Why would one have simultaneously debt and savings? We covered previously why people have simultaneously a savings acocunt and credit card debt, in which case it is perfectly rational. Can there another case be made for rationality?

Karna Basu claim that if you know you are time-inconsistent and want to do something about it, you can set up a scheme whereby you save your wealth and then borrow when investment opportunities arise. How would this make sense? The goal is to prevent over-consumption. To do this, you need some commitment device, and in this case it is unsafe lending. People save, but because of the uncertainty about losing their holdings, their are penalized when they fail to invest. This disciplines future selves. Indeed, one could simply indulge on current consumption using the loan. However, because this is borrowed, and savings may be lost, it is too risky to be caught bankrupt next period, and one limits one's consumption. Without the risk on the savings, nothing would prevent one from over-consuming. Thus, the risk on savings is beneficial. A subtle and counterintuitive conclusion.

Wednesday, March 10, 2010

Savings and religion

What is the impact of religion on economic growth? The basic Solow growth model tells us that there are three engines to economic growth: capital accumulation, population growth and technological progress. It is quite obvious that religion has an influence on population growth (mostly by favoring it) and technological progress (typically by inhibiting it), but what about capital accumulation? Different religions have different attitudes with respect to afterlife, to property rights and to bequests, so some interesting results could emerge from an empirical study of savings across religious beliefs.

Anja Klaubert uses PSID data to study savings behavior by religious affiliation. Compared to a cross-country study where institutions are endogenous to dominant religions, a study centered in the US should be able to concentrate the impact of religions on individual behavior. It turns out all blends of Christianity pretty much look alike. It should surprise no one that Jews are most likely to save, and they save the most. However, atheists are the least likely to save. Why would that be? As they can less rely on a church in case they fall on hard times, they should be doing more precautionary savings. The lack of belief in afterlife should not be material, as afterlife is immaterial. And it is the religious people believing the world will end soon who should not be saving. To the contrary, the frequency of church attendance seems to be positively associated with the likelihood of saving. All this is a real puzzle to me, and unfortunately the author does not address it. Do you have an idea?

Tuesday, March 9, 2010

Facts for heterogeneous agent macroeconomics

I rarely discuss material published in journals because I usually have seen it before in a working paper form. But sometimes you come across a great article, and in this case a special issue of the Review of Economic Dynamics. Nowadays, macroeconomics, at least the fresh water variety, is all about agent heterogeneity, and thus it is important to understand well the data these models are supposed to replicate. The special issue does this for nine countries, in an effort that tries to use uniform definitions and treatment of the data. In addition, data and programs are made available.

There is too much to write about for the whole special issue, so I will concentrate on the introduction by Dirk Krueger, Fabrizio Perri, Luigi Pistaferri and Giovanni Violante. They highlight that:

  1. Wage disparity is lower where the labor market faces more institutional constraints.
  2. The college premium is high everywhere.
  3. Income inequality has increased.
  4. Earnings inequality is larger than wage inequality.
  5. Asset income and private transfers have no impact on inequality.
  6. Government transfers affect inequality at the bottom, taxes at the top of the distribution.
  7. Inequality in disposable income is larger than inequality in consumption.
  8. Long-run changes in the inequality of discposable income are also larger than for consumption.
  9. In recessions, inequality of earnings is more pronounced at the bottom of the distribution.
  10. The same holds true for consumption.
  11. Recessions have no impact on wealth inequality (we have to wait and see for the last one, though).
  12. Inequality over the life cycle varies considerably across countries.

I found of particular interest the effort to reconcile micro-level consumption data with the national accounts. It is well known that there are discrepancies in the US and the UK for the growth of consumption, but apparently not elsewhere.

Monday, March 8, 2010

Should Economics adopt methods from Physics?

In their quest for universal laws, physicists use data mining methods on large datasets and uncover regularities that beg for a theory. Should economic adopt similar methods?

Austin Gerig thinks so, and he bases his entire argument on the distribution of daily returns of the stock market. It is true that Wall Street is full of Physics PhDs who do data mining, looking to beat arbitrage and the efficient market hypothesis. But that is not Economics. There is much more to Economics than studying the daily returns on the stock market, even if your family or neighbors think this is what you do as an economist. In particular, Economics is about studying how agents' behavior changes as the environment changes, something purely statistical methods will never uncover. And do not get me started on theory-less data mining. We already have too much of that in Economics, so do not let physicists do it, too.

Saturday, March 6, 2010

Now that the Olympics are over

Now that the Olympics are over, Vancouver is stuck with infrastructure it will not use, and the town will soon discover that not everything is paid for and a substantial debt will need to be serviced. It is like this after every Olympic Games. And inevitably, there are calls that the Olympic Games should find a permanent home.

I agree. The is considerable waste in providing oversized infrastructure for a few weeks and the be left with while elephants. The best example is the Olympic stadium in Montreal, or the ski-jumping and luge/bobsleigh installations in most Winter game locations. If games happen in a location that needs an infrastructure push, the money is better spent in installation that are needed in the long run.

And where should the permanent home of the Olympics be? For the Summer Games, Athens seems to be an obvious choice. This is where they originated, they where held there recently, and thus the infrastructure is already in place. Summers are really hot, though, so holding them in September is probably better. And Greece could use some revenue.

As to the Winter Games, they should be held in Switzerland, and more precisely in St. Moritz. Games were there already twice, again, there is infrastructure in place. Also, Switzerland has the advantage of being neutral and thus less subject to boycotts. And do not forget that the Swiss are very efficient, have an excellent transportation system and a top tourism industry. And the International Olympic Committee has its seat in the country.

My voice does not count for much in this decision, but add me to the chorus that is calling for an end to this waste of resources.

Friday, March 5, 2010

Growth and democratic change: there is no free lunch

There is considerable evidence of a positive correlation of standard of living and democracy across countries. Given this, it would seem natural that growth in the standard of living would be positively correlated with democratic change. One could even conjecture that there is a causation from growth in GDP to democratic change. Theory, though, indicates that this causation could be positive or negative: sluggish growth may lead to popular uprising and democratization, or booms may raise political expectations.

Paul Burke and Andrew Leigh explore this question with data from a large set of countries. Causation is not that obvious to measure well, because of the obvious endogeneity problem: democratization may also cause growth. They use some well-reasoned instruments to cover this problem, but I want to retain here only results with temperature as an instrument, as it is the only one that does not turn out to be statistically weak. And the causation is negative: You cannot expect that healthy growth can also lead to democratization. While there are always exceptions, do not keep your hopes of democratization in China too high.

Thursday, March 4, 2010

Inequality and growth

The empirical literature on the relationship between growth and inequality is a mess, because of the obvious endogeneity problem, the measurement issues and the fact that cross-country regressions are always reduced form, at least as far as I know. And the literature is inconclusive on the causation and its sign. Maybe a bit of theory would help here.

Gustavo Marrero and Juan Rodríguez argue that the observed inequality is the result of two inequalities: inequality of opportunity and inequality of returns to effort. The first has a negative impact on growth, because good entrepreneurship opportunities get lost. The second has a positive impact on growth, because what really matters for growth is the success of the most productive people, and this encourages investment in physical and human capital. Marrero and Rodríguez verify these conjectures using PSID data and compare across US states, and it works. No wonder people find inconclusive results if they lump all inequalities together.

Wednesday, March 3, 2010

Price discrimination drives industry leaders to further innovate

Quality-ladder models in the innovation literature describe how firms try to outdo each other in research and development in order to become market leaders by producing the most advanced products. One log-standing result of this literature is that leaders have no incentives to innovate because it would cannibalize their own business, a result that flies in the face of overwhelming evidence to the contrary.

Hélène Latzer builds a model where firms can price discriminate in a specific market. The difference with standard quality ladder models is that consumers differ by wealth, preferences are non-homothetic and only full units of technology goods can be consumed. In standard models, it is always winner-takes-all. Here, because a slightly obsolote product still has a market, a market leader may still want to innovate to capture also the market for the second-best good.

Tuesday, March 2, 2010

Lowering crime: police versus redistribution

It is well known that African-American males underperform in the Univted States according to a lot of economic dimensions: they work less, are paid less, are more and longer unemployed, and they are much more involved in crime, in particular property crime. While these are all important problems, let us focus on the last one for a moment. What could be done to reduce the property crime rate among blacks? One could increase policing, or one could improve their economic condition through redistribution.

Marco Cozzi builds a dynamic general equilibrium model where agents differ by race and education and have the opportunity to commit crimes to supplement their income. Employment opportunities differ by education and race, both of which are exogenous, and agents can turn down job offers. The government supplies unemployment insurance, which is redistributive, and fights crime at a cost, wherein caught criminals are incarcerated. Cozzi claims this model, calibrated to the United States, replicates the basic features of the distribution of crime and employment. He then proceeds to policy experiments.

First, give $481 to every highschool dropout every year, that is 2.5% of their non-asset income. This costs $73 to every citizen and reduces property crime by 6.8%. Second, use those $73 to increase policing, from $127. The crime rate drops by 18.6%. Thus policing is more effective than redistribution in reducing the property crime rate. It would nice to know how sensitive this result is to various assumptions, because it is an important result.

Monday, March 1, 2010

Tall people get paid more despite sedentary work

I have reported previously that tall people have an edge on the labor market, and about some speculation why this would be the case. One theory is that they are better at performing some tasks because they are tall, or at least appear to because height is associated with strength and health.

Petri Böckerman, Edvard Johansson, Urpo Kiiskinen and Markku Heliövaara use a Finnish survey and find that smaller people are doing more strenuous work, while taller people typically have jobs where they sit. The height premium does vary with the strenuousness of the job, after controlling for all sorts of indicators that typically determine wages. Would this mean that the wage premium does not come from actual strength used, but rather from intimidation? That would surprise me from Finns, who seem to be leaders in equal opportunity. Is it that they are healthier, as my original post seemed to indicated. May be, but this data had no other indicators of health.