Monday, February 28, 2011

Feet vs. ballots in local policy choices

When you are unhappy about public policy where you are you can either influence it by voting, or you can vote with your feet and move to an area that follows your ideals. But what if you could do both? It is not obvious that this would be welfare improving as the fact that one can move away makes that poorer choices could be offered. And moving implies costs that can be substantial.

Alessandro Innocenti and Chiara Rapallini take the experimental approach. They compare two games, one where dictators impose local payouts and people can move, and one where people vote on payouts and then can decide to move. It appears voting with the opportunity of moving is better than only moving, which makes sense if there are no moving costs: it gives more degrees of freedom and better outside options. And this is what Tiebout's theory was all about. However, I would have loved to see results of experiments with moving costs. This makes people captive, and strategies become more complex as arbitrage by moving is more difficult.

Friday, February 25, 2011

Are hot teachers better teachers?

It is well known that beautiful and tall people have better lives and are better paid. This is especially thought to be true in activities where skills are relatively unimportant. What about economics professors?

Anindya Sen, Marcel Voia and Frances Woolley use the hotness indicators from student evaluations at in Ontario and find hot economics university professors are paid a whooping 10% more than their less attractive counterparts. Not only is this a large number, it also runs counter to previous results that such effects are limited to unskilled professions. This effect is especially strong for men and not present for women, Indeed women who negotiate hard are not deemed attractive.

In addition, hotter teachers also get better student evaluations, even after controlling for all what the authors could put their hands on. For other indicators of professor productivity, it turns out that hotness affects positively women for citations, although this could be due to a few highly cited women (citation counts are always very skewed). But neither men nor women publish significantly more when hot, but they tend to attract more co-authors. I really need to be careful with my appearance.

Thursday, February 24, 2011

What inflation target to set

Central banks, implicitly or explicitly, set targets for the inflation rate, usually in the form of an interval. What determines this interval and its mid-point? Theory tells you that larger economic fluctuations should leads to wider intervals and less central bank independence should like to higher targets.

Roman Horváth and Jakub Matějů set out to verify this by way of questionnaires to central bankers and sifting through official publications. They gather data from 19 countries, including how the targets have changed through history and confirm the conjectures above. They also find that targets seem to accommodate inflation expectations and follow world inflation. Interestingly, the party in power does not matter, even for less independent central banks. But one aspect that is not covered and I have always wondered about is how the dominant dogma would matter. Indeed, if a central bank believes in activist policy, it would presumably allow for a wider target interval. Or a neo-classical central banker would want a very low target inflation.

Wednesday, February 23, 2011

Publish school performance information!

Schools strongly resist the publication of their performance, officially because they have special circumstances that justify their ranking, and those circumstances get overlooked. However, as I reported before, evidence from the Netherlands showed that publishing school rankings forced the worst school to improve, and they do improve. But maybe the circumstances in the Netherlands are special.

Simon Burgess, Deborah Wilson and Jack Worth exploit a natural experiment in Britain: Wales suppressed the publication of school rankings in 2001, while England kept it. Using a difference-in-difference analysis, they show, oh surprise, that the performance of Welsh students regressed significantly, based on national exams. Only the top 25% schools escape this debacle. In addition, they find no indication of changes in stratification across schools in Wales, which invalidates further the argument that publishing rankings exacerbates school disparities through self-sorting of students. What is then a good argument for withholding school performance information?

Tuesday, February 22, 2011

Does part-time employment increase firm productivity?

In many countries, encouraging part-time work is seen as a way to reduce unemployment, as the a job is split among several people, and as a way to keep mothers on the job and thus preventing loss of human capital. Firms do not like these policies because they perceive that part-time workers are less productive due to the time lost during the daily settling in routine and the transitions between shifts. However, some argue that shorter work time allows workers to work more intensely.

Annemarie Nelen, Andries De Grip and Didier Fouarge look at this from the firms' perspective and sift through the evidence using records from the Dutch pharmacy sector. By estimating production functions, they find that part-time work in fact increases productivity. The reason is that part-time workers allow the firm to allocate labor where is the most urgently needed, for example during lunch breaks or to fill the difference between opening hours and work hours. So, at least in the retail sector, part-time work is a benefit. I wonder though about manufacturing and office work.

Monday, February 21, 2011

How to best increase organ donations

There is currently an increasing shortage of organs available for transplantation. This is due to a reduction in traffic fatalities, the main provider of healthy organs, and an exploding demand from patients. An economist would say here that there is a classic case of rationing because the price is too low (at zero) and one should let patients pay for organs. But as this is viewed as unethical, we will have to live with rationing and waiting lists, unless one can bring more people to donate organs. This brings up the question why people donate, and in particular why there is altruism. This question is still puzzling, as altruism may emerge from a combination of sense of duty, coaxing, reciprocity, tradition, social pressure, and others.

Juan Cabasés and María Errea try to sort this out by focusing on blood and living organ donation. They model the decision process of the potential donor that in particular factors in some negative effect of donation. Then they administer a questionnaire and test their theory. The survey allows to highlight the attitude towards donating, which in theory corresponds in part to the degree of altruism. But it appears the perceived cost of donating is much more important, as well as information about the need for donations. This shows that in order to encourage more donations, information campaigns may be quite effective, and maybe rationing or a proper market would not be necessary.

Addendum: I forgot to mention a caveat the authors neglect: The survey is administered to staff of an university. Such employees, I believe, are more altruistic than average.

Saturday, February 19, 2011

Ethics in Economics

Ethical behavior in the Economics profession has so far never been codified or even much thought about. Indeed, economists have the reputation to be easy to buy, just ask any lawyer needing a "expert" to testify. But the recent movie Inside Job has brought to the general public the issue of conflict of interest in the profession, and the American Economic Association seems to have finally picked up the ball. As it is set to draw a code of ethical standards for the profession (New York Times article), one has to evaluate the large task ahead given the many ways in which economists have breached basic scientific conduct guidelines, with rather small consequences. Let me quickly go through a serious of examples to show how little unethical behavior has been sanctioned so far.

The prime example is, of course, the case of Andrei Shleifer, Harvard professor who was a major consultant for the Russian government during the massive privatization of its state-owned industry. Shleifer amassed substantial wealth during this process in ways many think where not legitimate, and in particular the US Department of Justice thought so. In the end, Harvard paid much of the fines, Shleifer is still a professor there and probably one of the richest people in the profession (more).

Or Florencio Lopez-de-Silanes, coincidentally student and frequent co-author of Shleifer, who as director of the Yale Center for Corporate Governance ironically double-billed US$150'000 worth of travel expenses. He was fired despite tenure, but landed on his feet, still active in the profession as a professor in France. (more).

A bit too frequently, the issue is that if someone gets caught with the hand in the cookie jar, he just resigns and lands a job elsewhere where no one suspects anything. The next examples are not documented online or in print, so I will not give names.

Professor A has help full-time appointments at two universities, with none of the two knowing about it. Colleagues grew suspicious when Prof. A would have strange schedules, rearrange classes in odd ways and never be available. The scheme was finally discovered after a few years, and Prof A was summarily fired. However, a few years later he was again holding two full-time positions at different universities...

PhD student B gets caught in massive plagiarism, we are talking here about copy-and-pasting a dozen full articles. Administrators get alerted and promise to dismiss the student. Student B still graduated with a PhD and is now a "respected" free-lance analyst.

PhD student C gets caught copy-and-pasting the entirety of a term paper from a published article. During the investigation it turns out Student C is a repeat offender, the teacher in the previous case failed to follow the proper procedure, Summarily dismissed, the student enrolls in another PhD program and is now close to graduate and already has a research job.

Professor D publishes as sole author the term paper of a student. Gets caught and dismissed. Moves to another country and now holds a chair.

Professor E plagiarizes and gets caught. Is asked to leave from a well-respected US department, applies for a well-endowed chair in another country. The university is impressed to see a candidate of such prestige and hires Professor E, oblivious to the baggage.

Is the AEA going to be able to take care of all these cases? Most likely not, as it is going to focus on conflict of interest. For the other cases, it is going to argue that every university has internal procedures to enforce ethics and in particular plagiarism. But as I showed with the cases above, this is of little use when offenders can simply walk away and act like a virgin elsewhere.

RePEc has a new initiative that would take care at least of the plagiarism cases by exposing them. As the blog post explains, the goal is the shame plagiarizing authors (after proper procedures have been followed) as was as shaming administrations in imposing proper sanctions. I applaud this initiative and I hope it will set an example and reduce the staggering among of plagiarism going on, and perhaps instill more ethical behavior into economists.

Friday, February 18, 2011

How to finance housing in Islamic economies

Financial markets in Islamic countries face large challenges, as the law prohibits, in principle, interest. Lenders and creditors need to go through all sorts of hoops to find a legal way to allow for something that is interest in spirit but not in fact. One consequence of these hurdles is that the mortgage market is almost non-existent, and this has translated into an absolutely desolate residential stock in many Islamic countries. Clearly, improving the lives of people goes through an proper and active mortgage market. How could this be achieved in an economically and legally reasonable way?

Zubair Hasan claims to have solved this problem. The current practice is to sell the house to a bank and then buy it back with a mark-up added. This margin corresponds of course to interest, but this practice seems very controversial in case of default, as banks insist on full payment of the debt disregarding any installments already paid. This trouble arises because of the ownership structure and this is why the idea is to propose joint ownership between the "landlord" and the bank. The latter gets gradually reimbursed for the amount of the debt and also receives rent for the share of the house it owns. This solution boils down to the same outcome as for a classic, western mortgage. The trouble is that it involves three separate contracts (joint ownership, lease and buyback), and Islamic law prohibits making a contract conditional on another one. This is very constraining.

Hasan's idea is to replace the full ownership of a share of the house by the bank by a constructive ownership, much like a stock broker possesses the stocks his clients really own. The author thinks, without being certain, that this should satisfy Islamic law. But what this highlights is that Islamic law seems to put absurd hurdles on economic activity and that, maybe, it could be adapted to modern circumstances.

Thursday, February 17, 2011

Price points, good diversity and price rigidity

Much of the real impact of monetary policy hinges on some sort of rigidity in some prices. As regular readers must have noticed, I am not convinced I am not convinced that prices a rigid to the point that it matters, and I am particularly appalled how price rigidity is introduced in theoretical models. Let us have a look at some of latest research on price rigidity.

Edward Knottek uses supermarket scanner to find that price points are much more important than menu costs in determining prices. Price points are for example prices ending in 9, which make up 60% of retail prices. He also finds that in all but 10% of cases, prices return to the previous level after a sale. These two facts cannot be reconciled with menu costs being of relevance. Yet menu costs are the foundation, explicitly or implicitly of almost all models of price rigidity.

Saroj Bhattarai and Raphael Schoenle use producer prices and establish interesting patterns in decisions to change prices. They find that firms with a large variety of goods change prices more frequently, but by smaller amounts. If they change a price, they are more likely to decrease it, and the variance of positive price changes is larger. They also find that for a model to replicate such facts, one needs firm-specific menu costs and state-dependent pricing. This is definitely not Calvo pricing.

Wednesday, February 16, 2011

The investment-consumption correlation

In the analysis of business cycles, investment-specific technology (IST) shocks are the new rage. A few papers now have shown that they explain better business cycles than the classical shocks to total factor productivity ("technology"). Specifically, IST shocks are perturbations to how efficiently investment translates into productive capital. There is one problem, though, and it is a major one: in response to IST shocks, investment and consumption move in opposite directions, while the data clearly indicate they are positively correlated.

Francesco Furlanetto and Martin Seneca study under which circumstances a positive correlation could be obtained. They find that you need the following: non-separability of consumption and leisure in utility and nominal price rigidity (à la Calvo, sigh...). Remove any of the two, and the result crumbles. Thus it seems essential to make a point whether these two assumptions make sense. Regular readers know that I do not believe Calvo pricing is an appropriate way of looking at price rigidity, provided that it even is significant to matter economically in the first place. It is not clear that another pricing mechanism would yield the same result. And regarding non-separability of leisure and consumption, I have no evidence whether this is a valid assumption, and the authors do not help me. And what about other shocks? Those typically lead to positive correlations between consumption and investment, and include such shocks may help relaxing the requirements identified by Furlanetto and Seneca.

Tuesday, February 15, 2011

If anything goes wrong, it has to be the central banks

Some institutions are excellent scape goats to impose necessary reforms in a country, such as the International Monetary Fund or the World Bank. Local governments can always blame them if they have to put their fiscal house in order. Other institutions seem to attract conspiracy theorists in large numbers because someone needs to be blamed for some condition and the institution is poorly understood. The prime candidate here is the central bank. Indeed, the best central banks are those that act independently from the government, but people see this apparent lack of accountability as the origin of all trouble in the economy.

A very good example for this sorry confusion is a recent paper by Subhendu Das, with the following abstract:
In each country the central bank is a privately owned bank with no transparency and accountability to the government of that country. It is also the only bank that can print the money for that country and does it so out of thin air. At the same time this bank wants that the government returns the money with interest. We show that this structure creates deficit, introduces tax, and causes poverty around the globe. This paper shows how central banks control the economy by manipulating the financial system it has designed. The paper explains how easily the central banks can control the unemployment, create recessions, and transfer wealth from the lower economic group to higher economic group and perpetuate the poverty. The paper also proposes three methods of eliminating central banks.

Where to begin. Central bank governors are typically appointed by the government and are accountable to it (just see how frequently Bernanke is on Capital Hill). The central banker's decisions are independent from the government, and for good reasons: you want to avoid policy actions to be taken for a short term political gain that is detrimental in the longer run through higher inflation. Central banks that are not independent from governments typically have much higher inflation, as the government ends up relying on seigniorage for its expenses instead of taxation. The presence of the independent prevents deficits because governments know they cannot inflate debt away.

Then, central banks most often make profits. These profits are then transfered to the government. That reduces the need for taxes. But this does not absolve the government from raising taxes. If is it taking real resources form the economy (either labor or goods), that needs to be paid for in real terms one way or the other. For a typically government, the central bank would only be able to cover this with excessive inflation.

Do central banks create poverty? A central bank that is independent from the government leads to low inflation, which is good for poor people who are cash based. To repeat myself, a government controlled central bank will create more inflation, and that is when there is a transfer of wealth from poor to rich, who can shield their assets from inflation.

Do central banks have an impact on unemployment and recessions? Honestly, it is open to debate whether they have any significant impact on this. They can certainly mess up things, for example when influenced by the government, but a well-run independent central bank will just make sure the economic is well greased. It cannot fix structural problems. That is up to the government. Central banks cannot control the economy, and in fact in many countries do not even have regulatory authority over the financial sector.

All in all, this paper has everything backwards, except for the fact that money is created out of thin air. But keep in mind that most money is not created by the central bank, but by private banks, and the central bank makes sure not too much is created. So the author still got that wrong.

Monday, February 14, 2011

Heterodox money

Heterodox economics is frustrating because it keeps working in a self-referential vacuum, consistently ignoring advances in orthodox economics. This is not how progress can be made, and in particular this is not how you can get results from heterodox economics accepted or at least considered in the mainstream. It is now as if there were two parallel universes and no portal between them.

A good example is a recent paper by Randall Wray, grandiosely entitled "Money" that is supposed to teach us what money is. It lays on three principles (I quote):
  1. Money buys goods and goods buy money, but goods do not buy goods.
  2. Money is always debt; it cannot be a commodity from the first proposition because if it were that would mean that a particular good is buying goods.
  3. Default on debt is possible.
It then proceeds to talk about how to understand this and how this defines money, with references to Keynes, Marx, Sraffa and Kaldor, and their disciples.

But have we not made some progress since? The only mention of the mainstream in the paper is a criticism of representative agent models where agents pay money to themselves and thus never default. Really? Really? Modern models that try to rationalize the use of money explicitly have heterogeneous agents and explicitly take into account that some may refuse money for payment. And this is not exactly an obscure and recent literature, Kiyotaki and Wright, for example, dates back to 1989 and already has all these ingredients. This money search literature is mentioned nowhere. The same applies to the literature on trading posts, which has rationalized the emergence of particular commodities as money (See recent post).

Also, why this reluctance to use formulas to make arguments and assumptions explicit? In this paper, there is implicit talk about budget constraints and accounting identities, but they are never explicitly laid out, which can make it easy for the author to sweep something under the carpet (I am not saying Wray does, though). But there is something essential about writing an equation: it forces you to define variables precisely, and it forces to use a logical proof of your arguments. Only then will your arguments be water tight.

Friday, February 11, 2011

Fiat money, 1683

We tend to think that fiat money is an invention of the twentieth century and thus does not predate the Italian car industry. But there have been a few experiments before this and in particular a remarkably successful one in the Netherlands starting in 1683.

Stephen Quinn and William Roberds tell the story of the Bank of Amsterdam that in 1683 started limiting the ability of depositors to withdraw coin. At a time where this would have been interpreted as "taking the money and running," this was remarkably well accepted by the depositors, and the Bank of Amsterdam never abused the situation, maintaining stable prices over the next century and greatly facilitating trade in the kingdom. All this without government supervision, basically out of private initiative. Call that almost-private central banking (the bank was sponsored by the city of Amsterdam), even conducting open market operations. Of course, this all ended went the Bank of Amsterdam went bust in 1795: the rest of the world still relying on precious metal, the lack of access to fresh silver during the Fourth Anglo-Dutch War led to a strong depreciation of the guilder, and the experiment ended due to lack of fiat.

Thursday, February 10, 2011

Are minimum wages attracting immigrants?

Immigrants typically compete on the labor market with the low-skilled domestic labor force. Along with global competition through offshoring, this is probably the main reason why real wages have stagnated or even decreased over the last decades for the least educated. One way to counteract this development is to raise minimum wages, which may, however, have the adverse effect of encouraging even more outsourcing to abroad. There may be more reasons for concern.

Corrado Giuletti shows that increasing minimum wages also attracts more immigrants, which puts even more pressure on the least educated workforce. This is not obvious, as the higher wages could also imply lower job prospects, and thus be discouraging for immigrants. To come to this conclusion, Giuletti uses the Current Population Survey and analyzes the responses to the minimum wage increases in 1996-97 in the United States, which differed substantially by state, and lead to different expectations about future wage increases. Those that had the highest increases saw an immigration inflow four times larger than those with the lowest increases, if one focuses on the low-skilled. No impact is seen for the high-skilled. What the implications are for the domestic low-skilled workers remains to be seen, however.

Wednesday, February 9, 2011

Minimum wages in Nicaragua

Should a poor country adopt minimum wages? On the one hand, such legislation could increase welfare of employed workers by giving higher wages, and it could lead to higher paying jobs. On the other hand, underemployment is often severe in such economies, and you want to give jobs even to those with low marginal productivity to give them a chance. Also, imposing minimum wages increases the size of the informal sector and thus shrinks the tax base and potentially worsens working conditions. And you can probably imagine other consequences of imposing or not minimum wages in poor countries.

Enrique Alaniz, Thomas Gindling and Katherine Terrell try to make sense of all this for Nicaragua. They have at their disposal household and individual panel data that allows to trace employment and income across minimum wage changes. As the minimum wage is relatively high compared to average wages, the impact of changes should be easier to notice than elsewhere. They find no evidence that an increase in the minimum wage increases wages for those beyond the vicinity of that minimum wage, and it reduces formal employment (elasticity of 0.5). This decrease in employment comes partly from reduced hiring, partly from layoffs, and those result typically in unpaid family work (and thus switch to the informal sector). However, an increase in the minimum wage improves the probability of a household to transition out of poverty, especially if the head of household is affected, as he is less likely to lose his job. Getting people out of poverty is what matters most, so minimum wages appear to be a good policy, at least in Nicaragua.

Tuesday, February 8, 2011

Monopoly in health insurance is better

We typically advocate that competition is good, except when it is not, for example in the case of large production fix costs. Such natural monopolies then need to be regulated. Part of the debate on health care in the United States is also about competition: if health insurance is provided by a single entity, it got to be less efficient. Well, there is data that can verify this, by looking at employers that offer a choice of providers and those that do not.

Ilya Rahkovsky does this and comes to the stunning conclusion that insurance providers that have a exclusivity contract with an employer charge about 40% for the same "insurance quality units." How could this be? Exclusive providers tend to provide better quality insurance because they can subsidize it with the premiums of low quality policies. That would not be possible if they were to compete with other providers.

That said, insurance providers must have been in competition in order to obtain the exclusivity contract, so it is not quite true to state that the monopoly is welfare improving. But from the employees' perspective, it looks like a regulated monopoly in the sense that the employer can keep a leash on the insurance company by threatening to change providers, and that keeps the monopolist from exploiting all rents, it even encourages it to show goodwill to keep the contract. With multiple providers, everyone goes for the quick buck and offers lowly policies.

Monday, February 7, 2011

The impact of credit card cash-backs

Banks seem to really push credit card use on their customers, seeing all the junk mail, the recruitment stands in malls, campuses and airports, and the various incentives (frequent flyer miles, cash-backs). Why are they doing this? One would think the marginal customer is less profitable, and may even be detrimental to the bottom line as he is more likely to default.

Sumit Agarwal, Sujit Chakravorti, and Anna Lunn look specifically at cash-backs using administrative data and find that a 1 percent increase in cash-back leads to a US$68 increase in spending and US$115 increase in debt in the first quarter. While one can understand this would increase spending, it is puzzling to see the debt increase even more. Why would people substitute debt away from other cards? Indeed debt is not tied to this cash-back. It turns out this comes mostly from people who have previously barely used the card, thus they basically switch allegiance both in spending and debt. A reduction in the interest rate has similar consequences.

Are cash-backs good or bad. This paper shows that they are mostly used to steal customers from other cards. Such competition is good. However, the ones who pay for these rewards are the merchants, who face basically a duopoly and are caught between a rock and a hard place. Ultimately, the consumer ends up paying for these cash-backs through higher prices in the store, and those using cash or debit cards lose out.

Sunday, February 6, 2011

Why should I write grant applications?

My administrators insist I should go for grants. They say it raises prestige and my research would benefit from it. I have not applied for a significant grant for quite some time for a reason: it is a horrible waste of time. I do not need grants. I do my research very well without the need for support money. All I need is a pencil, paper and a computer. I can even do without a printer. I do not need to pay for data, software and subscription, as all this is available for free (thanks to open source and open access). I do not need a research assistant as I do that much faster and better myself. And I do not need summer money as I am already well paid. In other words, I am doing just fine without grants, why should I put the time and effort into maybe getting a little money I do need, that comes with all sorts of strings attached?

My administrators do not care about the impact on my research, or my welfare for that matter. They want the overhead. They are begging for money to justify their existence. I already bring lots of money to the college by teaching many, many tuition paying and public funding attracting undergraduates. In fact, from a back of the envelope calculation, my pay should double just for that. I am already subsidizing the administrators, why would they need grant overhead? They need to feed a machinery that deals with those grants. The office of research, which manages the grants, is twenty people strong. And if I hire a research assistant among the graduate students, I have to pay his or her full tuition before anything can be assigned. I cannot hire outside the university. So why would I want to hire anyone?

In some way, the administration wants me to pay for my salary through grants, a salary I have already more than earned with teaching to overflowing classrooms. To be honest, if I were successful in obtaining grants, I would leave the university and keep everything for myself. I would then be able to concentrate on research instead of putting up with all the red tape. But most funding agencies do not accept submissions from independent researchers, so I continue doing my research without grants and try to ignore these administrators. Let them show their self-importance elsewhere.

Friday, February 4, 2011

Want more FDI in Africa? Get a foreign-trained leader

You know the mantra: if you want to get funding for a project, you need to be well connected. It turns out the same holds true at the macroeconomic level for foreign direct investment in Africa.

Indeed, Amelie Constant and Bienvenue Tien point out that have an head of state educated abroad increases on average FDI by up to 100%. And 40% of African leaders obtained their tertiary education outside of the continent. More importantly, it is once you have some FDI flows going that the foreign connection becomes important. Indeed, for countries in the lower quantiles of FDI, foreign education of the leader has no impact. But if there significant FDI, then it matters a lot. It is not clear why, perhaps part of the story is that low FDI countries cannot attract funds no matter what. And why would foreign education matter? It is probably not because of human capital, as those with tertiary education in Africa do worse, but still better than those without tertiary education. It must be the connections.

Thursday, February 3, 2011

On the wisdom of Groupon

For those who are just coming back from their sabbatical in the middle of the Amazon forest, Groupon is an obnoxious coupon provider that recruits members by validating coupons only when a predefined number of users promise to use them. Also, users prepay and obtain vouchers for the purchased good. The scheme seems remarkably popular among consumers, and Groupon recently turned down a US$6 billion buyout offer from Google. While it is successful among buyers, what about sellers? There is at least anecdotal evidence that some retailers regret participating in the scheme, for example when they get swamped by vouchers.

Benjamin Edelman, Sonia Jaffe and Scott Duke Kominers analyze why businesses would want to participate. First, as for any coupon, there needs to be a reason to discriminate between customers, that is, those that consistently looks for good deals from those who do not bother. Second, it is a good way to get a new business known, and thus accept temporary losses on those deals (if you are patient enough). Third, as those coupons are primarily increasing sales, it is important that the marginal cost of the product be rather low. You do not want to be in Groupon to sell personalized cakes. And I would add that you need to either cap the number of available vouchers or be ready to increase capacity in a moment's notice. You cannot reject customers with a voucher, while you could those with only a coupon.

Wednesday, February 2, 2011

A neolithic prisonner's dilemma

Why did humans adopt agriculture in Neolithic times? Our intuition would say because it has better nutritional outcomes. But the evidence points to the contrary: the bones of early farmers consistently show poorer health than the preceding hunter-gatherers. So why would agriculture be adopted if it lead to a disadvantage?

Robert Rowthorn and Paul Seabright say it was individually rational to adopt agriculture, even though it was detrimental to society, much like in a prisoner's dilemma. The problem of a farmer is that he needs to defend his land and his cattle. That seems an additional disadvantage with respect to hunter-gatherers. But farmers can team up in villages, and fortify them. And voilà, now that they have a secure base, they can start raiding around them instead of only defending. This is where the prisoner's dilemma comes in: it is individually rational for every farmer to dedicate resources to defense, but this lowers everyone's welfare.

And thus started the grip of the defense industry on the economy.

Tuesday, February 1, 2011

A driving median voter reduces gas taxes

If you own a car, you are not too happy when gas taxes go up: it is more money out of you pocket, however you benefit from a reduction in congestion and lower pollution as long as this tax increase also implies a reduction in gas consumption. If you do not own a car, you would view positively the increase in gas taxes, as the state can now provide more services or reduce other taxes you may be paying. However, some goods with a high share of transportation costs may be become more expensive. Does this reasoning make sense in a political equilibrium, i.e., is the level of gas taxes determined by whether the median voter is a car driver or not?

Fay Dunkerley, Amihai Glazer and Stef Proost show that it does and figure out that in the OECD a car driving median voter leads to a gas tax that is 20% lower than a walking median voter. Of course any such estimate is fraught with endogeneity: the median voter is walking because the tax is high. To overcome this problem, the authors use a dynamic setup that takes into account when a median voter starts to drive.