Why do some bikers not wear helmets?

There are no laws mandating helmet use for motorcyclists in many developing countries and some US states. In the first case, such laws are likely unenforceable, in the second I suppose the American urge for "freedom" makes such laws inappropriate and the hope is that motorcyclists would have the common sense to use helmets. So what determines why some choose not to wear a helmet?

Michael Grimm and Carole Treibich went to Delhi and surveyed motorcyclists, focusing on helmet use and speeding. Some of the answers are not surprising: the bare-headed ones are less risk-averse, younger, less educated and less informed about accident and fatality rates. More interesting is that speeding and not using a helmet seem to be strong substitutes. Imposing helmets alone would thus not necessarily improve safety. One would have to impose helmets and enforce speed limits. That is likely too much to expect from India though, where just informing about the true risks may be more effective.

Give girls a bicycle

It is well known that girls from developing countries face hurdles in their schooling experience. This goes from subtle issues during their periods, curricula geared towards boys, and household work to plain denial of access to schools. While some of this has to do with cultural issues that are difficult to overcome with (economic) policy, some help could be surprisingly easy. It happened before in public health, my favorite example being telling kids to wear shoes eradicated hookworm from many parts of the world.

Karthik Muralidharan and Nishith Prakash have a recommendation, and that is to give girls a bicycle. They base this on an experiment they ran in India, where girls were offered a bicycle if they continued into secondary education. This helped overcome traditions that would not let girls out of the village and increased enrollments by 30% and closed the boy-girl gap by 40%. The authors also claim this is more cost-effective that the traditional cash transfers because bicycles have positive externalities, such as the safety of girls during commutes and more generally empowering them. As with any such experiment, one can question whether the result can be generalized, but it is interesting nonetheless.

PS: As several readers noted by email (but could have commented), this is not a randomized experiment. Rather, the authors used an initiative conducted by the government of Bihar. I apologize for the confusion.

Why invest in cows if their return is negative?

In some developing economies, cattle are used as store of value. This is because there is no other good asset available as financial markets are not developed. Cattle has its drawbacks though, as it can die from disease or hunger, usually at the worst moment, can walk away or be stolen, and thus needs constant guard. This implies that their return could actually be negative.

Santosh Anagol, Alvin Etang and Dean Karlan find that cows and buffaloes in rural India have a negative return of a whooping 64% respectively 39%. If you take the extreme assumption that labor has no return, then their returns are minus 6% respectively plus 13%. How is that possible? The authors offer several potential explanations: measurement error, preference for home-made milk, the lack of other saving vehicles, in particular those that allow commitment to keeping those savings, improvement in social and religious standing, and preference for lotteries (small probability of striking it rich with female cattle). The one I like the most is that marginal return of labor is actually zero. Indeed, farms do not operate like firms. As they are typically family-operated, everyone "works" even if that means being idle most of the day. This idle person may have a productivity close to zero, and may thus be used to guard cattle.

Why do Indian and Mexican plants not grow?

When a business is successful, it grows. Successful businesses also are more likely to survive and thus old business tend to be larger. Now define business. The business unit relevant for this is difficult to ascertain, for example because of mergers and acquisitions, or simply because the boundaries of a firm are hard to establish (are contractors part of it? Subsidiaries?). Thus the common way to measure a business is at the plant level.

Chang-Tai Hsieh and Peter Klenow show that plants in India and Mexico do not grow with age, or much less than, say, the United States. This points to a very inefficient allocation of resources, as successful plants should invest to grow: they are obviously better than the competition, thus can produce more efficiently or better goods. With a simple simulation exercise, Hsieh and Klenow show that this lack of plant growth leads to a 25% productivity loss compared to US plant growth.

The question is of course why plant growth is stifled in India and Mexico. For India, it is rather obvious, with policies that favor small businesses and actively prevent them to grow "too large." Many of these policies, which are heavily promoted by owners of incumbent plants, are being revoked and can in part be credited for the large recent growth of the Indian economy. As for Mexico, it has been suggested that when plants grow from the informal to the formal sector of the economy, they are subject to more taxes and regulations. In both cases, inappropriate institutions are to blame.

On the difficulty of implementing right-to-work legislation

The chronically poor have a low labor-market attachment, to a large extend because of a lack of skills and experience. This is thus a vicious circle. One way to break this vicious circle is to offer them employment and hope this turns into a virtuous circle. This is what India implemented in 2005, a program that guarantees any rural adult 100 works days on public projects at minimum wage (thereby getting the richer people to self-select out). Does the theory work out in practice?

Puja Dutta, Rinku Murgai, Martin Ravallion and Dominique van de Walle report that it worked, sort of. The poorest families do indeed use the scheme most, but here remains unmet demand, thus the state was not able to fulfill its work guarantee. In fact, this rationing was most prevalent in the poorest Indian states, where the guarantee is the most needed, and where the resulting public works would also be of the highest benefit. And while the scheme seems to motivate more rural women to participate in the labor market, the rationing still privileges men. All in all, the program seems to roughly target the right people, although there is substantial scope for improvement. But we still need to wait for more data to see whether it works to alleviate chronic poverty.

How to fight corruption

Conventional wisdom tells us corruption is bad (except for a few people). The evidence is surprisingly mixed (see old post), but that has not deterred every government or international agency to at least pretend to do something about it. Eradicating or attenuating corruption rarely works, maybe it is because the approach is wrong.

Martin Dufwenberg and Giancarlo Spagnolo verify an innovative angle to attack bribing, as proposed by Kaushik Basu and widely discussed in the Indian press: make bribing legal, but levy heavy fines on accepting bribes. That is somehow similar to the situation in some countries where consuming some drugs is legal, but their commerce is not. The conundrum the proposal tries to resolve is that briber and bribe-taker are usually partners in crime and unlikely to report the activity. By guaranteeing immunity to one party with return of the bribe, it is more likely that the corruptive transaction will be reported. But it turns out to optimize it, immunity should only be granted to those who report a bribe. Indeed, this gives stronger incentives to report. Also, granting immunity to any briber would have made it morally acceptable to bribe. To this I would have added that one also offer the repented briber a commission on top of the returned bribe. Then it would become profitable to report bribes, even when the requested service is ultimately not provided.

Spite and development

One of the big lessons Adam Smith has taught countless generations of economists is that homo oeconomicus is all its selfish glory can be quite useful to society. Of course, there are circumstances were selfishness is not the best outcome for society, for example when an activity exerts negative externalities onto others.

In a recent article, Ernst Fehr, Karla Hoff and Mayuresh Kshetramade give an example of a situation where society would be better off if people were selfish: spiteful preferences. This happens when somebody desires to reduce another's payoff only to increase one's relative payoff, and doing so hurts oneself. Society would be better off if this person would just be selfish and not commit such acts of spite.

Two points here: first, we need to define what selfishness is. If it maximizing private utility, then if it is relative outcome that are relevant to one's preferences, then this is what we ought to accept as utility. Where it become problematic for society is if such preferences are widespread and people enter into spite tournaments and mutually hurt each other. But even if there is only one spiteful person, his actions exert a negative externality onto others that needs to be redressed.

Second, how widespread is such behavior? The authors of the article argue it is more widespread than you may think. They conducted experiments in India with a game where cooperation is a Nash equilibrium. They find that between 61 and 73 percent of players punish cooperators, and this is more prevalent among higher castes.

I am saddened by such results, as this is obviously bad news for economic development. If people are so willing to hurt themselves to prevent others to become richer, everyone is going to stay poor.

The Economics of energy subsitution

The increase in oil prices allows nicely to highlight the mechanics of substitution. The increase in the price of most goods lead to a decrease in its use, while increasing the demand for its substitutes. This leads to an increase in the price in the other goods. We have seen this in the past month nicely with increases in electricity and food prices, although these are not pure substitution effects (oil is at least partly an input).

Another substitution effect come form the use of goods that were not used before. In the case of energy, using alternatives like solar energy or windmills becomes more economical, thus creating goods that were not in demand before. But again, this is not a pure substitution effect, because these alternative energy sources have been pushed for other reasons as well, such as pollution reduction.

For automobiles, the rise of hybrid cars is a substitution effect, although they still use some gas. What about a car that does not use energy from oil at all? Enter the AirCar, which simply runs on compressed air. The concept is ten years old, but was not economical until now (except for some cars running in Spain). Tata Motors, the major Indian car manufacturer now announced it will start producing a car based on this concept in August 2008. The MiniCAT will have a range of 300km for a maximum speed of 105km/h, the refill will come to $2.00 at a station, and an emergency compressor can be plugged into a socket to refill as well.

Note that this car does not use the air pressure per se, but rather the thermodynamic effect when you change the pressure and the volume of the air. The emissions are thus only very cold air, which can be used for air conditioning...

Politicizing markets: the India example

India is facing rising crude oil costs like other nations, but very differently. Indeed, the retail price of gas is set by the government, and as this price has been adjusted only once in 20 months, refineries that have to pay the market costs for their input face big losses. And the fact that the government is postponing meetings to solve the issue makes the problem just worse and worse. The longer it waits, the more brutal the price increase will be, and the more people will revolt. Because there, people have a reason to blame the government for price changes as the latter sets them...

Politicizing an economy is always a bad idea, and India is a prime example in this respect. For example, lobbies have been successful in enforcing protection for small manufacturers by preventing big plants to establish. This has especially hurt India in the textile sector, for which it is perfectly suited but has abandoned the world market to others to preserve inefficient mom and pop operations. By some accounts, the Indian GDP could be close to tripled by simply removing this kind of government meddling. Since this account, the Indian government has taken this seriously, deregulating substantially, leading to growth rates similar to China. But the new government ruled by the Congress Party does not seem eager to pursue this policy at all, unfortunately.