No need to ban incandescent lightbulbs

It is sometimes difficult for a shopper to understand all the consequences of purchasing choices. Take lightbulbs, for example. The variety in price is large, and so is the variety in expected life or energy consumption. When more efficient lightbulbs came on the market, they were massively more expensive than existing bulbs, yet in the long run worth it thanks to much lower energy consumption. Consumers did not seem to understand that, along with what this entails for pollution, hence the old bulbs were banned. Was this really necessary?

Hunt Allcott and Dmitry Taubinsky exploit two randomized experiments to look into this. The first is computer based and gives participants a budget and different information about lightbulbs. The second is a field experiment at a home improvement retailer where shoppers where given different information and discount coupons. They find that people do not undervalue energy costs that much, meaning that only minor, if any, subsidies were necessary to win them for next-generation lightbulbs. Once more, it looks like a ban is outdone by the nudging that the price mechanism can do with appropriate subsidies or taxes. They also find that there is a large fraction of shoppers that wants to stick with incandescent lightbulbs, indicating a substantial welfare loss from a ban that is similar to standard rationing. One more piece of evidence that bans need to be banned.

How efficient is net neutrality?

Net neutrality, the fact tat no one has priority over the use of the Internet, may sound very democratic, but it is also potentially inefficient. A Skype communication, which cannot afford much latency, has the same priority as an email, which can definitely afford to wait a few seconds. The obvious solution is market based: let people pay if they want less latency. This should also make the broadband hogs who need to watch videos absolutely everywhere realize how they are affecting the Internet use of others. But that would give up the ideal that the Internet is free for all and whichever way you use it.

Nicolas Curien points out that net neutrality does not imply that Internet use should remain free, both for end users and content providers. It only implies that the price does not discriminate in any way. Curien goes on to formalize in a rather convoluted way neutrality and efficiency, showing that the most efficient outcome in many situations implies some imperfection in neutrality. This is hardly surprising. Maybe more interesting is the discussion in the conclusion, unfortunately not backed up by formal analytics, that competition makes neutrality easier to enforce, and thus Europe is in a better position in this respect than the United States. I am curious whether is true.

All hail news aggregators!

Newspapers have been fighting a losing battle with news aggregators on the grounds that the latter allow readers to bypass the newspaper front pages by deep linking to news articles, thereby reducing advertising income. This argument has always puzzled me, as news aggregators allow readers to discover these articles in the first place. It appears, though, that news aggregators have a different and so far neglected impact on the newspaper industry: the content of newspapers is changing.

Doh‐Shin Jeon and Nikrooz Nasr Esfahani imagine a world where newspapers try to steal readers from each other by exploiting the presence of news aggregators. Readers are interested in a number of issues, and newspapers write articles about them. They may try to cover many issues and choose how much quality to put into the reporting. Suppose the news aggregator identifies the highest quality article for each issue. When readers switch from following the local newspaper to following the news aggregator, the newspapers are forced to specialize into a few issue and perform much higher quality reporting. As a result the readers get much better news, newspapers make get less profits, though, but only if there were few competitors to start with. If you have many small newspapers, they become niche providers on very few topic and take great advantage from the news aggregator. And we are all happy for it.

Forecasting the weather using the market

In public opinion, economic forecasting has as low regards as weather forecasting. To some extend this is coming from a firmly anchored stereotype, because forecasts for both are actually much better than a mean reverting random walk. And one should factor in that the weather or the economy are very complex animals with a lot of interacting forces (including silly politicians who take nonsensical decisions). But, in a horse race between meteorologists and economists, who would be better at forecasting?

Enter the economist, Matthias Ritter. He uses the price of weather derivatives traded at the Chicago Mercantile Exchange to determine what the market thinks is going to be the future temperature, more precisely the two-week ahead Heating Degree Days and Cooling Degree Days for 6 US cities. And the economic forecast is impressive, it manages to lower the meteorologists' root mean square error by about a quarter. And people say such speculative markets are useless.

Your turn, meteorologist.

Gender discrimination on the labor market in China

China is a country of contradictions. While its communist ideals dictate that all people are equal, genders are quite obviously treated differently. The country's leadership is more male-based than most (23 of 25 in the politburo) and parents routinely practice gender selection for their children, which leads to the ticking bomb of a large male population surplus (more here). Is such discrimination also practiced on the labor market in China?

Xiangyi Zhou, Jie Zhang and Xuetao Song went through the trouble of sending about 20,000 fake employment applications on various major Internet bulletin boards and analyzed the responses they got. The results are damning. There is signification discrimination, but in surprising ways. State-owned enterprises tend to prefer males. Foreign and private firms go the other way and tend to prefer females. The public sector is rigid and follows rules, so it seems deeply ingrained to privilege men despite all the rhetoric. The private sector is more flexible and, I suppose, takes opportunities where they are, and hiring discriminated women seems to be the way to go. On more lesson on how free markets can be powerful adjusters.

Limit gas price changes to once a day?

For some reason that is unclear to me, fuel for cars is in most countries the most flexible price, sometimes changing several times a day. As demand is rather inelastic and the raw commodity supply comes from politically volatile regions, the price also fluctuates over a wide range. And this wide range leads to a lot of grief, especially when prices go up, with calls from the public for politicians to do something about it. The latter then usually do something stupid, and they are never short of ideas.

One recent innovation comes from Austria: in the belief that higher prices come from frequent changes, gas stations have been limited to one price change a day. Martin Obradovits analyzes this policy and comes to the obvious an obvious answer: it is a stupid policy. For one, it is not like gas companies are bound by fixed increments and this would reduce fluctuations. Second, it introduces new frictions in the market that go to the detriment of the consumer: you get the same profits and the same expense for the same quantities, there is only some intertemporal rejuggling that inconveniences the buyers. I would add that if prices end up too low during the day, gas stations may simply close and ration out buyers until they can adjust prices. Ah, politicians...

Should immigration quotas be traded?

We all want to end world poverty, and a particularly efficient way to do this is to allow the free movement of people. Unfortunately, this often puts a burden on the receiving country, and thus immigration limits are set. But there is clearly a positive externality on the other countries from allowing immigrants in, as long as the others also care about world poverty. This implies that immigration quotas should be set higher.

To make this happen, Jesús Fernández-Huertas Moraga and Hillel Rapoport suggest a system of tradable immigration quotas, that mimics the market for pollution quotas. There is one difference, though, as migrants have preferences on where to go. Thus, there is a global number of migration slots put on the market and countries can trade them, paying for a slot elsewhere if local costs of immigration are particularly high. A central assignment authority attributes migrants to countries following their preferences and a particular assignment scheme.

This market allows to extract the price of immigrants to the host country as well as price the benefit of migration to world social welfare. Unfortunately, it does not appear immune to strategic behavior, as most bilateral assignment problems. But it seems to be a very promising step towards a better world, especially in the light of potentially large migration following climate change.

Animals as forecasters

Futures markets and in particular prediction markets are a good way to hedge against various risks as well as establish what people really think about the likelihood of some event. As they a putting money on the line, these markets are deemed (and have proven) to be more really than surveys and polls. Of particular interest in this context was the short-lived "terrorism futures market" organized by the Pentagon, which was supposed to offer an additional tool for predicting terrorist threats, and which would allow those who could suffer from terrorism to buy insurance against it. Unfortunately, there was also a fear that threats could materialize because of the market, as people would try to manipulate it.

Adi Schnytzer and Yisrael Schnytzer point out that there is another potential for prediction markets: natural disasters. Of course, we humans are so far not particularly good at forecasting such events as earthquakes, but some animals have evolved a sixth sense in this respect that is rather underexploited. While it seems difficult for scientists to drum up money to study this, maybe because this technology does not seem credible or usable, the Schnytzers point out that if prediction markets are created for natural disasters, then funding would emerge if money is to be made. And this would also establish whether these theories have credibility.

How to solve the Kyoto and Copenhagen climate gridlocks

The Kyoto Protocol to reduce greenhouse emissions has not been widely adopted or followed and the Copenhagen climate summit ended in a fiasco. Why is it that the world community cannot cooperate on an important issue? And even if one doubts about global warning, one has to agree that this is a potentially large issue, and thus at least some coordination is required. People will immediately point out that there is a huge free rider problem, and they are right. As emissions are global, everyone benefits from the efforts of the others but little from one's own. Hence the need for cooperation.

Peter Cramton and Steven Stoft write that this cooperation problem becomes even more difficult depending on what the central coordination mechanism is. The argue that cap-and-trade makes things especially difficult, because it makes objectives of the negotiating parties even more divergent. If the rule of the game is that everybody needs to have individual and binding emission ceilings, then everyone will try harder for low (developed economies) or high (developing ones) emission caps. One solution out of this quagmire is to adopt a global emission ceiling that is enforced through a market-based mechanism, with the sale of pollution permits. We have known for a very long time that prices are very powerful enforcement mechanisms, and in the context of this public-goods game it is even better because it will foster more cooperation in the negotiation of the emission ceiling and lead to an agreement having a better chance of actually happening.

How to reform North Korea

The economics profession is being criticized these days because it was unprepared for the recent crisis. Few people had thought about the fact that liquidity problems of such dimensions could appear in interbank markets. Thus it is now very welcome to think about hypothetical situations instead of studying past phenomena. One such hypothetical is what to do if North Korea would suddenly abandon its Juche system (self-reliance).

Scott Bradford, Dong-jin Kim and Kerk Phillips tackle this with a simulated dynamic general equilibrium model, pretty much the only solution given that there is no history to draw on and no reliable data. Also, this is definitely a situation where reduced forms would not teach us anything. So, structural they go. First, they try to emulate the current situation with massive mis-allocation of resources and little infrastructure. It is quite obvious that from this starting point almost any reform is beneficial. But suppose the reform is purely internal: no opening of the economy, and no touching the military. Then introducing market forces, but this still be of limited extend given the immense lack of infrastructure, Massive investment in infrastructure is needed much more urgently than market reform. And serious commitment to reform that would benefit residents is likely to attract significant foreign aid, which makes it much more affordable.

What can we learn from Barbados?

That institutions matter is well known, empirically from many cross-country growth regressions, as well as from twin countries like North and South Korea or East and West Germany. The latter examples highlight situations where countries started roughly at equivalent levels of development and thereafter diverged massively. Could policy differences achieve the same? Zimbabwe is an obvious example, but let us exclude implosions.

Peter Blair Henry and Conrad Miller have an interesting look at Jamaica and Barbados. Both are small Caribbean islands, former British colonies with typical institutions, populated mostly by former slaves brought in for the sugar cane plantations. Jamaica was blessed by valuable bauxite deposits, yet soon after independence, the unemployment rate shot up, due to a combination of high and rigid wages and a flight to the city. The other difference is how these island states have reacted to the oil shock: Jamaica went on a spending spree financed by debt and inflation, intervening massively in markets, while Barbados had a much more moderate fiscal policy. During that period the growth rate differential was 3.5% in favor of Barbados. And nowadays, the GDP per capita in Barbados is a multiple of that in Jamaica.

In there something to learn for the current situation. Quite obviously, these are economies quite different form the large ones now looking for rescue policies. But quite obviously, Barbados benefited tremendously from having a government with foresight that was trusting markets.

Markets trump policy: illicit drugs

Among developed economies, the United States has the most restrictive policy relative to illicit drug. The Netherlands have a much more relaxed one. Guess where more people use drugs.

According to a study published in PLos Medecine, Americans are far ahead of anybody else. this table shows that 16.2% have tried cocaine, New Zealand is second at 4.3%, and the liberal Netherlands have 1.9%. For cannabis, it is 42.4, 41.9% and 19.8%.

So much for the war on drugs. This shows that markets are much more powerful than regulation, they find a way to circumvent rules and laws. How can one really reduce drug use, if this is the true goal? Make it legal, thus reducing its price, as the risk premium drops. Supply will then drop. If the price goes too low, tax it like tobacco and alcohol. At least revenue would then end up in the pockets of the government instead of crooks.