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Even when eligible, not everyone chooses to receive payments from welfare. This may be by ignorance or by choice. In the latter case, welfare payments may obliterate other incomes, or vice-versa. A particularly interesting problem is that of single mothers reporting (or not) paternity.
Indeed, reporting who the father of the child induces most of the time procedures by the state to obtain child support from the father. If the mother is a welfare recipient, most US states capture most of this child support. It becomes thus a strategic decision for the mother: report the father and see little in child support, or seek child support informally (and possibly not strain a relationship with the father).
Jennifer Roff shows that this can be formulated as a Stackelberg game where the mother is the leader. She shows in particular that the outcome of this game can have perverse consequences when states capture more of the child support payments: mothers report fewer fathers, and the total captured amounts are lower. Also, awarding high child support payments decreases expected payments as mothers expect fewer fathers to comply, mostly because because of low paternal incomes. In other words, it does not necessarily pay to play tough.
Friday, August 29, 2008
Thursday, August 28, 2008
Save the savers
These are tough times, and in tough times, the government is here to help. This is why the finance industry is getting help, people late on their mortgages can seek assistance, the Big Three in Detroit are asking for 25-40 billion dollars, airlines are clamoring for supports. What about those that planned ahead?
You have heard this argument already a thousand times: why should those that were foreseeing troubled times bail out the irresponsible ones? It is clear that Schumpeterian creative destruction is beneficial here and that the role of the government is not to encourage moral hazard. What about the current monetary policy of low interest rates, though? Retirees and those who planned ahead saved and are getting very low returns now, in fact in most cases below inflation. The popular press claims low interest rates are good for the economy, but this is not the case for everyone.
Time to increase interest rates to fight inflation (remember the Taylor principle: for every increase in inflation of one point, increase interest rates by one and a half points) and put some money back in the pockets of those bailing the others out.
You have heard this argument already a thousand times: why should those that were foreseeing troubled times bail out the irresponsible ones? It is clear that Schumpeterian creative destruction is beneficial here and that the role of the government is not to encourage moral hazard. What about the current monetary policy of low interest rates, though? Retirees and those who planned ahead saved and are getting very low returns now, in fact in most cases below inflation. The popular press claims low interest rates are good for the economy, but this is not the case for everyone.
Time to increase interest rates to fight inflation (remember the Taylor principle: for every increase in inflation of one point, increase interest rates by one and a half points) and put some money back in the pockets of those bailing the others out.
Wednesday, August 27, 2008
Are preferences stable?
Whenever we model economic behavior, we assume preferences are given and stable. If we observe from empirics that preferences change, we attribute this to changing circumstances: with a different choice set, people take different decisions. If the econometrician cannot observe this choice set, he then concludes that preferences change.
This conclusion is generally thought to be wrong, and it is concluded that something else must have changed. But what if preferences change indeed? This is the question that Anderson, Harrison, Lau ad Rutström have tried to answer by conducting a field experiment in Denmark. They performed a standard lab experiment to elicit risk aversion measures by offering several choices of lotteries to a diverse segment of the Danish population. Up to 17 month later, they revisited their subjects, again measuring their risk aversion and obtaining information about changing economic circumstances.
They obtain changes, nicely normally distributed around zero, from raw data, that is, not taking into account changes in circumstances. Doing the latter, they find that a more positive outlook on personal finances leads to lower risk aversion. But the changes in the coefficient of relative risk aversion are statistically significant but modest, in the order of 0.20. So we are still not too wrong to assume constant preferences.
This conclusion is generally thought to be wrong, and it is concluded that something else must have changed. But what if preferences change indeed? This is the question that Anderson, Harrison, Lau ad Rutström have tried to answer by conducting a field experiment in Denmark. They performed a standard lab experiment to elicit risk aversion measures by offering several choices of lotteries to a diverse segment of the Danish population. Up to 17 month later, they revisited their subjects, again measuring their risk aversion and obtaining information about changing economic circumstances.
They obtain changes, nicely normally distributed around zero, from raw data, that is, not taking into account changes in circumstances. Doing the latter, they find that a more positive outlook on personal finances leads to lower risk aversion. But the changes in the coefficient of relative risk aversion are statistically significant but modest, in the order of 0.20. So we are still not too wrong to assume constant preferences.
Tuesday, August 26, 2008
Directed labor search and the cycle
There used to be a time where the discussion of unemployment over the business cycle was limited to disputes over the level of NAIRU and how monetary policy would influence it. How much progress we have made since. A first step has been the Mortensen-Pissarides matching function, which has considerably refocused the discussion on micro-foundations on unemployment with the use of explicit labor search models.
After Robert Shimer showed some serious doubts about some of the critical business cycle properties of the matching function models, considerable effort has been made to either salvage the matching function models by augmenting or modifying them in some ways, or to come up with more micro-founded ways to understand the matching process.
One such avenue is the directed search model, where job seekers purposely decide to apply to certain positions on the basis of some signal (say, a posted wage). Guido Menzio and Shouyong Shi just wrote a paper that should be a trend setter for this class of models. The particular appeal here is that they are able to find a solution for a search model with aggregate fluctuation that is easy to compute, quite a feat for any model with heterogeneity across agents.
It is incredible how much such modeling has progressed in recent years. In this model, firms endogenously choose whether to open vacancies and how much to offer for each. Workers, unemployed or employed, decide where to apply and how much to ask. Each match has idiosyncratic productivity. In equilibrium, unemployed workers are less discriminating as to where they apply, as they want to make sure they are the only ones applying. Employment matches are also dissolved endogenously.
Aggregate fluctuations are triggered by the standard productivity shocks. For example, a positive shock lets firms open more vacancies with different terms, and workers look for better terms and better application success rates. In addition, fewer matches are dissolved. Once calibrated, the model can explain 40% of the fluctuations in the unemployment-employment transition and all of the reverse transition. In addition, 80& of changes in unemployment and 30% of those in vacancies can be accounted just by productivity shocks.
Firms and workers are ex-ante identical here. They are all in the same sector. Once even more complexity can be added to the model, it looks very promising what could be achieved in terms of understanding fluctuation of employment and, eventually, what policies could impact it.
After Robert Shimer showed some serious doubts about some of the critical business cycle properties of the matching function models, considerable effort has been made to either salvage the matching function models by augmenting or modifying them in some ways, or to come up with more micro-founded ways to understand the matching process.
One such avenue is the directed search model, where job seekers purposely decide to apply to certain positions on the basis of some signal (say, a posted wage). Guido Menzio and Shouyong Shi just wrote a paper that should be a trend setter for this class of models. The particular appeal here is that they are able to find a solution for a search model with aggregate fluctuation that is easy to compute, quite a feat for any model with heterogeneity across agents.
It is incredible how much such modeling has progressed in recent years. In this model, firms endogenously choose whether to open vacancies and how much to offer for each. Workers, unemployed or employed, decide where to apply and how much to ask. Each match has idiosyncratic productivity. In equilibrium, unemployed workers are less discriminating as to where they apply, as they want to make sure they are the only ones applying. Employment matches are also dissolved endogenously.
Aggregate fluctuations are triggered by the standard productivity shocks. For example, a positive shock lets firms open more vacancies with different terms, and workers look for better terms and better application success rates. In addition, fewer matches are dissolved. Once calibrated, the model can explain 40% of the fluctuations in the unemployment-employment transition and all of the reverse transition. In addition, 80& of changes in unemployment and 30% of those in vacancies can be accounted just by productivity shocks.
Firms and workers are ex-ante identical here. They are all in the same sector. Once even more complexity can be added to the model, it looks very promising what could be achieved in terms of understanding fluctuation of employment and, eventually, what policies could impact it.
Monday, August 25, 2008
Advice for first year graduate students
About now, most graduate Economics programs are starting. Time for me to give some advice on how to survive this first year.
The first year is going to be a grueling experience. Never before were you so challenged. You may have flown through your classes before, you may have been the first in class. Not anymore. Within a year, you are supposed to be literate in economic research, within a second year ready to contribute to the frontier of research. This is a very short time that will require substantial commitment. Be prepared to spend long hours studying. Do not fall behind. Work with fellow students, not against them. Look beyond the technical aspects of your classes and build up your economic intuition. Attend seminars. Seek contact with faculty beyond the classroom. Do not worry about thesis topics during the first year, but keep an eye open.
The most difficult time is probably going to be in December, where you will be doubting why you are getting into such a stressful adventure. Everyone goes through such a depression, and it is only those who manage to work past this episode who will be successful. So be aware that you will have doubts. Grow over them.
If you are married or in a relationship, it will suffer. Foreign partners get bored of neglect and should seek contact with other spouses in such a situation, or look into taking classes of their own. Still set aside some social time, even if it is just with fellow students. Graduate programs are very multicultural, it is great to learn about other cultures (and foods).
But not everything is stress, doom and gloom during the first year. You will learn exciting stuff, meet exciting people and build relationships that will last for a lifetime, both personal and professional. This is an exciting year where you are building the foundations for decades to come. Make the most of it!
The first year is going to be a grueling experience. Never before were you so challenged. You may have flown through your classes before, you may have been the first in class. Not anymore. Within a year, you are supposed to be literate in economic research, within a second year ready to contribute to the frontier of research. This is a very short time that will require substantial commitment. Be prepared to spend long hours studying. Do not fall behind. Work with fellow students, not against them. Look beyond the technical aspects of your classes and build up your economic intuition. Attend seminars. Seek contact with faculty beyond the classroom. Do not worry about thesis topics during the first year, but keep an eye open.
The most difficult time is probably going to be in December, where you will be doubting why you are getting into such a stressful adventure. Everyone goes through such a depression, and it is only those who manage to work past this episode who will be successful. So be aware that you will have doubts. Grow over them.
If you are married or in a relationship, it will suffer. Foreign partners get bored of neglect and should seek contact with other spouses in such a situation, or look into taking classes of their own. Still set aside some social time, even if it is just with fellow students. Graduate programs are very multicultural, it is great to learn about other cultures (and foods).
But not everything is stress, doom and gloom during the first year. You will learn exciting stuff, meet exciting people and build relationships that will last for a lifetime, both personal and professional. This is an exciting year where you are building the foundations for decades to come. Make the most of it!
Friday, August 22, 2008
The rise of Europe, the standstill of Asia
One of the big challenges of Economic history is to explain why, a thousand years ago, Asia, and in particular China, suddenly stagnated and why in the following centuries Europe started growing, leading eventually to the Industrial Revolution before any other continent. Of particular interest here is that even when you abstract from the leaders of the Industrial Revolution and look at, say, Bulgaria, Norway and Portugal, they have done much better than the rest of the world. Why?
Some of the standard answers have been that this is due to 1) cultural aspects, but within the time line we are talking about here, this is endogenous; 2) chance events (steam engine, proximity of coal), but European countries away from such events also grew faster than Asian ones; 3) resource grab from America, but would Asia really have benefited from such manna?
Cem Karayalçin argues that this divergence in growth is due to the political competition in Europe. States were fragmented and small, and people could escape there policies by migrating. This was impossible in Asia once the Ottoman, Chinese and Mughal empires were created. The latter essentially had monopoly power over fiscal matters, and thus could exploit their trapped population without further harm to the rulers. Contrast this with Europe, where sovereigns had to be careful not to tax too much, to provide services for the taxes and even had to dole out incentives to attract farmers.
A particularly important aspect of this competitive environment in Europe was that sovereigns were careful to give sufficient guarantees for ownership, that is, not expropriate at will. This made the accumulation of capital favorable. The same cannot be said for Asian empires, where for example the 122 top ranking nobles received 1/8 of the national product of India at the time of Akbar. Bequests were typically confiscated. In the Ottoman empire, wealthy traders would be stripped of their assets if not killed. It is difficult to muster any aggregate savings necessary for capital accumulation in such a hostile environment.
Karayalçin's paper has two parts: one theoretical that demonstrates his points, the other historical where he justifies the assumptions underlying his results, for example evidence on mobility in Europe since medieval times, the lack thereof in the Asian empires, and the differences in taxation burdens. This paper makes Economic history exciting.
Some of the standard answers have been that this is due to 1) cultural aspects, but within the time line we are talking about here, this is endogenous; 2) chance events (steam engine, proximity of coal), but European countries away from such events also grew faster than Asian ones; 3) resource grab from America, but would Asia really have benefited from such manna?
Cem Karayalçin argues that this divergence in growth is due to the political competition in Europe. States were fragmented and small, and people could escape there policies by migrating. This was impossible in Asia once the Ottoman, Chinese and Mughal empires were created. The latter essentially had monopoly power over fiscal matters, and thus could exploit their trapped population without further harm to the rulers. Contrast this with Europe, where sovereigns had to be careful not to tax too much, to provide services for the taxes and even had to dole out incentives to attract farmers.
A particularly important aspect of this competitive environment in Europe was that sovereigns were careful to give sufficient guarantees for ownership, that is, not expropriate at will. This made the accumulation of capital favorable. The same cannot be said for Asian empires, where for example the 122 top ranking nobles received 1/8 of the national product of India at the time of Akbar. Bequests were typically confiscated. In the Ottoman empire, wealthy traders would be stripped of their assets if not killed. It is difficult to muster any aggregate savings necessary for capital accumulation in such a hostile environment.
Karayalçin's paper has two parts: one theoretical that demonstrates his points, the other historical where he justifies the assumptions underlying his results, for example evidence on mobility in Europe since medieval times, the lack thereof in the Asian empires, and the differences in taxation burdens. This paper makes Economic history exciting.
Thursday, August 21, 2008
What is an MBA worth?
US Economics undergraduate majors typically take four directions: straight to a job, to Law School, to Economics graduate studies or to an MBA (usually after a few years on the job). Law schools have proliferated and produced a glut of students which is clearly leading to starting wages that do not justify the cost of studies. Is it then worth taking on an MBA as an alternative?
Peter Arcidiacono, Jane Cooley and Andrew Hussey tackle this question with data from the GMAT, the standard test used to select MBA candidates. What is particularly interesting in this data is that it contains students that did not pursue the MBA, as well as what potential students were earning at the time they were taking the test and after studies.
So what is an MBA worth? A raw regression with few controls gives a return of 9.4% for men and 10.4% for women. Add controls for ability, returns drop to 6.3% and 6.7%. Or use fixed effects, and returns are only 4.8% and 3.8%. These numbers are truly not impressive given cost and supposed prestige of those programs. Which begs the question: are all MBA programs equally valuable?
For a school ranked outside the top 25, a full-time or part-time MBA program is essentially useless, in particular after controlling for ability. Executive programs have a return in the order of 11%. Going to a program ranked 11-25 increases returns by 27% (men) and 14% (women). Go to a top 10 school, and you can add another 6% or 28%.
Remember where the data comes from: people who took the GMAT and some decided not to go for an MBA. Is it because they realized they where not getting into a top school, so they skipped the MBA entirely, thereby making essentially the same return as those going to a lower ranked school? I call this an indifference point between going to school or not. So at the margin, going to a school outside the top 25 or not is equivalent.
What I conclude from this? Most MBA programs are not worth the time. Only the top programs give significant returns. This implies also that the top programs will continue to attract students without bounds. Harvard now graduates about 900 MBAs a year...
Peter Arcidiacono, Jane Cooley and Andrew Hussey tackle this question with data from the GMAT, the standard test used to select MBA candidates. What is particularly interesting in this data is that it contains students that did not pursue the MBA, as well as what potential students were earning at the time they were taking the test and after studies.
So what is an MBA worth? A raw regression with few controls gives a return of 9.4% for men and 10.4% for women. Add controls for ability, returns drop to 6.3% and 6.7%. Or use fixed effects, and returns are only 4.8% and 3.8%. These numbers are truly not impressive given cost and supposed prestige of those programs. Which begs the question: are all MBA programs equally valuable?
For a school ranked outside the top 25, a full-time or part-time MBA program is essentially useless, in particular after controlling for ability. Executive programs have a return in the order of 11%. Going to a program ranked 11-25 increases returns by 27% (men) and 14% (women). Go to a top 10 school, and you can add another 6% or 28%.
Remember where the data comes from: people who took the GMAT and some decided not to go for an MBA. Is it because they realized they where not getting into a top school, so they skipped the MBA entirely, thereby making essentially the same return as those going to a lower ranked school? I call this an indifference point between going to school or not. So at the margin, going to a school outside the top 25 or not is equivalent.
What I conclude from this? Most MBA programs are not worth the time. Only the top programs give significant returns. This implies also that the top programs will continue to attract students without bounds. Harvard now graduates about 900 MBAs a year...
Wednesday, August 20, 2008
Regulating private money
With the emergence of electronic money and prepaid cards, the debate about private money has reemerged. Stephen Williamson has long been and advocate of private issuance of money, even the complete privatization of this central bank activity. But he also acknowledges that there can be a lemons problem, as the quality of issued notes may vary. Think for example of gift certificates which may lose their value when the issuing store goes bankrupt or, more often, when they have an expiration date. This may call for some regulation.
Among proposed regulations is the requirement that private money be exchanged at par with "official" money. Clearly, if private money is perfectly credible, this would be an equilibrium outcome anyway. But if there are some doubts about private money issuers, their money should be redeemed at a discount in equilibrium. Imposing parity could clearly constrain the economy away from some optimum. This is the argument of David Mills in the lead article of the latest International Economic Review.
I like very much the money search approach, which is arguably still very crude, but has the immense merit to give true micro-foundations for money, instead of money-in-the-utility, ad hoc nominal rigidities or assumed Phillips curves. It allows to explicit the impact of institutions or policy on agents' behaviors. Search theory can also make statements about welfare.
In this case, the modeling allows to explicit the differences between a regime where market participants are free to determine the price of private money and free to accept it or not. It highlights how much stronger the gambles of accepting private money becomes when its price is fixed and the monitoring of private money issuers are imperfectly monitored. The essential issue is that with parity, price cannot function as signals anymore.
Among proposed regulations is the requirement that private money be exchanged at par with "official" money. Clearly, if private money is perfectly credible, this would be an equilibrium outcome anyway. But if there are some doubts about private money issuers, their money should be redeemed at a discount in equilibrium. Imposing parity could clearly constrain the economy away from some optimum. This is the argument of David Mills in the lead article of the latest International Economic Review.
I like very much the money search approach, which is arguably still very crude, but has the immense merit to give true micro-foundations for money, instead of money-in-the-utility, ad hoc nominal rigidities or assumed Phillips curves. It allows to explicit the impact of institutions or policy on agents' behaviors. Search theory can also make statements about welfare.
In this case, the modeling allows to explicit the differences between a regime where market participants are free to determine the price of private money and free to accept it or not. It highlights how much stronger the gambles of accepting private money becomes when its price is fixed and the monitoring of private money issuers are imperfectly monitored. The essential issue is that with parity, price cannot function as signals anymore.
Tuesday, August 19, 2008
Economics Academics Blog
A new blog portal, Econ Academics, has been unveiled. It features blogs that discuss research in Economics, as opposed to current events or each other. I am happy not only to see mine featured, but also to discover a few other like-minded ones. And they are good. Check them out.
Monday, August 18, 2008
How can housing bubbles happen?
Bubbles are something thought to be irrational, like a feeding frenzy not linked to any fundamentals, but rather self-fulfilling expectations. Given that bubbles are essentially expectation based, it has been very difficult to prove their existence in the data. The reason is that they depend, by definition, on intangibles. But there are times where the guts just tell you that a bubble must have been there, and many feel so about housing in Anglo-Saxon countries in recent years. The question one can ask then is, how can such bublles happen?
Óscar Arce and David López-Salido make an interesting attempt at rationalizing housing bubbles. They build a model that features several equilibria, some bubbleless and under some conditions some with bubbles. They define a bubble as "the price of an asset that exceed the present discounted value of the dividends", in particular when households hold assets that do not earn any dividend. For this to happen, the interest rate needs to be equal to the growth rate (zero in the model), and the bubble represents the excess of savings, typically held by middle-aged households. Why? Because they have a collateral constraint on mortgages.
What does this mean? First, a policy of low interest rates encourages bubbles. That is something we knew. Second, high collaterals encourage bubbles. That seems a bit odd given the recent US experience, where there is a widely held belief that the lack of collateral constraints led to a surge in housing prices. I think this has to do with the definition of a bubble: it is not the price of the asset, it is the portion that is above what can be justified by fundamentals. With the decrease in collaterals, the bubble portion may have decreased, while the fondamental portion may have increased more.
As said, bubbles are very difficult to measure. This paper seems to make it even more difficult.
Óscar Arce and David López-Salido make an interesting attempt at rationalizing housing bubbles. They build a model that features several equilibria, some bubbleless and under some conditions some with bubbles. They define a bubble as "the price of an asset that exceed the present discounted value of the dividends", in particular when households hold assets that do not earn any dividend. For this to happen, the interest rate needs to be equal to the growth rate (zero in the model), and the bubble represents the excess of savings, typically held by middle-aged households. Why? Because they have a collateral constraint on mortgages.
What does this mean? First, a policy of low interest rates encourages bubbles. That is something we knew. Second, high collaterals encourage bubbles. That seems a bit odd given the recent US experience, where there is a widely held belief that the lack of collateral constraints led to a surge in housing prices. I think this has to do with the definition of a bubble: it is not the price of the asset, it is the portion that is above what can be justified by fundamentals. With the decrease in collaterals, the bubble portion may have decreased, while the fondamental portion may have increased more.
As said, bubbles are very difficult to measure. This paper seems to make it even more difficult.
Friday, August 15, 2008
Voting over redistribution? Americans are not greedy
US politics are fascinating in some ways, for example because they pose many challenges to economic logic. Political economy, especially when applied to the United States, relies a lot on the concept of the median voter, self-interest and the fact that voters act rationally, that is, they understand what they are voting on.
Take one important dimension of electoral platforms: federalism and equalization payments across states. There is no explicit system that would redistribute fund across state in the US like there is in Canada or some European countries. However, there is implicit redistribution through various programs and through taxation. For example, if NASA gets more funding, Florida, Texas and California are going to benefit the most. If the food stamp program gets cut, Mississippi will suffer more than Massachusetts. And if the marginal income tax rate is increased for high incomes, Connecticut will suffer more than Arkansas.
The Republican party is typically associated with the right wing, which advocates little redistribution. The Democratic party is pushing for more redistribution, at least compared to the the Republican party. All this would imply that states that would gain the most from redistribution should vote for the Democratic party, right? Right?
Well, look at this data from the Tax Foundation, which describes for each dollar in federal taxes, how many dollars are spent by the federal government in that state. The states that gain the most from this type of redistribution are those that tend to vote Republican. And the bottom is a nice collection of typically Democratic states.
What does this mean? Voters do not understand what they are voting for? Republican congressmen are better at pork spending? Democrats are genuinely generous? Equalization payments are irrelevant and the observed correlation is spurious?
Take one important dimension of electoral platforms: federalism and equalization payments across states. There is no explicit system that would redistribute fund across state in the US like there is in Canada or some European countries. However, there is implicit redistribution through various programs and through taxation. For example, if NASA gets more funding, Florida, Texas and California are going to benefit the most. If the food stamp program gets cut, Mississippi will suffer more than Massachusetts. And if the marginal income tax rate is increased for high incomes, Connecticut will suffer more than Arkansas.
The Republican party is typically associated with the right wing, which advocates little redistribution. The Democratic party is pushing for more redistribution, at least compared to the the Republican party. All this would imply that states that would gain the most from redistribution should vote for the Democratic party, right? Right?
Well, look at this data from the Tax Foundation, which describes for each dollar in federal taxes, how many dollars are spent by the federal government in that state. The states that gain the most from this type of redistribution are those that tend to vote Republican. And the bottom is a nice collection of typically Democratic states.
What does this mean? Voters do not understand what they are voting for? Republican congressmen are better at pork spending? Democrats are genuinely generous? Equalization payments are irrelevant and the observed correlation is spurious?
Thursday, August 14, 2008
Should Economists be certified?
The Wall Street Journal had yesterday an op-ed on the fact that a college degree often does not constitute proof of competency. As I have argued before, many students have no business being in college, but the latter graduate them anyway. This waters down the quality signal of a college degree. The response to this situation by various trades has been to certify themselves the competences of prospective tradespeople. Examples are the bar exam, CPA, CFA, actuarial exams, etc. Should the same apply to Economics?
In most US colleges, an Economics major has only two years of study in that field, hardly worth claiming to be an economist. To make matters worse, many Economics programs feed on the rejects fom business schools, who typically failed out because of low grades in basic Mathematics and Statistics. Hardly the best clientele for an Economics degree. While Economics programs typically dismiss more students than most other programs, they still graduate many that do not have required competences.
A test like the GRE subject test would have been a good start, but this has been cancelled in 2001. The American Economic Association has been thinking about devising some criteria to be voluntarily applied to college curricula, but I think something much more drastic would be needed.
In most US colleges, an Economics major has only two years of study in that field, hardly worth claiming to be an economist. To make matters worse, many Economics programs feed on the rejects fom business schools, who typically failed out because of low grades in basic Mathematics and Statistics. Hardly the best clientele for an Economics degree. While Economics programs typically dismiss more students than most other programs, they still graduate many that do not have required competences.
A test like the GRE subject test would have been a good start, but this has been cancelled in 2001. The American Economic Association has been thinking about devising some criteria to be voluntarily applied to college curricula, but I think something much more drastic would be needed.
Wednesday, August 13, 2008
Sillyness of visa regulations
A US Economics department hired an non-US citizen. It needs to provide evidence that it did a search which was proper in order to obtain a visa for the new faculty: no discrimination against Americans, open position properly advertised, no undercutting of wages, and the best available was hired. These are procedures that are common to every country. It is in the details that the hassle starts.
Remember when Jobs Openings for Economists (JOE), published by the American Economic Association, was a print publication? You could then just put an issue in the documentation to send to state and federal authorities to prove that you did a proper search. Now that JOE is online only, you cannot do that. And a printout from the web page is not legal documentation. So how can you provide documentation that fits the criteria, that is, is in a printed outlet? Put an ad in the Chronicle of Higher Education, which nobody reads. If you did not think of this little trick, you are in trouble.
And that is silly.
Remember when Jobs Openings for Economists (JOE), published by the American Economic Association, was a print publication? You could then just put an issue in the documentation to send to state and federal authorities to prove that you did a proper search. Now that JOE is online only, you cannot do that. And a printout from the web page is not legal documentation. So how can you provide documentation that fits the criteria, that is, is in a printed outlet? Put an ad in the Chronicle of Higher Education, which nobody reads. If you did not think of this little trick, you are in trouble.
And that is silly.
Tuesday, August 12, 2008
Optimal portfolios for retirement
You are building up assets for retirement. What is the best portfolio to do this? This question has been studied before, but has neglected flexible labor supply. Indeed, if for some reason your retirement did not work out as expected, you should still have the option to work (again/more). Gomes, Kotlikoff and Viceira takes this idea to a calibrated life cycle model and come to the following conclusions.
First, no surprise, young people should start accumulating for retirement right away. But the accumulation of assets stops before retirement. Why? As wages decline typically after age 55, it is better to increase leisure and start drawing on assets.
Second, young people should invest fully in stocks and take advantage of the higher return in the long run. In the early thirties, they can start investing in bond, at an increasing share all the way to retirement. But the stock share always stays above 45%.
Third, once retired, draw first on the bonds, so that the stock share increases. Why would one want to increase the risk of the portfolio as one ages? It is not that risky, as there is fixed income from social security.
And what did flexible labor supply add to this? One needs to accumulate less assets for retirement, the self-insurance aspect being lessened. Also, it is possible to have a more risky portfolio and thus reap the benefits from the long-term equity premium over bonds. Finally, the modeling indicates that one should retire gradually. The only sudden shift in behavior is due to social security payments kicking in at 65.
First, no surprise, young people should start accumulating for retirement right away. But the accumulation of assets stops before retirement. Why? As wages decline typically after age 55, it is better to increase leisure and start drawing on assets.
Second, young people should invest fully in stocks and take advantage of the higher return in the long run. In the early thirties, they can start investing in bond, at an increasing share all the way to retirement. But the stock share always stays above 45%.
Third, once retired, draw first on the bonds, so that the stock share increases. Why would one want to increase the risk of the portfolio as one ages? It is not that risky, as there is fixed income from social security.
And what did flexible labor supply add to this? One needs to accumulate less assets for retirement, the self-insurance aspect being lessened. Also, it is possible to have a more risky portfolio and thus reap the benefits from the long-term equity premium over bonds. Finally, the modeling indicates that one should retire gradually. The only sudden shift in behavior is due to social security payments kicking in at 65.
Monday, August 11, 2008
Why three medals at the Olympics?
It is interesting to follow Olympics in various countries. While everywhere there is focus on domestic athletes, big countries, say the US, only consider gold medals to be worth mentioning, while in small ones, say Denmark, even Olympic diplomas (ranks 4-8) make major news. This brings up the question: why reward more than the winner?
Pavlo Blavatskyy demonstrates that giving a single prize elicits a lot of effort from a few athletes. Giving several prizes reduces the effort of those few, but this may increase the overall effort as more athletes participate.
Given, as I suggested above, only gold medals are worthwhile in big countries, I wonder whether we can see more effort from the top athletes from big countries, while we see more effort from small country citizens among diploma-worthy athletes. An empirical test of this would be difficult, though. Indeed, a prediction of this theory would to find proportionally more athletes from small countries in ranks 2-8. But larger country athletes could simply be missing from because a fellow citizen won.
Pavlo Blavatskyy demonstrates that giving a single prize elicits a lot of effort from a few athletes. Giving several prizes reduces the effort of those few, but this may increase the overall effort as more athletes participate.
Given, as I suggested above, only gold medals are worthwhile in big countries, I wonder whether we can see more effort from the top athletes from big countries, while we see more effort from small country citizens among diploma-worthy athletes. An empirical test of this would be difficult, though. Indeed, a prediction of this theory would to find proportionally more athletes from small countries in ranks 2-8. But larger country athletes could simply be missing from because a fellow citizen won.
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