On the advantage of marriage over cohabitation

Why marry when cohabitation can provide the same benefits of economies of scale and companionship? One may even think that cohabitation is superior because it allows a break up with less consequences. That is exactly wrong. The fact that divorce is costly makes that one is more careful in committing to marriage and, once married, one puts more effort into the marriage. The key here is that marriage is a commitment device that gives strong incentives to make a marriage work.

Murat Iyigun shows that this logic gives marriage a large surplus than cohabitation through spousal commitment, as long as men and women are available in roughly equal numbers and commitment costs are symmetric across genders. Otherwise, marriage surpluses collapse and cohabitation dominates.

The fact is that commitment costs are not equal, mostly because of children and traditional roles in the household and the labor market. In fact, the countries where women are the most equal to men (say, Scandinavia) are those where cohabitation is the most prevalent. That evidence goes exactly counter to the predictions of the Iyigun model. Unfortunately, the paper provides absolutely no empirical support for its results. In fact, it is not even motivated by any empirical fact that would need to be explained. What is it then good for?

Entry on the labor market and social beliefs: the impact of recessions

Do the economic conditions in which you grew up have an impact on beliefs and opinions about the economy? We all have notice how our grand-parents, having lived through the restrictions of the Great Depression or the Second World War, lived in a more thrifty way than us, never throwing away something. But could this experience also have an impact of beliefs about markets and social issues?

Paola Giuliano and Antonio Spilimbergo use the General Social Survey and exploit regional and chronological differences in economic conditions where respondents grew up to look at this question. They find that growing up in a recession makes you believe more that personal success is due to luck rather than effort, you support redistribution more but without believing government is there to help you. While should not be too surprising, how persistent such beliefs are is astonishing.

Now imagine that the current recession last longer than usual (some say there could be a double-dip) and this could plant the seeds of a profound change in the US. This country is the most capitalistic and the least relying on government at the moment. But attitudes could change over the next generation and indeed bring major reforms like public health care, more redistribution and more regulation of business as those in their formative years now experience (relative) hardship.

Sweatshop equilibrium

Westerners complain about sweatshops in Asia for two reasons: they produce at much lower labor costs, thus undercutting the Western labor force; and the labor conditions are inhumane due to long hours and poor environment. One answer to these critics is that without those sweatshops, the local labor force would not have jobs and that eventually conditions and wages will improve, as it has happened during the Industrial Revolution in the West.

Nancy Chau does not seem to share this vision as she shows sweatshop conditions could be permanent due to an unfortunate outcome in a multiple equilibrium. Think of the search and matching framework used nowadays to study the labor market. People need time to explore and find new jobs. But this time is not available in a sweatshop. In other words, on-the-job search is impossible and workers end up in a situation akin to slavery. The way out? Enforce shorter hours, even if this means temporarily reducing the workers welfare. The latter may oppose it, but it is only because they do not know what their outside options are.

The scenario I describe above is only one of several possible ones, but it is somehow reminiscent of European labor history. But Chau shows that there are also equilibria where an economy can grow out of sweatshop conditions without intervention. The big question is then: in which equilibrium are Asian sweatshops currently?

Is hyperbolic discounting rational?

In dynamic economic models, future periods are typically discounted geometrically, i.e., at a constant rate. There is, however, mounted evidence from experiments that people discount hyperbolically: there is much discounting the first period, and then it is geometric again. This evidence has been put forward as an argument against the rationality of individuals.

Doyne Farmer and John Geanakoplos argue that hyperbolic discounting is observationally equivalent to geometric discounting with uncertainty about future discount rates. While this may rescue rationality, one has to ask oneself whether this makes any empirical sense. And for that there is little support at the moment.

Predicting oil prices from interest in electric cars

You have heard or read the public opinion theories that the oil companies are acting like monopolies (i.e., they conspire) to manipulate gas prices. While I have yet to see hard evidence that they collude, I find it troubling that little production capacity has been added despite higher prices. But that could be due to environment regulation, as is credibly claimed.

Jose Azar adds a troubling observation to the debate. He finds that whenever interest in electric cars increases, oil prices happen to decline. And not just a little, half of oil price changes can be explained by the frequency of Google searches about electric cars. But that can also show that markets really work: when there is interest in substitute goods, prices decline.

Child labor and trade liberalization

There are two simple prerequisites to get of child labor: high returns to education and sufficient parental income. The difficulty is to satisfy these conditions. Would the trade liberalization that comes with globalization help?

Krisztina Kis-Katos and Robert Sparrow study child labor outcomes in Indonesia as a consequence of heterogeneous decreases in tariffs. As the latter have different impacts on difference districts, and they measure child labor in those districts, they can identify the impact of trade liberalization on child labor. It turns out the advantages of globalization play through and help reduce child labor. The dynamics are tricky, though, as there may be a short term burst in child labor after a tariff decrease. One can imagine that a sudden increase in labor demand tempts children to work, but as parent income increases and future income prospects improve, children go back to school for good.

This is one more reason people should stop blaming child labor on globalization. While the latter is a new phenomenon, child labor was always present. And if you want poor countries to benefit from world wealth, the barriers should be reduced.

The punishment of unemployment insurance cheaters

A worker on unemployment insurance is supposed to actively look for a job and accept suitable job offers. If caught cheating, one is subject to penalties, going from forfeiting future eligibility to repaying received benefits and more. But there could be indirect consequences as well.

Gerard van den Berg and Johan Vikström use Swedish data to study the impact of cheating on the future labor market history of a cheater. It looks like a stigma is at work, as future jobs are likely to be paying less and even in a lower occupational level. The latter is quite important, as it implies a human capital loss that has consequences throughout the remaining working life.

The analysis is based on comparing he jobs before and after the unemployment spells. Van den Berg and Vikstr&oum;l also observe the job several years later to see whether there is any persistence, and there is. I am, however, not sure on how to interpret the results. One could view them as the consequence of a stigma, that the worker is not reputable and only worse jobs get offered to him. But it could also be that he scrambles to accept the first offer after being sanctioned, either because of the reduction in benefits or as a natural reaction after being caught with the hand in the cookie jar. The first interpretation means that the sanction leads to a societal welfare improvement: there is a clear signal about the quality of the worker. The contrary applies to the second interpretation, as it seems a mis-allocation of talent is at work. It would be important to sort that out.

Family environment and IQ

There has been a long discussion in the literature on whether intelligence is inherited or acquired, the nature versus nurture debate. The traditional empirical strategy has been to look at twins separated at birth and raised in different families. While this seems to be a perfect data set for this kind of study, it suffers from at least two drawbacks: samples are very small, and there could be a selection bias, as twins given for adoption may not be representative of twins, and furthermore, twins may not be representative of the general population.

Anders Björklund, karin Hederos Eriksson and Markus Jäntti focus on the correlation of IQ across siblings as it compares with father-to-son IQ correlation. For Sweden they find that they are 0.473 respectively 0.347 from a data set of military conscripts (all male). As siblings share genes and environment, whereas father and son only share genes, they argue that this is evidence that the environment is important. An environment that may include the mother and her genes, by the way.

These results look interesting, but I do not quite know where to go from there. Does this mean that we have less to worry about the intergenerational persistence of skills? Or that the high correlation of earnings within a family is OK and not a sign of mis-allocated opportunities in society?

How to select presidential candidates based on their biography

Every party would like to find a way to find the perfect candidate to run for office. In some way, this is the goal of primaries in the United States. But in most states, this only determines the preferred candidate among sympathizers, but the most electable in the general population may be different. Any other criteria we could use?

Scott Armstrong and Andreas Graefe looked at detailed biographies of US presidential candidates and claim to have found the formula that works 25 times out of 28. You can start now looking for the perfect candidate: coming from a political family, first-born, single-child, lost a parent in childhood, is still married with children, some adopted, went to a military academy, then received a graduate degree from an Ivy League school, is a member of Phi Beta Kappa, held political office (the more the better) and was never defeated in an election, has written books, was a movie or sports celebrity, has military experience, survived a major disease, is tall and heavy, has common first and last names, is attractive and looks competent, comes from a large state and is affiliated with a large region. All in all, the paper mentions 34 criteria. My score is 15, so I am afraid politics is not for me.

The unpredictable ones? Truman, Carter and Clinton (first term).

Cattle as self-insurance in modern economies

We have all used this example in class: in economies with no credit markets or serious banking, people may use cattle as a means of storage of value and to self-insure against future eventualities. But could such a thing happen in a modern economy with well-functioning financial markets?

Anne Borge Johannesen and Anders Skonhoft study Saami reindeer herding in northern Norway. The idea is to look at reactions to price fluctuations. For example, if meat prices increases and herders slaughter only few animals, it means that they keep them for other reasons than simply revenue: self-insurance or status. But one has to be careful. Price increases that are perceived to be permanent should lead in fewer slaughters in the short term, as herders beef up their animals. One needs to looks at temporary price changes.

Borge Johannesen and Skonhoft come to the conclusion that the price response is indeed weak for Saami herders. They also find that herd size is relevant for status, but that it does not appear to matter for slaughter decisions. Thus, there is a strong self-insurance component.

About estate subsidies and capital income taxation

There is an endless debate about estate taxation, especially in the United States. One side wants to repeal it because it discourages entrepreneurship, the other side wants to expand it, for fairness' sake. Here comes a paper that claims that both sides are wrong. Estates should be subsidized.

Carlos Garriga and Fernando Sánchez-Losada are the ones making this surprising claim. The logic is the following. Imagine that there are three potential sources of taxation: estates, capital income and labor income. You want to optimize the tax mix in order to minimize the distortions from raising taxes and maximize equity as measured by the distribution of wealth across agents. Factor also in that there is some cross-generational altruism and that one cannot bequest more than one has. One also has to realize that bequest have an important positive externality that the donor only partially takes into account: its effect on the recipient. Logically, the donor needs to be encouraged, hence the estate subsidy. But this needs to be financed somehow, hence the capital income tax. It is usually found that capital income should not be taxed, but here the pressure to raise taxes is too strong. In fact, capital income tax is significantly higher than labor income tax.

All this is done with a model that gets reasonably close to mimicking the existing distribution of skill, income and wealth in the population. Garriga and Sánchez-Losada even look into tax progression in their analysis, but qualitative results remain with constant tax rates. What I learned from this is that despite equity concerns, one has to factor in that people leave too little bequests. And that the combination of estate subsidy with capital income taxation essentially alters the intertemporal profile of wealth holding to a more egalitarian one.

Religiosity and risky behavior

Teenagers tend to engage in risky behavior, and many reasons have been identified for this. Still, there are large differences across teenagers, and some literature seems to have identified religiosity as a powerful explanatory variable for less risk taking. But as so often, correlation is not causation. "Nice" kids who follow their parents' advice and behave may also be more likely to follow their parents to church, for example. Perhaps more importantly, individual religiosity may be influence by religious fervor in the social circle beyond the family.

Jennifer Mellor and Beth Freeborn try to disentangle this by using data from the National Longitudinal
Study of Adolescent Health and consider binge drinking, smoking and marijuana use. One may discuss whether the latter is truly risky, but this is not the topic here. Mellor and Freeborn use county-level religious density, a measure that takes into account the proportion of people of a same religious group in the same area, as an instrument to control for the social environment. For religiosity, they use the frequency of church attendance.

Measuring religiosity is tricky business. Density measures depend on the size of the area and how one fragments religious groups (split protestants apart or not, for example). And church attendance may be more a social event than anything else in some areas. I prefer measures like "Do you believe in hell?" to measure this. But let us assume the authors do the right thing (I wished they would supply some robustness exercises).

The results? Marijuana use is robust to taking into account the endogeneity in religiosity. So religious teenager indeed smoke less pot. But smoking cigarettes and binge drinking is a frequent as for less religious teenagers.

Placement officers can lower unemployment

From my casual observation, it appears that in countries where the unemployment rate is rather high, unemployed workers tend to rely more on government run employment offices to find jobs. I do not think there is causation in this correlation though. But this makes it more important to understand whether employment office are good at anything.

Jens Hainmueller, Barbara Hoffmann, Gerhard Krug and Katja Wolf discuss an experiment in Germany where the case load of some employment officers was halved, which would be equivalent to doubling the number of employment officers. Does this help in increasing the placement of the unemployed? The above four claim that yes: the unemployment rate is reduced and so is the number of people registered in employment offices. But these results are obvious, except maybe that they are statistically very significant. What matters more is that they are economically significant.

Is a 0.5%-point reduction in the unemployment rate economically significant? Probably yes. Is it worth the cost? Remember, you double the number of case workers and you increase taxes to pay them. In fact, some of the unemployed may have been hired as case workers. It is much less obvious that the experiment is positive look at it this way.

This is what should have been studied. I am too often frustrated by studied that just look at the statistical significance of an effect, ignoring the economic significance and especially how this fits in the rest of the economy. And this happens too often with labor economics papers. If there is one thing that distinguishes economists from other social scientists is that we tend to think more in a general equilibrium way, and this papers for sure does not do justice to economics.

Optimal deposit insurance

With the current financial crisis, the question of the optimality of bank deposit insurance has flared up again. Figuring out how much deposit insurance should cover is not an obvious exercise. Indeed, one has to think this as a game between bank managers, who want to take advantage of moral hazard through excessive risk taking, bank owners, looking maximize bank value, depositors, who decide whether to run and withdraw funds, and regulators, who want to prevents crises, but also want to liquidate banks that should be liquidated.

Michael Manz develops a nice and rich model that attack the problem from the perspective of global games. This has the advantage of resolving the issue of multiple equilibria in the standard bank run models. Among the many results, several stand out. If the bank risk is exogenous, coverage should not be high as it prevents necessary and efficient runs. Also, liquidity requirements are a good substitute to deposit insurance. Finally, coverage should not increase in the event a financial crisis hits. The reason is that the financial risk increases with the scope of deposit insurance because, if I understand right, while higher coverage protects better deposits in banks of systemic importance, it leads to more moral hazard in others and then increases the likelihood of a run on all banks. The only way out is to discriminate coverage by bank, which is a completely different regulatory game.

Rational procrastination

So you have a deadline to submit a project. Your cost, in terms of utility for example, for working on the project is stochastic with a known distribution. When should you start working on it? The solution to this problem is a stopping rule, which will of course depend on the way you discount future disutility.

Alberto Bisin and Kyle Hyndman look at this with three different types of discounters and come up with interesting solutions. Agents with a standard exponentially discounted utility will choose to work on their project when it is most convenient, which may be before the deadline. Agents with hyperbolic discounting will delay until the last moment. But hyperbolic discounter may not be that naïve. Sophisticated ones realize they have a procrastination problem and will end up completing their project before the deadline.

This last result is important because sophisticated hyperbolic discounters and exponential discounter end up being, potentially, observationally identical. However, looking at me and around me, there are many hyperbolic discounters who are aware of their problem, but still cannot do anything about it except complaining. I am thus not quite convinced of the empirical relevance of this result. Of course, my empirics are anecdotal, but I saw no empirical evidence at all in the paper.