The efficient allocation of slaves in Korea

As the subtitle of this blog indicates, there is economics in everything. Even in activities that are illegal, immoral or banned. Slavery is one such activity, but at some time it was considered legal and moral in many parts of the world. The slavery market is in fact akin to a financial market, as a slave is an investment good that yields dividends in the form of labor, and depending on the country, also in the form of offspring. Now what is the first thing a financial economist would check when he encounters a new market? Verify whether this market is efficient.

This is what Elise Brezis and Heeho Kim do for the slave market in Korea in the 18th and 19th century, the period during which the existence of money and slavery overlapped. They compile data from several markets and deflate nominal prices using the price of rice, a proxy for the general level of prices. Given that slaves were typically farm workers, and thus their yield is probably correlated with the price of rice, this may not be the best choice for a deflator. But there may be no other price data to draw on consistently.

Brezis and Kim then use the arbitrage asset equation and find that the market is efficient most of the time, the exception being towards the end. The authors claim this is because monitoring costs became too high and hiring free workers became more economical. I wonder though whether the looming repeal of slavery may have something to do with this.

Fair labor income tax and human capital accumulation

The big problem with labor income taxation is that it discourages effort. What you would really want to do it tax luck (being born intelligent and rich) and encourage effort no matter your abilities (or even encourage it more if you are abler). There is a tax scheme that does the latter, the so-called ELIE taxes suggested by Serge-Christophe Kolm: taxing people on, say, IQ, is not distorting and brings more equality.

But removing the distortions on the labor supply may not be the only impact of ELIE taxes. There may also be an impact on the accumulation of physical and human capital. David de la Croix and Michel Lubrano build an overlapping generation model with people of heterogeneous skills and show that if markets are complete, ELIE taxes indeed reduce inequalities but reduce growth because less human capital is accumulated. The reason is that the taxes cannot solely be based on exogenous elements, and the endogenous parts is ties to education, which is then discouraged. Now prevent people from borrowing for education, and the growth penalty becomes less severe because the taxes redistribute resources towards those that are borrowing constrained. Of course, one can get education (and growth) back to the desired level by subsidizing education. Thus, tax the intelligent, but make education free, which is mostly used by the intelligent anyway.

Terrorism reduces crime

One could consider terrorism to be the ultimate crime, yet an argument can be made that terrorism is the best thing that could happen to reduce crime. Why? Eric Gould and Guy Stecklov argue that terrorism increases police presence and keeps people at home. They use data from Israel and analyze various types of crime and show that property crimes and assaults, even domestic assaults, are down after a terrorist event. But would this be the same in Europe or even the United States.

The type of terrorism Israel faces is a different threat than the one Western countries face. It is what I would call "petty terrorism", the bomb carried by a single person to areas otherwise of no particular interest. It appears Western Europe and especially the United States faces a more organized terrorism towards high-profile targets. A threat in the latter case would thus draw police away from the neighborhoods to the airports and landmarks, thus leading to higher crime.

Imagine if all those airport security personnel were cruising the bad neighborhoods in the US. Far fewer people would die violently.

Hurricane insurance needs to be government run

Insurance is a difficult business in the presence of moral hazard. While an insurance company can make a profit by exploiting the risk aversion of its policy holders, this profit may be annihilated if moral hazard drives the insured to increase the risk. And if policies cannot discriminate by risk category, then only bad risks can be insured, at a loss. But I do not see where there could be moral hazard in the case of hurricane insurance, as policy holders cannot influence the path of a hurricane. If they fail to strengthen their house, this is something that is easy to inspect and price into a policy. So why did private insurance companies leave the hurricane insurance market in Florida?

Mario Jametti and Thomas von Ungern-Sternberg describe how the state of Florida had to step in and provide coverage to all homeowners at a cost ultimately much lower than what private companies offered. While the state may be able to better diversify over the area of the whole state, it is not like it does not face substantial risk. A hurricane can have severe consequences for a significant part of the state. Private companies can diversify with other geographic areas or coverage types, they can even re-insure, two means that are not available to the state. But the latter can make up any loss with federal help or, gulp, taxes. And it cannot simply declare bankruptcy if it takes a big hit, like a poorly covered insurance company would.

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.