Politicians and leisure

When you think about leisure in the utility function, for most applications you need to take a stand on some properties: is the income effect larger than the substitution effect? Is leisure a normal good in the first place? Convincing empirical evidence is surprisingly difficult to find: read the endless debate between microeconomists and macroeconomists about the size of the wage elasticity. This may be an aggregation issue, but maybe we are lacking a clear natural experiment.

Naci Mocan and Duha Altindag report on an interesting change in the way members are paid in the European parliament. Whereas previously they were compensated at wildly different levels by there home countries, since July 2009 they get money according to a uniform rule: 38.5% of a European judge's salary as a base, plus a per diem when present. Mocan and Altindag then use the difference between and with the previous schemes to highlight that an increase in the base reduces attendance (yes, the income effect! Leisure is normal!) and an increase in the per diem increases attendance (the substitution effect is larger than the income effect). Politicians are rational after all.

Mandatory health insurance and informality

Insurance suffers chronically from the problem that only bad risks want to get insured, which makes the cost of insurance prohibitive and the insurance market often collapses while its presence would be a clear welfare improvement. A workaround is to force everyone to participate, thereby avoiding that good risks could weasle out. This is the principle behind health insurance mandates in most of the Western world, and it is part of the so-called Obamacare. But such mandates are difficult when there is a large informal economy, as it makes difficult tracking people, especially if access to government services, paying taxes, etc. are the way the mandate is enforced. Could in fact a mandate increase informality?

Reyes Aterido, Mary Hallward-Driemeier and Carmen Pagés look at Mexico and ask a somewhat different question, but it is still informative: Does the provision of health insurance to those without social security (mostly informals) increase informality? They find the formal sector decreased by 0.4 to 0.7% points because fewer people join it. It is not surprising that fewer people see the need to be cover by social security and thus declared their jobs, yet I find it interesting that the effect on formality is so low in a country where it is so easy to disappears from the books. Transpose that to, say, the US, where having a job is currently pretty much a requirement for health insurance coverage. Would then a health insurance mandate lower the incentive to have job? Most likely yes, but seeing how small the impact was in Mexico and considering that the lower elasticity of the formal/informal margin in the States, that effect is very likely to be very small.

About a (partial) return to the gold standard

In difficult times, it is easy to blame central banks for everything. Part of their role, after all, is to play the scape goat for policies the politician do not dare implementing. But then, there is only so much the central banks can do, as Europe and the United States no "nicely" show now. A substantial ingredient in the blame game is a call for a return to the gold standard, a nostalgia for supposedly better and easier times.

Olivier Ledoit and Sébastien Lotz echo this call and study what our current understanding is about the coexistence of fiat and commodity money. In principle, we can start from the idea that currency competition is good: this would force the central bank to be more careful with its fiat money. Indeed, we have learned from money search theory that bad money does not necessarily chase good money (the old Gresham's Law). Also, if the commodity has a positive return, its monetization is beneficial as long as its storage and transaction cost is sufficiently low. The question is then on how to find a commodity that has a real return from just sitting there. There is a larger problem, though, with small denominations. How do you mint coins measured in cents when the commodity is, for example, gold? Either the coins need to be very small or they have very small commodity content, to the point that they become ... fiat money. Monetary policy also becomes tricky, as quite obviously temporary easing becomes difficult if it risks driving fiat money out.

But in the end, isn't a commodity like gold only valuable because people believe it is valuable? Gold, to take an extreme and popular case, has little intrinsic value, as I argued before, and is thus just another fiat currency. It is all a question of perception.

Monetary and fiscal policy cooperation in a liquidity trap

We are living interesting times in terms of macroeconomic policy: the world faces big shocks and substantial challenges, and many current circumstances have no historical precedents. This means that policy makers cannot draw from experience and need to invent new policies from somewhere better than their guts. And after a few hesitations, theory is now in much better shape to answer questions from policy makers. For example, what should one do when there is a liquidity trap in a globalized economy, especially if the trap itself is globalized?

David Cook and Michael Devereux show how, and it borders on a political miracle. Not only does one need to get the cooperation of fiscal and monetary authorities (something the US is not close to achieving) but one needs the cooperation across countries even if it entails some costs to the "winners" (something the Chinese have so far refused and the Swiss recently abandoned).

Specifically, Cook and Devereux show that with so many countries currently with negative real interest rates, we have a worldwide liquidity trap. In an open economy, the policy prescription differs from a closed economy. If there is a negative demand shock, fiscal policy needs of course to raise aggregate demand, but with a global economy, this can come from anywhere in the world and thus a coordinated fiscal policy is due. But to channel the impulse to the relevant countries, monetary policy coordination is necessary to raise interest rates in the foreign countries, even if they are in a liquidity trap. And this takes some serious courage. One can always dream.

Should small businesses be encouraged?

Small businesses are thought to be rather inefficient because of fix and because of other issues that hamper the exploitation of increasing returns to scale in their size range. Yet, policies keep popping up that try to protect them. Why? Is it nostalgia, throwing us back to times were "better?" Or do we want to protect (inefficient) employment? Even this may be moot according to a previous post.

Ben Craig, William Jackson, and James Thomson claim that small businesses should be encourage because they have an inherent disadvantage on credit markets: there are information problems, more acute in downturns, that make access to credit more difficult for small businesses. Thus, it is good for a government agency to provide loan guarantees. Still, this does not address why we would want to have small businesses in the first place. If inefficient firms are getting rationed on credit markets, I am fine with that.

On the size of cities

There is an active literature that tries to explain the size distribution of cities. It is based on a strong regularity, that the distribution follows a Zipf law (population rank times population is constant). Models try to explain this fact with rather simple structures and then back out what assumptions are needed to obtain the Zipf law, with little regard whether these assumptions make much sense. This is not how someone usually proceeds. While you indeed want to explain a fact, you use believable assumptions and then draw a theory and check whether it can replicate the fact. Also, you not want to have a model with many degrees of freedom to explain a single fact, you want to check on many aspects from the data.

Marcus Berliant and Hiroki Watanabe share this concern. They point out that the current theories assume that households cannot insure against city-level shocks, which are at the heart of the models. This is important, because insurance and moving can be considered substitutes. If some insurance is available for example through self-insurance, then there is little reason to move, especially given the empirically large costs of doing so, and all that matters are the initial conditions. In order to obtain more sensible results, Berliant and Watanabe assume that city-specific shocks leads to a winner-takes-all outcome: the best city gets to produce everything within a sector. Then insuring is inferior to moving, as the first yields only a partial wage while the latter a full wage. The availability of partial insurance does not change this. In some sense, the presence of insurance does not matter in this model, while it matters in others. But this relies on the extreme risk that is assumed. Have we progressed? I am not sure.

Bruno Frey's academic utopia

Bruno Frey has fallen into disgrace these days as he has been shown to play dangerous games of self-plagiarism, submissions to multiple journals and hypocrisy in describing the perverse incentives facing researchers. I have argued recently that he is living in a bubble that has now popped.

Apparently not. With this wife Margit Osterloh, he just authored a paper about the impact of rankings on academic publishing. Their argument is that the current emphasis on rankings pushes academicians to privilege publication to science. They want to decouple funding, tenure and promotion from any evaluation metric. Rather, scientist should be carefully selected at their initial appointment and then be given guaranteed funding and only be asked to evaluate themselves. This strikes as a very utopian view of academia, and in particular a view that surprisingly ignores the impact of incentives on motivation. While the Frey and Osterloh utopia may yield in a few cases the expected very innovative researchers willing to take substantial risks along new paths, most would free-ride to a large degree. The best example of this is the French system of "research associates" on the national research foundation, who are appointed right after their doctorate for a lifetime position of researcher with no other significant duties. While this system has yielded some success stories, the research impact of these associates is rather dismal compared to researchers elsewhere who are subject to regular evaluations using publication metrics.

Reading through the paper, I could not resist to see the irony in many of the arguments, where Frey could be really writing about himself. A few quotes:

In academia, examples can be found (e.g. the ‘slicing strategy’) whereby scholars divide their research results into a ‘least publishable unit’ by breaking the results into as many papers as possible in order to enlarge their publication list.

Of course, Bruno Frey and his students are big specialists in slicing.

there is evidence showing that academics with the highest score in publication rankings score only modestly in a ranking based on their contributions in editorial boards (Rost and Frey, 2011).

Note that Frey was kicked off an editorial board for resubmitting a published paper elsewhere.

For example, a broad and international selection of reviewing peers is necessary in order to avoid cronyism.

Frey's colleague Ernst Fehr recently anointed one of his students with the most prestigious prize for an European economists. Frey and Osterloh argue that awards cannot be manipulated, while citations metrics can. I do not think this is true, in fact awards are easier to manipulate because they are determined by small committees. Citations come from the whole research community.

Another example is editors who encourage authors to cite their respective journals in order to raise their impact rankings

Frey requires this for acceptance in the journal he co-edits, Kyklos. At least, the paper does not mention self-plagiarism this time.

Is this paper a mea culpa? It certainly does not read that way. As in his previous writings on the publishing game, he comes across as someone about it all, who tell everyone how things should be while claiming the moral high ground. The paper was completed on August 24, 2011, thus well after all the conflagration about the hypocrisy of Bruno Frey, yet it does not show anything about it. Bruno Frey has not learned a thing. And, do you want to bet that he is submitting this to journal, taking away space that young researchers need to get publications for tenure, as he has argued before? In fact this particular paper would fit much as a blog post than into a journal.

Addendum: And they are doubling up with another paper, entitled "Input Control and Random Choice - Improving the Selection Process for Journal Articles" with the following abstract:

The process by which scholarly papers are selected for publication in a journal is faced with serious problems. The referees rarely agree and often are biased. This paper discusses two alternative measures to evaluate scholars. The first alternative suggests input control. The second one proposes that the referees should decide only whether a paper reaches a minimal level of quality. Within the resulting set, each paper should be chosen randomly. This procedure has advantages but also disadvantages. The more weight that is given to input control and random mechanism, the more likely it is that unconventional and innovative articles are published.

You read it right: instead of peer review, they advocate complete tyranny by editors who randomize over a select set or, alternatively, to decide early who is worthy publishing and then let the chosen few do as they wish. Which is how Bruno Frey and his lackeys have been operating. But at least Frey and Osterloh have had the decency to withdraw that last paper (which is why I print the abstract above).

Ethnic heterogeneity and natural disasters

Some countries seems to be very poorly located, as they are in the path of all sorts of natural disasters. But some do better than others in coping with their perilous situation. In particular, death tolls from cataclysms seems to be, in general, of an order of magnitude larger in developing countries. What else could influence such numbers?

Eiji Yamamura, from a rich and homogeneous country that does quite well with earthquakes, tsunamis and typhoons, studies ethnic heterogeneity in two different ways in this regard. The first is ethnic polarization, which describes how close the distribution of ethnic group is from a fifty-fifty one, and ethnic fractionalization, which can be interpreted as the probability that two random people are from the same ethnic group. Once one adds the miracle instrument of cross-country regressions, legal origins, the first indicator has shows that heterogeneity has a positive impact on natural disaster deaths (meaning more of them), while the second has none.

Now Yamamamura takes this as a sign that ethnic polarization is a better indicator of ethnic heterogeneity than ethnic fractionalization. This looks like some seriously flawed reasoning here, which is repeated several times in the papers: the fact that some indicator tests favorably some hypothesis does not necessarily mean that it measures what the hypothesis says. What if in really the hypothesis is false? And in any case, on what theory would this hypothesis be based? I can easily imagine good reasons why homogeneity would lead to fewer deaths, a better social cohesion that leads to better institutions coping with disasters, like in Japan.

How to publish prolifically

I dedicated several posts to Bruno Frey and his chronic self-plagiarism. In retrospect, one should have seen that something was fishy from the mere fact that he was simply publishing too much for it to be normal, 600 articles by his own count. It is not possible for an academic, at least in Economics to be that productive. Yet, there are some who seem to be on a similar path.

Take, for example, Michael McAleer. He is an Australian econometrician who had a very respectable career in the 1980's, publishing in the AER with Adrian Pagan (and a homophone of Paul A. Volcker), four Review of Economic Statistics, a Review of Economic Studies, an Economic Journal and plenty of other decent publications. McAleer get elected into the Academy of Social Science in Australia in 1996. Then the quality of the publications dips, as he must be facing the same loss in productivity so many in the profession suffer in their forties. Still a good stream of publications.

Then suddenly, a burst of historic proportions.

Let us first look at working papers. According to his RePEc page (that is all I could find, a 2004 CV has 32 pages despite having no publications listed): 12 in 2008, 45 in 2010, 39 in 2010, and so far 15 in 2011. And these are according to their titles, at least, distinct papers. How can one do this? First McAleer has many co-authors, but he is no Paul Erdős, as his has a small set of regular collaborators. Second, many of the papers are about the same theme, with small variations: journal impact, with applications to neuroscience, tourism studies, econometrics, and economics in general, including one that I discussed. There is nothing wrong with this, except that entire sections are copy-and-pasted from one paper to the next. His other papers, for example on tourism demand in the Far East, are incredibly thin slices of research.

But these are all working papers, and he is free to write all this as long as he does not pretend this is all original and substantially new work when submitting to journals that have such requirements. McAleer is, however, also publishing avidly, although luckily few of the papers mentioned above get placed, and then only poorly. In terms of publishing, he has found another niche, the Journal of Economic Surveys:

• 2011, issue 2: 1 article
  
• 2011, issue 1: 2 articles
  
• 2010, issue 1: 2 articles
  
• 2009, issue 5: 2 articles
  
• 2007, issue 5: 1 article
  
• 2006, issue 4: 3 articles
  
• 2005, issue 5: 1 article

The journal has 5 issues a year, averaging 7 articles in each issue. That is a remarkable publishing success in a generalist journal. It turns out frequent co-author Les Oxley is the editor, who himself does not hesitate to frequently publish in his own journal. I counted 17 articles of non-editorial nature, several over 60 pages long, as well as 7 reports on conferences he attended.

A good number of those articles are titled "The Ten Commandments of ...", which I find rather pretentious. I was curious about The Ten Commandments for Academics, which could reveal some of the motivations of McAleer. They are:

1. choose intellectual reward over money;
2. seek wisdom over tenure;
3. protect freedom of speech and thought vigorously;
4. defend and respect intellectual quests passionately;
5. embrace the challenge of teaching undergraduate students;
6. acknowledge the enjoyment in supervising graduate students;
7. be generous with office hours;
8. use vacation time wisely;
9. attend excellent conferences at great locations;
10. age gracefully like great wine.

What I find interesting here is what was not considered. I think a better alternative, and one that would condemn much of what McAleer is doing, are due to Wesley Shrum:

1. Thou shalt not work for deadlines;
2. Thou shalt not accept prizes or awards;
3. Honor thy forebears and colleagues regardless of status;
4. Thou shalt not compete for recognition;
5. Thou shalt not concern thyself with money;
6. Thou shalt not seek to influence students but to convey your understandings and be honest about your ignorance;
7. Thou shalt not require class attendance or emphasize testing;
8. Thou shalt not worry about thy own intelligence or aspire to display it;
9. Thou shalt not condemn those with different perspectives;
10. SEEK TO UNDERSTAND THE WORLD.

These are principles about integrity, about changing the world and putting the scientific interest ahead of oneself. McAleer, rather, seems keen on clogging journals and working paper series with useless drivel, showing off and self-plagiarizing. At least for the latter part of his career, I do not see a positive externality from his efforts.

To come back to my initial question, to be prolific: find willing co-authors and editors, slice thinly, copy-and-paste, and do not think too hard what academia is about.

The Internet makes you happy

We have previous established that the Internet, contrarily to conventional wisdom, makes people more social. Does this also mean that people with Internet access are happier? Of course, one should take into account that those without Internet, at least nowadays, are likely to face hardships like low income and education.

Thierry Pénard, Raphaël Suire and Nicolas Poussing do such an analysis for Luxembourg and find indeed that Internet users are happier, especially among those with lower incomes. This is also true when taking into account the intensity of Internet use. This implies that making the Internet accessible to lower socio-economic classes can improve welfare, possibly significantly. Of course, one has to take with a grain of salt studies of happiness based on surveys that ask for subjective self-evaluations. That grain of salt may be bigger when one considers who small Luxembourg is. The approach then becomes similar to the randomized experiments in the development literature where results for a small set of villages are difficult to apply to other contexts. Yet, Luxembourg is surprisingly diverse, so maybe these results are generalizable. Readers, you can now safely that you are now happier from being on the Internet and reading this.

One more perversion of employer-based health insurance

Whenever you see risk, you think insurance. And there are different ways to insure yourself. This may be by buying some contingent claims, often bundled into an insurance policy. Or this may be through self-insurance, whereby you build some assets for eventualities beyond savings needs. Formal insurance and self-insurance sure look like substitutes. For the case of health risk, this means that people with formal insurance should have less assets, other personal characteristics being controlled for. This statement is, however, factually wrong: insured people, ceteribus paribus, have more assets. That is difficult to square with standard theory.

Minchung Hsu makes a good attempts at solving this puzzle. The major assumption here is that health insurance is provided through employment (there is also private health insurance, but it is of minor importance, as in the data because it is crowded out by social programs). This means that the loss of employment bears a larger risk for someone who formally insures: one may lose income and insurance. Then, ironically, more self-insurance is needed than for someone who self-insures, but one has also to keep in mind that a self-insurer typically has lower income and is partially covered by social programs. Thus Hsu performs the same regressions as done in the literature and still finds the fact mentioned above. Interestingly, his regression also rejects the existence of precautionary savings, while it is the central element of the model. So much for the power of this test.

The fall of internal migration

It is costly to move, and those costs vary by culture and economic circumstances. International migration is of course hampered by immigrations laws and cultural barriers. But in most countries, internal migration is free and only restrained by costs and some degree of local attachment. In this respect, Americans are considered to be the most mobile, as they are very willing to drop everything to pursue better opportunities while the housing market is, usually, very fluid. In fact, the perception is that this mobility has even increased in the US and that it has been hampered only in the last few years, due to the current difficulties in selling homes.

Raven Molloy, Christopher Smith and Abigail Wozniak take a close look at the data and dispel some of those perceptions as myths. In fact, US internal migration has been in a steady decline for thirty years, a decline that in apparent whichever way you look at the data: by socioeconomic household characteristics and distance moved. And this has change little with the current crisis, probably because the additional incentive to move (as there is substantial evidence that some structural mismatch, including a geographic mismatch, has increased the unemployment rate recently) has been roughly compensated by the poor saleability of homes. Still, internal migration rates are still higher than almost everywhere else.

Pricing Asian options

Options are securities that are difficult to price. In particular American options, which can be exercised at any time posed a serious challenge that could only be solved in approximation with some Nobel Prize winning work. European options are simpler because they can only be exercised at maturity. Today, I learned there are also Asian options. Asia seem really to catch up in all aspects of economic life. Asian options are American options with the difference that the exercise price is some form of average of the underlying price.

Paolo Foschi, Stefano Pagliarini and Andrea Pascucci provide a way to price Asian options in a first approximation under local volatility, that is the price volatility depend on the current price level, and provide an algorithm for higher order approximations. As you may guess, it is not straightforward. Along the way, I also learned about the Greeks in option pricing. They measure various aspects of the sensitivity of option prices to underlying parameters, and they are usually represented by Greek letters. Now that I have learned that, I'll leave the actual pricing of Asian options to others.

Greening production through information

People in general prefer green products, although they are not always ready to pay a significant markup for a greener product. If they know that a product has been manufactured using green procedures, there will attach more value to it if the claim is credible. Several green labels, supposed to certify such claims, have emerged, but none have much recognition, in fact one sometimes wonders whether some of them are really weak.

Another approach is voluntary disclose of pollution emissions and other environmental disclosures by the industry. This is reviewed by, take a deep breath, Venkatachalam Anbumozhi, Qwanruedee Chotichanathawewong and Thirumalainambi Murugesh with a focus on Asia. They highlight that the final consumer is not necessarily the one targeted by this information. For example, some investment funds, in particular sovereign wealth funds, are under pressure to invest in ethical firms. Or potential employees may avoid polluters, and local planning may benefit form the available information, thus encouraging local investment.

The authors argue that there is little environmental regulation in most of Asian, with makes the price of environmental benefits close to zero. If you want firms to start abating, you need regulation, and then they also be willing to should how well they abate, leading to more abatement. In some larger Asian countries, a few modest disclosure programs have started, and they have shown excellent prospect in increasing environmental compliance.

Economic freedom and prisons

Americans are proud of their freedoms, political or economic ones. Yet, they are very trigger happy when it comes to takes one's freedoms, say by taking voting rights from felons, throwing people into prison or even executing them. How could such an apparent disconnect be explained? Why is the US different from Europe, where there is less economic freedom, but also much less punishment?

Rafael di Tella and Juan Dubra note that this apparent paradox does not only appear across countries, but also over time within the United States. For example, over the 30 years including the "Reagan Revolution" that considerably deregulated the economy, incarceration rates were multiplied by seven. They explain this with a theory that states the following. People view that when there are ample opportunities for legal activities in a system where there are many economic freedoms, people who still commit illegal acts must be "meaner" than the average criminal in a world with fewer economic freedoms. This can be supported with some limited empirics, but this is quite an appealing explanation. Indeed, Americans strongly believe that effort, not luck, is the root of success, and thus offer few excuses to those who become criminals out of necessity, an opinion that interestingly more and more African-Americans share.