On the negative correlation between effort and pay

It would seem natural that in a system where pay is linked to performance, better performers are rewarded more handsomely. Yet, there are plenty of examples where this does not work. If it is difficult to find a metric of performance, then the selected metric may give wrong incentives. The classic example is programmers paid by the number of code lines written, which leads to bloated and confusing code. Another one is with many civil servant jobs where the output is not related to a marketed good. The issue can be so bad that a negative correlation between performance and pay emergences.

Ola Kvaløy and Trond Olsen show that this could happen in another way that is not related to monetary and non-monetary rewards, yet has an impact on intrinsic motivation: weak enforcement probability. Suppose the latter is variable. Then high monetary rewards may be associated with a low probability that the scheme will actually be used. Workers may then just slack off. The above hypothesis is not completely insane, as one can imagine situations where there is moral hazard on the side of the worker, and the work contract tries provide the worker both with incentives and with some insurance. It works also without worker risk aversion if there is limited liability.

Spouses and unemployment duration

When unemployed, some people search more intensely for a new job than others. That will of course depend on their personal circumstances. The urgency of getting some income is obviously more pressing when there is little alternative income, and one such alternative is the spouse.

Stefania Marcassa studies French couples where one spouse works and the other is unemployed. It turns out unemployed men search longer for a job if their spouse earns less, while it is reversed for unemployed women. That turns out to be consistent, in a standard labor search model, with a breadwinner stigma for men. French men do not seems to be able to bear the thought of having a successful wife while being unemployed, while women see no hurry to work if their husband is doing well. Clearly, the sexist ones here are the men.

Is obesity an information problem?

As mentioned yesterday, childhood obesity is a problem that can be reduced by giving more opportunities to be outside and away from the television. But one may also try to combat the problem with information campaigns. One way is to publish dietary information in restaurants, something that even benefits the restaurants, as I reported earlier. But most food is not consumed in restaurants, especially for poor households who also are most likely to be obese. But do such information campaigns really work?

Andres Silva, Marian Garcia and Alastair Bailey show that when news about childhood obesity hit the media in the UK, households change their food habits for the better, and without having an impact of expenses. It is thus possible for the poor to do something about the obesity risk without financial consequences.

The fact that information matters is corroborated in a study by Linda Thunström, Jonas Nordström, Jason Shogren and Mariah Ehmke that shows that people use strategic self-ignorance to make choice they know has bad future implication. Specifically they did an experiment where people could choose meals and obtain without cost calorie information. Most subject chose to remain ignorant and then took in more calories than the enlightened ones.

The fight against obesity: more city parks, please

Obesity rates are increasing pretty much everywhere, but nowhere is the obesity problem as massive as in the United States. And nowhere else is television viewing such a cultural focus. With ever increasing viewing times, now about 4 hours a day, one has to wonder what drives Americans to spend so much time in front of the TV with a beer and greasy finger food. Maybe it is the lack of alternatives. Indeed, walk around almost any US city and you will find very few people outside, in a large part because there is nothing to do outside: few parks, no pedestrian areas, no river fronts, etc.

Maoyong Fan and Yanhong Jin show that this does indeed matter for obesity, in particular childhood obesity, which is the most difficult to reverse. One needs to differentiate by various characteristics, though. Parks work particularly well for girls in unsafe neighborhoods, but not as well for white adolescents with high incomes. Now switch that TV off and go outside.

Children in out-of-home care and adult criminality

It always saddens me when children are born into bad families. In extreme cases, society's responses is to put them into foster care or into institutions, in the hope that they will have a better shot at good adult outcomes. While there are some prominent counter-examples, the norm is that they still face significant hurdles. One measure of this is how frequently they end up being convicted of a crime.

Matthew Lindquist and Torsten Santavirta look at Sweden and children sent to foster or residential care. The latter seems seems to increase the likelihood of criminality in later years, as does placing boys in foster care after 13. Girls seems largely unaffected by this, except for residential care. Of course, this could all be selection bias, as the worst cases cannot be put in foster care. But in this study, much of the case record is knwon to the econometrician, in particular whether placement is due to child or parent behavior.

Are consulting and research substitues or complements?

Think tanks have a horrible reputation everywhere by in the media. The reputation is because they are often very biased and sell out to their funders. The media is because think tank staff are willing to provide the expected sound bites to journalists, no matter what the topic. All this would be OK if think tanks were good at conducting independent research. It turns out the most prominent ones, do not do much of it on the hot topics they talk about, according to Dan Farber, who finds that they do not publish much of relevance (and this is not even considering peer reviewed research).

Interestingly, the picture is very different with respect to consulting. Looking at academics across all fields from five Spanish niversities, Pablo D'Este, Francesco Rentocchini, Liney Manjarrés-Henrìquez and Rosa Grimaldi find that getting grant money is positively associated with getting consulting contracts. In other words, good researchers also get consulting gigs. And in some fields, consulting is where the financial rewards of research really lie, especially in social sciences where grants are usually relatively small.

Game theory with pipelines

It seems every winter brings a new situation where Russia is holding up one of its neighbors, or one of them another one, over the delivery of natural gas. The pipeline transfer of natural gas through various countries seems to be the perfect example of a problem that has been haunting human history since trade began: local fiefdoms extracting tolls on transiting merchandise. The case of natural gas is a very pure example, because it is rather difficult to find an alternate route, given the gigantic fix cost of laying the pipeline.

Yet, there is talk of constructing some new pipelines to circumvent the hold-up problem. The question is what the new route should be. Technical considerations are here secondary, capacity and supply as well, all that matters is how bargaining power is impacted. Franz Hubert and Onur Cobanli use cooperative game theory and Shapley values of coalitions to analyze three proposed pipelines. The best seems to be North Stream, which runs thorugh the Baltic Sea from Russia to Germany, bypassing all the troublemakers. South Stream, which goes through Bulgaria and then the Balkans or Greece and Italy, is of little strategic value, as too many players are involved. And Nabucco, which taps fields in the Middle East and runs through Turkey and Bulgaria is of substantial value, but the rents accrues mostly to Turkey.

On the secularization of America

How committed to religion are people? This is rather difficult to establish as surveys can be biased by social pressure. For example, it is nowadays perfectly acceptable to be an atheist in Europe, but an atheist would be a social outcast in many parts of the United States. Hence, many stay in the closet in the US and are not visible, for example by still attending church because of social pressure or because it is the only social activity in their area.

As so often, actions are more revealing than opinions. Fernando Lozano uses an indirect indicators of religiosity that is based of economic choices: working hours on religious holidays over the last 30 years in the US. A few interesting trends emerge: Jewish holidays have become more observed, while Christian ones have become more observed if they have been secularized (like St. Patrick) and less if not (Good Friday). This is consistent with the renewal of Judaism and the commercialization of Christian holidays.

Optimism and debt overload

Throughout the last crisis, there has been much talk about excessive borrowing by individuals (and countries), and how this seems to follow some irrational behavior. We have to understand here that irrationality is a very strong concept, in the sense that people would knowingly take decisions that are against their best interest. I am not saying this does not happen, but ignorance and wrong beliefs can lead to behavior that looks irrational but is in fact perfectly rational.

Ari Hyytinen and Hanna Putkuri explore some data from Finland and find that those who borrow excessively do so because they are much more optimistic about future outcomes. Believing that future incomes will be high seems a perfectly rational justification for borrowing, especially when the lender seems to share this assessment. What is more worrisome though is that those overly optimistic households have more difficulties revising their expectations when faced with evidence. Maybe they hate it to be proven wrong (who does not?). Maybe it is Finnish bankruptcy law that encourages them to go for broke once a point of no return is reached. The latter would be perfectly rational again.

About agricultural policies in developing economies

Policy advice and intervention in the poorest developing economies are all about agricultural policy. How to increase crop yields, how to select crops, how to empower various players, how to get them onto markets. The results, overall, have been dismal: the poorest countries have grown less than the world average, thus they are getting even poorer in relative terms. The reaction to this? Thinking even harder about agricultural policy and intervention.

A recent example is a paper by Erik Jonasson, Mateusz Filipski, Jonathan Brooks and Edward Taylor that builds an elaborate model that tries to understand why some farmers do not participate in markets, which should help in specialization and reaping gains from it. They then evaluate the impact of various policies, and find some could lead to improvements in welfare, but nothing dramatic.

Yet, the most important change that should be contemplated is completely absent from this paper: getting subsistence farmers away from agriculture altogether. Obviously, they are not living in areas that are good for farming, so why to reinforce their dependence on the wrong trade. Countries with excess of labor supply should rather industrialize and import if necessary food. This is where the gains from specialization (and trade) are.

Using unemployment insurance to compensate for losses from opening trade

It is quite obvious that the gains from trade are positive, but implementing a free trade agreement obviously also implies some losses, in particular for workers whose skills were locked into the industry that just opened up. The implementation of some free trade agreements includes some compensation for such workers, but it is not much used if available. Why? And why would we need such compensation schemes at all?

Indeed, Marco de Pinto points out that unemployment insurance fulfills this role remarkably well. Those who benefit the most from the free trade agreement, and work, contribute to it, while those who lost, and are unemployed, receive insurance benefits. And if the unemployment insurance is not actuarially fair, that is OK, as it corresponds to a side-payment to the losers (no pun intended). But of course, the necessary taxation is distorting to the point of destroying the gains from trade. In such a context, it appears to be better to finance the unemployment insurance with a wage tax, as it neutral on all markets, in particular because under unionized labor markets, after tax wages are unchanged in aggregate. A profit tax is worse, but better than a payroll tax because it does not reduce labor demand for low-skilled workers as much.

Why LIFO beats FIFO

When I write a blog post, it is usually about the last paper I read. I draw from a pile that goes by the LIFO principle, "last in, first out." That guarantees that my "stories" are super-fresh, but when there is nothing I go down the pile. I could use the FIFO principle, "first in, first out," which would give each paper a fair chance to be featured, but then I may end up with papers that are always older, instead of just occasionally (there are several dozen papers on the pile). Well, it turns out my principle is in fact better than FIFO (well not exactly, my case is different, but anyway).

Trine Tornøe Platz and Lars Peter Østerdal model a situation where people queue for service (say, boarding an airplane), where there is a bottleneck but it is open at all times. Agents then decide to queue depending on the way they are served. Suppose the cost of waiting is linear in time, people like to be served early, and everyone can be served. Then it is better to implement LIFO than FIFO. Indeed under FIFO, there is no reason for people to wait, they all come at the earliest possible time and have to wait the longest possible period. Under LIFO, there is less of an incentive to come early, indeed the first ones are not served first if anybody arrives right after. Waiting time is then reduced and everybody is better off, in expected terms.

Can electoral districting be optimal?

Drawing electoral district borders is difficult to think of as an optimal outcome in the mechanism design of elections. It has all the ingredients that lead to manipulation by the incumbent majority, leading to suboptimal persistence of power. On the surface of it, it would much simpler and less strategic to just have everyone elect as many people as there are openings within a jurisdiction (say, a US state for federal elections), which has the advantage of giving smaller parties a fighting chance, and forget about districts and especially that ludicrous gerrymandering.

Yet, Emanuele Bracco think one can optimize the districting process. The key aspect here is that the parties platform is endogenous, that is, they are responsive to the electorate's wishes, as all the parties care about is getting elected. Parties tries to match the preferences of the median district- While this seems to be a rather romanticized view of elections in some countries, an interesting result is that if the electorate is risk averse, the majority party actually suffers from redistricting, while it would have benefited under exogenous platforms. So there is some hope that the US electoral system is not beyond repair. I still wish there would be a few viable small parties, though.

Cobwebs on the law professor market

Law professors were among the first in universities, and Economics emerged in many places from Law Schools. This make the study of laws an old and established profession, but this is not why I am mentioning cobwebs here. I am rather referring to the cobweb model, where price and quantity bounce around along the path of a spiral to reach an equilibrium.

According to Christoph Engel and Hanjo Hamann, this is what is happening on the market for Law professors in Germany. Say there are a lot of open positions in the German university system. This pikes the interest of law students, who after their doctorates require to go through a "habilitation" process that takes 6-9 years before they can apply for a professor position. And lo and behold, about eight years later, there is a surplus of candidates, which discourages younger students to choose this career, and we enter the other part of the cycle. Engel and Hamann show that this is not just theory, but applies remarkably well to the data, as it has before to cattle, whose biology leads to a similar market (ROsen, Murphy and Scheinkman 1994).

Recycling tourism

In areas where waste collection is paid by the one creating the waste, it is obvious that people are going to try to shop for the best option. In some cases, that option is illegal waste dumping, which leads to the unfortunate creation of trash police forces. But except for this the latter unfortunate turn of events, there is nothing wrong with price competition for trash.

Except when these prices are subsidized by municipalities, and they then complain that people from other municipalities use their services. Simon De Jaeger and Johan Eyckmans look at such trash and recycling tourism in Flanders, where this is believed to be a major issue facilitated by the fact that pricing methods vary widely from facility to facility. They build a choice model of where households would bring their trash given prices and estimate it with spatial econometric techniques. The average price in neighboring municipalities is used to capture waste tourism, but I think the lowest price, not the average one, should be used. Maybe this is why De Jaeger and Eyckmans find no evidence for tourism except for bulky household trash.