How politicians lie

We all know politicians lie, no surprise here. What we do not quite know is how and why they lie. Indeed, they generally do not tell outright lies. They exaggerate or add some "extra spice" to their statements. How badly they lie likely depends on the political context.

Alessandro Bucciol and Luca Zarri, from a country long lead by a professional liar, decide to focus on politicians from the United States. They use data from PolitiFact.com about 7000 claims by 1000 national politicians from 2007 to 2012. They determine that Republications lie more than Democrats, which should not surprise given the influence of the Tea Party on Republicans. I am thus not sure this ranking will last once the Republican Party gets back to its roots. More interesting are variations across party lines. Politicians lie less in battleground states (when the stakes, or scrutiny, are higher), in more educated states, and in the South. And health-related issues are the subject of the most lies.

I am not quite sure how to generalize these results. As mentioned, the current context for the Republican Party is out of the ordinary. Also, health care has been a central issue on the national political agenda over these years. All this can change, and it may be different in other countries. But it is interesting to see that definite patterns are emerging. If we can rationalize them, maybe we can then think about policies that would minimize lying. And hope for politicians to adopt them. A good resolution for the new year.

Is there a small-state effect?

In countries where some parliament chamber allocates the same number of seats to each member state regardless of its population, small states are deemed to enjoy a disproportionately strong influence. One paper that analyzes whether this small-state effect is empirically significant is by Gary Hoover and Paul Pecorino which shows that US states with higher per capita representation also get more federal funding. Does this mean that the open question is now closed? Of course not, as the scientific process would tell us to revisit this to test whether it holds more generally, whether the effect disappears with time, or whether it is robust to different specifications.

Stratford Douglas and Robert Reed (link corrected) address the latter question. They run a robustness exercise that is unfortunately too rare in Economics. They confirm the results of Hoover and Pecorino, but find that when you switch from ordinary least squares to cluster robust standard errors and include population growth that small-state effect vanishes. So we are not done with this question.

We should have more replication studies in Economies. It saddens me that Douglas and Reed felt the need to add the following footnote on the front page: "we wish to express our special appreciation to Gary Hoover and Paul Pecorino for their willingness to allow their study to be subject to critical analysis. Openness and integrity such as theirs is the basis by which science advances." This should be obvious.

Soviet general equilibrium theory

When we think about a social planner that maximizes welfare by assigning optimal allocations without an explicit price system, we are really describing a Soviet economy. History has shown that this utopia does not quite work out for a variety of reasons. Yet, Soviet economies were following this doctrine and their governments must have acted on some principles that must have come from somewhere: what should one allocate where, how should allocations change according to changes in exogenous factors, etc. Russia actually has a rich history of economic theoreticians who have worked out models to guide the policy makers, who liked to think themselves as technocrats. These theoreticians were mostly mathematicians working on various optimization techniques.

Ivan Boldyrev and Olessia Kirtchik describe the life of Victor Polterovich, who expanded Walrasian theory to non-market economies in the 1970s and was the only active Soviet economist with visibility in the West during that period: he has an Econometrica in 1983 and another one in 1993, and a few articles in the Journal of Mathematical Economics in between (see his page on IDEAS) and is a fellow of the Econometric Society. While Polterovich started as many others his academic career of Marxist planning theories, his move to general equilibrium theory may seem puzzling. Indeed, the welfare theorems have often been touted as a victory for the market economy, and Polterovich would certainly have been ill-advised to promote a market economy.

The paper is largely based on interviews of Polterovich that reveal interesting anecdotes, such as the unique history of his first Econometrica and how some of his most important results never got translated. The other Soviet economists did not go through the trouble of integrating with the international research community, and I am sure their are still interesting results that are ignored by the wider general equilibrium theory community. Polterovich came to general equilibrium theory by realizing that one needs at least as many instruments as objectives to manage optimally an economy. That did not seem feasible to him, hence his interest in decentralization. In his early models, agents interact, possibly forming coalitions. Keep in mind that to Soviets, agents were not individuals but political entities or firms. Later, price constructs are introduced, and they are helpful in understanding coordination among agents.

And on to the seventh year

Yes, this is the seventh year of blogging. Will I enter a a prolonged slump like some faculty do after obtaining tenure? Am I due for a sabbatical? Unfortunately, both may happen. As announced last Summer, my new responsibilities make it difficult for me to maintain the pace I have had in previous years. And it has shown in the last six months: I have missed days, I have been wrong on at least one occasion, and my posts have become shorter. Yet, I am more and more impressed by the following this blog is receiving and I hope the same will hold to Economic Logic, Too, where I invite others to post comments about papers they read.

Traditionally, I have reviewed the most popular posts of the year. For reasons I do not quite understand, this year's lists only contains posts from this year. So here they are:

1. Top Economics graduate programs are not as good as you think
   
2. Teen sex: are females dropping scruples due to the lack of men?
   
3. Are economists really uneasy about studying inequality?
   
4. The fundamental equation of economics
   
5. Is money a factor of production?
   
6. Five universal laws of economics
   
7. Forecasting the weather using the market
   
8. Test statistics and the publication game
   
9. How econophysics describes the income distribution
   
10. Overconfident NBA players are lead to their financial demise
    
11. Lack of transparency at the American Economic Association
    
12. Can IKEA replace the BigMac or the Ipod?
    
13. Procrastination is a strong predictor of academic performance
    
14. The price of diamonds
    
15. Flying in Europe and North America, puzzling differences
    
16. Which academic field contributes the most to economic growth
    
17. The obscure economics of vampires
    
18. homo socialis
    
19. The experimental macroeconomics of monetary policy
    
20. AEA elections are on, you know for whom to vote
    
21. Why are prices sticky?
    
22. What kind of jobs are academic scholars looking for?
    
23. Large GDP shocks are permanent
    
24. Reconciling macro and micro estimates of the Fischer labor supply elasticity
    
25. Some people go to classical concerts to cough
    
26. The AEA executive is still not representative
    
27. New responsibilities
    
28. Leaning against publication bias: about the experiments that do not work out
    
29. Why Keynes dominates Hayek
    
30. The brain drain from financial liberalization
    

Family wealth persistence over several centuries

Social mobility has been much studied to understand how the poor have a shot at becoming rich and how the rich manage to preserve their status. Such studies are usually limited to mobility during a lifetime for a single individual or for a family from one generation to the next. Going beyond this time frame is virtually impossible, because there is no panel dataset for wealth or income that spans over several generations. One can, however, discover some interesting proxies that allow to create such a dataset.

This is what Gregory Clark and Neil Cummins do in a pair of papers that exploit the fact that people with rare surnames are highly likely to be from the same family. Using national birth and death registries for England and Wales as well as probate registries that recorded wealth at death, they gather records for 21,618 people over about 150 years in the first paper. The second paper focuses on educational status instead of wealth over eight centuries and uses registries of students at Cambridge and Oxford universities as well as censuses for the rest of the population. In both cases, intergenerational correlations are estimated to be much higher than in studies with shorter samples. It can take 20 to 30 generations for an initial status to disappear. This may be indicative that social mobility has increased in recent generations in England and Wales (my interpretation, although Clark and Cummins argue that intergenerational persistence is stable over centuries despite stark changes in inheritance taxation) or that families have an underlying social status that changes much more slowly than characteristics that are easier to observe (the authors' interpretation).

PS: If you are looking at the papers, do not be surprised to see the same abstract on both. Very negligent LSE staff posted similar cover pages on both papers.

About faculty participation in university administration

A major difference between American and other universities is the professionalization of their administration. Typically, they are managed by former faculty who have specialized in higher education administration, and what is become more and more frequent, by administrators who have never been academics. While the result are universities that put in my opinion excessive emphasis on non-academic endeavors like athletics, students living and other student entertainment, there is little doubt that the academics are also in better shape than elsewhere. When faculty are in charge, I suppose there is too much rent seeking. It would be good, though, to have this formalized in some way for better analysis.

Kathleen Carroll, Lisa Dickson and Jane Ruseski build a model of university administration where the extend of faculty involvement may vary exogenously. The model is rather trivial and does not deliver unexpected results, the more faculty participate, the more academic affairs get priority, and this is social optimal if there are externalities from academics to non-academics. What would have really made the paper interesting is to put the model to the data and actually provide some quantification of effects. How much does faculty participation matter? What is the size of cross-effects between academics and non-academics? How big should the administration be? Too bad this paper was only about trivial theory.

When job search frictions are good

Generally, frictions in markets are viewed as something to avoid, except in rare cases like when they prevent excessive and damaging volatility. For labor markets in particular, frictions lead to unnecessary delays in matchings, misallocations of talent and higher unemployment. It would be difficult to find an advocate for frictions on the labor markets, unlike for some financial markets.

Well, there are in fact some advocates, such as Andriy Zapechelnyuk and Ro'i Zultan. Their point is that frictions on the labor market are costly for those unemployed, thus the employed will exert extra effort to avoid becoming unemployed. The same applies to employers who dread the cost of an unfilled vacancy and avoid firing workers. While this could leads to misallocations not being dissolved, Zapechelnyuk and Zultan claim that it is possible to find some level of search frictions that is optimal for welfare as long as there is a sufficient level of moral hazard in job search. This means also that higher unemployment benefits could lead to lower productivity for those working as they feel less hard-pressed to perform to avoid losing their job. But keep in mind that these unemployment benefits also allow the unemployed to wait for a better match, so it is really difficult to sort all these effects out without some quantitative exercise, which this paper is unfortunately lacking.

How to model China

Many people are thinking about the Chinese economy, and all too often they apply for this the tools they are used to, for example models with competitive markets. That does not quite apply to China, despite its recent liberalization, as vast sectors of the economy are still under government control. The fact that China is different is quite apparent in the fact that it is the only economy (that I know of) where the share of labor income in national income is less than half. One needs some serious market distortion to get to such an abnormal outcome.

David Dollar and Benjamin Jones do the right thing and make the effort to model the Chinese economy like it should be done: capital controls, 5-year plans trying to maximize output, controlled internal migration with wage discrimination, state ownership of all land. With this, Dollar and Jones are able to replicate the labor income share, as well as the high investment and savings rates. They find also that if one where to relax China's special features, the economy would first deviate even more from standard characteristics. This is a model people should take very seriously for future modeling of China.

Early uses of accounting: to help in firm management or to pursue an agenda?

You may think that accounting practices are straightforward and have been in place for a long time. Actually, good practices are actually fairly recent, especially in terms of making them useful diagnostic tools for firm management. But with sophistication comes also the temptation to become creative and use accounting for purposes that are borderline legal, such as escaping taxation, or outright fraud. For this, you would need to be a sophisticated accountant, and one would think that one would not find such sophistication a century ago, let alone during the British Industrial Revolution.

Steven Toms and Alice Shepherd show that in the second case there were surprising sophistication, with creative accounting being used by industrialists to counter the "Ten-Hour" movement that sought to limit work hours. Specifically, they show how the the numbers from a cotton manufacturer were used in the policy debate and how his creative accounting made it appear as though he was facing excruciatingly high fix costs and thus low profits. Where he got creative is with the treatment of capital accumulation, thereby proving that the accusation of making most of his supposedly high profits during the last hour of the shifts was not true.

Why americanize your name?

Why do immigrants americanize their name? Evidently, they feel that this will help them integrate into the host society and bring them some advantages. It is well documented that the more integrated an immigrant is, or the more alike to a native she is, the more likely she is to find better jobs, earn higher wages, and feel better.

Costanza Biavaschi, Corrado Giulietti and Zahra Siddique analyze immigrants to the United States from the 1930's and find there can be a mighty pay-off. Those who chose the most common American name got up to 14% higher pay. And I like how they determined linguistic complexity of the names by using Scrabble points from the American version of the game.

To discount or not to discount?

In Economics, it is standard practice to discount future periods and generations. This is done throughout economics fields, even in the valuation of future benefits from nature, despite objections from biologists. Besides, we would not know how to solve our intertemporal models without discounting, unless one assumes a finite number of generations.

But this was not always so. As Pedro Garcia Duarte points out, Cambridge (UK) in the 1930s was lobbying against discounting. Surprisingly, Frank Ramsey (of the Ramsey model) was part of this faction, following his mentor Pigou. Their reasoning is purely ethical: future generations should be valued the same as the current one. But Ramsey pioneered an intertemporal model with infinite horizon, how did he solve it, you might say. Here is the trick. He assumed there is a finite maximum utility and a finite maximum production, called bliss, and minimized the deviation from it. A cheap trick, as this is essentially looking at infinity minus infinity. Garcia Duarte also explains the first intertemporal models and how discounting was either ignored or not viewed as a technical necessity. It is only in the mid-thirties that arguments about risk and impatience start appearing, and in the 1960s that work on the neo-classical growth model established discounting as an essential ingredient of any intertemporal theory.

Meta-analysis of the elasticity of intertemporal substitution

The elasticity of intertemporal substitution is one of the most estimated parameters in Economics. Why is it estimated over and over again? Because some results are positive, some are negative and some are zero. To have a clearer idea of what its true value is, we have to keep estimating it. However, the econometricians also need to get their results published, and the publishing tournament has not only an impact on which results get published but also on which ones the econometricians submit for publication.

Tomáš Havránek performs a meta-analysis of estimates of the elasticity of intertemporal substitution. That is, he gathers 169 studies and looks at their 2735 estimates. He finds significant under-reporting of results close to zero or negative, because of this publication bias. While the published mean is 0.5, the true mean should somewhere at 0.3 to 0.4. Negative results make little sense, but they can happen with some draw of the data. If editors and referees systematically discard such results, and positive ones, no matter how large they are, get a pass, we have a bias. But given the distribution of published ones, and knowing this bias, one can infer the full distribution of estimates, and hence Havránek's new estimates.

Mechanism design in attorney fees

When it comes to extracting money from clients, you cannot deny that attorneys have learned their Economics. You cannot say the same about the rest of the legal profession, though. So what makes attorneys so smart? Look at how they evaluate which cases to take. It is not about justice for the plaintiff, it is all about what will give them the highest expected return. And the fee schedule can change dramatically according to circumstances.

Take the paper by Winand Emons and Claude Fluet. They observe that defense attorneys use fixed fee contracts while those representing plaintiffs use contingent contracts with a smallish fixed fee. The latter are offered because it provides incentives to pursue strong cases only, they say. Defense attorneys fight all cases, while plaintiff ones can select, and they do it in a way that makes it worth their time. In addition the latter have privileged information: they can figure out the expected winnings, while the plaintiffs are in the dark. The attorneys thus adjust the schedule accordingly. With all this, I wonder whether there is a way to regulate the fees, say by allowing only particular fee structures, that would maximize the well-being of plaintiffs or some combination of plaintiffs, defense and attorneys, not attorneys only.

Why did the panic of 2008 spread abroad?

Why did the Great Recession spread outside the United States? In particular, why did almost all Western industrial countries enter a deep and pronounced recession together? The failure of Lehman Brothers sent ripples throughout international financial markets, plus European banks were heavily involved in the US subprime mortgage market. Yet, financial and goods markets are not perfectly integrated and this should not have lead to such perfectly coordinated business cycles.

Philippe Bacchetta and Eric van Wincoop show that you do not need complete market integration to get there, only partial. All you need is that market integration be sufficiently high. In addition, tight credit, very low interest rates and inactive fiscal policy "help" tremendously with creating a panic, and we certainly were in such a situation at the time. And this panic is what makes it different from "normal" recessions, where synchronization is not perfect. The model hinges on the fact that there are possibly multiple equilibria and a global panic is the optimal coordination on a bad one. Crucial to the model are a couple of rather strange assumptions, though: prices are preset while wages are fully flexible, I would have thought wages to be less flexible than prices; and there are two periods in the model, meaning that the panic state must be permanent. As a consequence, am not quite sure what to make of this paper.

Introducing "Economic Logic, Too"

I have been pondering for a while what to do with my blog, Economic Logic. My job responsibilities have made it difficult for me to attend to it as much as I would like. Sometimes I would have to skip days, sometimes I have not had time to read as much as I wanted (or I should as I got it wrong in one case). And I certainly have less time to write things up. Somebody suggested I should invite guest bloggers to help out. I am now ready to do this, but on a different blog, Economic Logic, Too.

Why keep them separate? EL got a reputation, and I would hate to ruin it. I have no idea how well this initiative will turn out with guest bloggers. I guess am too risk averse for allowing guest posters to alter EL. I hope they prove me wrong.

Here is how you can contribute to EL2 (this may be amended if need be):

1. I will accept discussions of interesting research and interesting discussions of research. That means it can also be rejected.
   
2. I may make a few small editorial corrections to the text.
   
3. There needs to be a link to an IDEAS page.
   
4. The research needs to be recent and in working paper form. This means it needs to be in Open Access (NBER and CEPR are OK) and unpublished.
   
5. You cannot discuss your own research. This is not voxEU.
   
6. You need to submit your text under your real name. It can be published anonymously, though.
   
7. Send me an email with your write-up, mention if you want it under a pseudonym or your real name.
   
8. I let you know about my decision as soon as I can.
   

Help make this a lively and interesting blog.