Posts
Soon after yesterday's post about the surprising increase in US adult literacy between ages 16-17 and 26-30, I stumble in the latest NEP dispatch on a working paper that seems relevant. Diego Restuccia and Guillaume Vandenbroucke point out that educational attainment as increased constantly from 1940 to 2000 and try to find a reason for it. They conclude that the skill premium in wages is the main motivator for people to get more educated. So far so good.
But they also show that all this is driven by skill-biased technological change. This is where the results do not seem to square with the paper discussed yesterday. If US students catch up late on adult literacy, it is because they are getting general education in college. In Europe, however, college is specialized from the start. If this is an equilibrium outcome, I would have expected technological change to be skilled-biased in Europe and be more general in the US. This is confirmed by the low mobility of the European labor force (and the ensuing high unemployment rate) that has a hard time changing sectors or occupations if necessary, at least compared to the United States.
What am I missing?
Wednesday, October 15, 2008
Tuesday, October 14, 2008
On adult literacy in the United States
Browsing through the latest issue of the Journal of Economic Perspectives, I stumbled on puzzling numbers on education in the article by Elizabeth Cascio, Damon Clark and Nora Gordon: while the United States is severely lagging in literacy for 16-17 year olds among countries with similar income levels, it is in the middle of the pack for ages 26-30. This is based on the International Adult Literacy Survey, which tests how well respondents answer to questions after reading a text.
That the performance of school students in the US is poor should surprise no one. What I find surprising is how well they catch up on the other countries later on. It is true that university graduation rates used to be higher than anywhere else, but this has changed now. Also, I am not convinced that a diploma in the US is worth the same as in other countries. However, the first two years in US colleges are typically spent furthering general education which has already been acquired in high school elsewhere. Can this explain the catching up? At least part of it. But I cannot believe that US college students learn that much to pass the Italian, Swiss or Danish ones.
That the performance of school students in the US is poor should surprise no one. What I find surprising is how well they catch up on the other countries later on. It is true that university graduation rates used to be higher than anywhere else, but this has changed now. Also, I am not convinced that a diploma in the US is worth the same as in other countries. However, the first two years in US colleges are typically spent furthering general education which has already been acquired in high school elsewhere. Can this explain the catching up? At least part of it. But I cannot believe that US college students learn that much to pass the Italian, Swiss or Danish ones.
Monday, October 13, 2008
Candidate attention in 2008
Following up on my earlier post on candidate attention, David Strömberg emails me about an interesting update to his article.
He uses his model to figure out out where presidential candidates should spend most of their time. Again, Florida comes on top, followed by Ohio, Pennsylvania, Michigan, Virginia and Colorado, which are the so-called battleground states. I am somewhat puzzled that California is next on the list: while loaded with electoral votes, it is a near certain Obama state.
Do candidates actually optimize? Obama does very well, with a correlation on 0.9. This is rather surprising given earlier promises to campaign in all states. But it is not surprising that McCain does not optimize well, with a correlation of 0.8. In particular, he spends a lot of time in New York, which he has a 0.3% chance of winning.
He uses his model to figure out out where presidential candidates should spend most of their time. Again, Florida comes on top, followed by Ohio, Pennsylvania, Michigan, Virginia and Colorado, which are the so-called battleground states. I am somewhat puzzled that California is next on the list: while loaded with electoral votes, it is a near certain Obama state.
Do candidates actually optimize? Obama does very well, with a correlation on 0.9. This is rather surprising given earlier promises to campaign in all states. But it is not surprising that McCain does not optimize well, with a correlation of 0.8. In particular, he spends a lot of time in New York, which he has a 0.3% chance of winning.
Friday, October 10, 2008
Why are stocks dropping so fast?
How is it possible that stocks could be dropping this fast all over the world while the current crisis is mostly limited to the US financial sector? Stock prices are supposed to represent the discounted present value of the expectations of future dividends, and possibly the liquidation value of the firms. What in that equation would lead to such price drops?
Lower expectations for dividends? Possibly, as people must by now realize that someone will have to pay for this horrible bailout package, and firms are likely to be the first ones on the hook in an election period. But that would not explain why stocks drop in the rest of the world, and it probably does not explain the amplitude of the drop in the US.
Changes in discounting? With the recent reduction in interest rates by the Federal Reserve Bank, we should in fact see increases in stock prices? So what is left? Irrational panic? While one cannot rule this out, there may be a perfectly rational explanation, and the lead article in the last American Economic Review gives one.
Ana Fostel and John Geanakoplos show how perfectly rational agents can generate something that looks like a panic. The premise is an economy populated with liquidity constrained individuals (no borrowing and short sales) who are heterogeneous in terms of optimism. They show that even a small group of agents heavily invested in a small sector of the economy can lead the economy into a so-called anxious state, where bad news is contagious for assets to which the news is orthogonal.
The crucial aspect is heterogeneity of agents combined with incomplete markets. The key is that some bad news increases volatility, because of the latter this does not necessarily increase the information. The result is more disparity in opinions. Some sell because of increased pessimism, others have to because of the liquidity constraint. It snowballs from there and looks like a panic, but everyone is acting in a rational manner.
Does this pertain to the current situation in the United States? The authors have emerging markets in mind, where indeed markets are much more incomplete than in the US. But the current US situation is one where it is very difficult to borrow and most agents never contemplate short sales, and some of those who do have just been forbidden to do so. And given that the model economy just needs few people in such a situation, I think the model applies.
But the model has good news. We'll get over it.
Lower expectations for dividends? Possibly, as people must by now realize that someone will have to pay for this horrible bailout package, and firms are likely to be the first ones on the hook in an election period. But that would not explain why stocks drop in the rest of the world, and it probably does not explain the amplitude of the drop in the US.
Changes in discounting? With the recent reduction in interest rates by the Federal Reserve Bank, we should in fact see increases in stock prices? So what is left? Irrational panic? While one cannot rule this out, there may be a perfectly rational explanation, and the lead article in the last American Economic Review gives one.
Ana Fostel and John Geanakoplos show how perfectly rational agents can generate something that looks like a panic. The premise is an economy populated with liquidity constrained individuals (no borrowing and short sales) who are heterogeneous in terms of optimism. They show that even a small group of agents heavily invested in a small sector of the economy can lead the economy into a so-called anxious state, where bad news is contagious for assets to which the news is orthogonal.
The crucial aspect is heterogeneity of agents combined with incomplete markets. The key is that some bad news increases volatility, because of the latter this does not necessarily increase the information. The result is more disparity in opinions. Some sell because of increased pessimism, others have to because of the liquidity constraint. It snowballs from there and looks like a panic, but everyone is acting in a rational manner.
Does this pertain to the current situation in the United States? The authors have emerging markets in mind, where indeed markets are much more incomplete than in the US. But the current US situation is one where it is very difficult to borrow and most agents never contemplate short sales, and some of those who do have just been forbidden to do so. And given that the model economy just needs few people in such a situation, I think the model applies.
But the model has good news. We'll get over it.
Thursday, October 9, 2008
US still a leader on the policy front, unfortunately
Now that the US has passed this unfortunate bailout package, other governments around the world are eager to pursue similar policies. This is quite silly, as we seem to create a gigantic moral hazard problem at great cost.
Iceland reached heights in silliness by taking over much of its banking sector. Icelandic banks had been very aggressive on European financial markets, in particular pursuing depositors with high interests rates. This means the banking sector is much larger than the country in that a majority of its customers are abroad. Why would the government then step in to save foreign customers? This is especially questionable as the Icelandic government is now itself in a situation of default as a consequence and is begging for money in Russia, of all places.
The only explanation I can think of for this decision is that Iceland just imitated US policy action without thinking too much. And other European governments are following suit as well, except for Switzerland. The latter is an interesting case, as UBS has been particularly bad hit by the subprime-mortgage situation. But knowing the government would not help, it recapitalized several months ago with funding from Asia, and it seems to be in relatively good shape now. The other big Swiss bank, Credit Suisse, is fundamentally healthy and has announced plans to hire 1000 investment bankers in anticipation of a rush of new customers. So much for preventing moral hazard problems: not intervening leads to a healthier financial sector.
Iceland reached heights in silliness by taking over much of its banking sector. Icelandic banks had been very aggressive on European financial markets, in particular pursuing depositors with high interests rates. This means the banking sector is much larger than the country in that a majority of its customers are abroad. Why would the government then step in to save foreign customers? This is especially questionable as the Icelandic government is now itself in a situation of default as a consequence and is begging for money in Russia, of all places.
The only explanation I can think of for this decision is that Iceland just imitated US policy action without thinking too much. And other European governments are following suit as well, except for Switzerland. The latter is an interesting case, as UBS has been particularly bad hit by the subprime-mortgage situation. But knowing the government would not help, it recapitalized several months ago with funding from Asia, and it seems to be in relatively good shape now. The other big Swiss bank, Credit Suisse, is fundamentally healthy and has announced plans to hire 1000 investment bankers in anticipation of a rush of new customers. So much for preventing moral hazard problems: not intervening leads to a healthier financial sector.
Wednesday, October 8, 2008
What faculty spend their time on
A popular complaint by faculty is that they do not have enough time for research and spend too much time on teaching and administrativa. A common complaint of the general public is that faculty do not spend enough time teaching. While it is difficult to say what the optimal time allocations are, one can study what they currently are.
Albert Link, Christopher Swann and Barry Bozeman do this for science and engineering faculty using a survey a US research universities. The survey has a drawback that it uses recall, asking how much time the surveyed faculty member spent on various tasks over a typical week of the last term. There is plenty of evidence that such questions elicit inaccurate and, especially, biased responses, which is why I will not report on the number of hours.
Rather, I want to discuss on how the time allocation evolves over an academic career. First, the number of hours per week is remarkably stable over a career. The allocation varies significantly, though. Take teaching (including preparation time and student advising), which starts very high for the two first years. Given that new faculty typically have a lower teaching load, it is surprising to see how it still does not compensate for the additional prepping for new classes. Teaching time then steadily declines, presumably because prepping time decreases with experience, but then increases for associate professors who where not promoted to full professors. As they did not make it to higher level in terms of research, they are presumably asked to take more teaching responsibilities. Or they lie about the time spend on prepping. Or they are simply less efficient.
For time devoted to research, again there is a peak in the two first years, then an almost steady decline for those staying on as associate professors. Full professors, however, maintain research time steady from the point of promotion. Grant writing time, important in the sciences and engineering, does not fluctuate much over the career. However, time dedicated to "service" (committees, consulting) increases steadily, without much difference between titles. Other remarkable findings: non-tenured faculty works 2.5 more hours a week, women 1.2 more.
Would these results pertain to Economics faculty? I can only relate to my anecdotal evidence (and that of a few others I called about this). It seems that the research hours actually decline over their career. They get plenty of opportunities in consulting, especially for full professors, or they just stop doing research, especially long-term associate professors. For the latter, I have not noticed any additional time devoted to teaching, so I conclude their total hours must be declining. Readers may correct me if my observations are truly anecdotal.
PS: Thanks to the Geary Behaviour Centre blog for alerting me about this article.
Albert Link, Christopher Swann and Barry Bozeman do this for science and engineering faculty using a survey a US research universities. The survey has a drawback that it uses recall, asking how much time the surveyed faculty member spent on various tasks over a typical week of the last term. There is plenty of evidence that such questions elicit inaccurate and, especially, biased responses, which is why I will not report on the number of hours.
Rather, I want to discuss on how the time allocation evolves over an academic career. First, the number of hours per week is remarkably stable over a career. The allocation varies significantly, though. Take teaching (including preparation time and student advising), which starts very high for the two first years. Given that new faculty typically have a lower teaching load, it is surprising to see how it still does not compensate for the additional prepping for new classes. Teaching time then steadily declines, presumably because prepping time decreases with experience, but then increases for associate professors who where not promoted to full professors. As they did not make it to higher level in terms of research, they are presumably asked to take more teaching responsibilities. Or they lie about the time spend on prepping. Or they are simply less efficient.
For time devoted to research, again there is a peak in the two first years, then an almost steady decline for those staying on as associate professors. Full professors, however, maintain research time steady from the point of promotion. Grant writing time, important in the sciences and engineering, does not fluctuate much over the career. However, time dedicated to "service" (committees, consulting) increases steadily, without much difference between titles. Other remarkable findings: non-tenured faculty works 2.5 more hours a week, women 1.2 more.
Would these results pertain to Economics faculty? I can only relate to my anecdotal evidence (and that of a few others I called about this). It seems that the research hours actually decline over their career. They get plenty of opportunities in consulting, especially for full professors, or they just stop doing research, especially long-term associate professors. For the latter, I have not noticed any additional time devoted to teaching, so I conclude their total hours must be declining. Readers may correct me if my observations are truly anecdotal.
PS: Thanks to the Geary Behaviour Centre blog for alerting me about this article.
Tuesday, October 7, 2008
Why is prostitution so well paid?
The oldest trade usually pays well, even where it is legal. Why so? Prostitution is low-skilled, labor intensive and female, all attributes that are usually associated with low pay. Lena Edlund and Evelyn Korn have proposed that the high pay can be justified by that fact that prostitute give up their fertility. This is based on the taboos that prevent the marriage of prostitutes. But this is theory.
Raj Arunachalam and Manisha Shah provide an empirical test of this theory. They use sex worker data from Ecuador and Mexico. Prostitutes are indeed better paid, especially when young, when they are also more likely to be married. Even worse for the theory, the premium is higher for male sex workers.
The authors hypothesize that the true explanation for the higher pay is risk. Sex workers face much higher risks of catching sexually transmitted diseases. Some proof of this is that sex workers earn less when using a condom, as shown by Paul Gertler, Manisha Shah and Stefano Bertozzi. But in the Ecuador sample studied here, this can only explain a quarter of the 30% premium.
Raj Arunachalam and Manisha Shah provide an empirical test of this theory. They use sex worker data from Ecuador and Mexico. Prostitutes are indeed better paid, especially when young, when they are also more likely to be married. Even worse for the theory, the premium is higher for male sex workers.
The authors hypothesize that the true explanation for the higher pay is risk. Sex workers face much higher risks of catching sexually transmitted diseases. Some proof of this is that sex workers earn less when using a condom, as shown by Paul Gertler, Manisha Shah and Stefano Bertozzi. But in the Ecuador sample studied here, this can only explain a quarter of the 30% premium.
Monday, October 6, 2008
Predicting the Nobel Prize
There are plenty of blogs trying to predict who is going to win the next Nobel Prize. Let's introduce some objectivity in this by using the RePEc rankings. Below, I look at various criteria and the three top papers or economists who have not yet won a prize.
Note that I have not used any criteria that puts more weight on recent citations, as I do not believe the prize committee thinks this way. There are a lot of macroeconomists above, probably a reflection of the fact that it is a wider field and thus people get more cited. But then, they should also get a proportional share of Nobel Prizes. Now, applying rigid rules is never a good way to perform forecasts, so let us through some subjectivity in there.
From the list above, Andrei Shleifer emerges as a favorite. His chances are, however, severely hampered by the Harvard-Russia scandal. That would leave Robert Barro, but I have a hard time imagining him getting the prize alone. With Thomas Sargent? The latter is one of those who have been extremely influential without being cited that much. In the same category are the often mentioned Eugene Fama and Kenneth French, who have the drawback of pioneering work in finance, and awarding the prize during the current financial crisis would reduce the credibility of the prize. This could also discount the chances of Lars Hansen, but his work on empirical asset pricing has had implication way beyond finance. Another personal favorite is Jean Tirole, who should have received it with Jean-Jacques Laffont before the latter died of cancer. Finally, let us not forget Paul Romer, who is fourth for several of the criteria above, including the very first one.
In conclusion: Robert Barro (with Thomas Sargent?), with Fama-French, Jean Tirole, Lars Hansen and Paul Romer as dark horses.
- Most cited articles: Manuel Arellano and Stephen Bond, Greg Mankiw, David Romer and David Weil, Paul Romer.
- Same, with citations weighted by simple impact factors: Lars Hansen, John Taylor, Avinash Dixit.
- Same, with citations weighted by recursive impact factors: Lars Hansen, Rajnish Mehra, Robert Barro.
- Authors, overall ranking: Andrei Shleifer, Robert Barro, Peter C. B. Phillips.
- Authors, most citations: Andrei Shleifer, Robert Barro, Mark Gertler.
- Same, weighted by simple impact factors: Andrei Shleifer, Robert Barro, Mark Gertler.
- Same, weighted by recursive impact factors: Andrei Shleifer, Robert Barro, Lawrence Summers.
- h-index: Andrei Shleifer, Robert Barro, Jean Tirole.
- Wu-index: Andrei Shleifer, Robert Barro, Ben Bernanke.
- Number of citing authors: Robert Barro, Andrei Shleifer, Olivier Blanchard.
Note that I have not used any criteria that puts more weight on recent citations, as I do not believe the prize committee thinks this way. There are a lot of macroeconomists above, probably a reflection of the fact that it is a wider field and thus people get more cited. But then, they should also get a proportional share of Nobel Prizes. Now, applying rigid rules is never a good way to perform forecasts, so let us through some subjectivity in there.
From the list above, Andrei Shleifer emerges as a favorite. His chances are, however, severely hampered by the Harvard-Russia scandal. That would leave Robert Barro, but I have a hard time imagining him getting the prize alone. With Thomas Sargent? The latter is one of those who have been extremely influential without being cited that much. In the same category are the often mentioned Eugene Fama and Kenneth French, who have the drawback of pioneering work in finance, and awarding the prize during the current financial crisis would reduce the credibility of the prize. This could also discount the chances of Lars Hansen, but his work on empirical asset pricing has had implication way beyond finance. Another personal favorite is Jean Tirole, who should have received it with Jean-Jacques Laffont before the latter died of cancer. Finally, let us not forget Paul Romer, who is fourth for several of the criteria above, including the very first one.
In conclusion: Robert Barro (with Thomas Sargent?), with Fama-French, Jean Tirole, Lars Hansen and Paul Romer as dark horses.
Friday, October 3, 2008
Thursday, October 2, 2008
I am upset
We have just witnessed another example why the political process is broken in the United States. There is complete disregard of policy advice from people who understand the issues, staggering amounts of money is thrown at problems with policies that are ill-conceived from the start, are amended to make them worse, and then hastily packaged with other poor policies to "sweeten the deal".
In a nutshell, here is what is wrong: If the government buys the toxic assets, it will face a very serious adverse selection and buyer's remorse problem: it will only get the worst ones, and at a price well above the market. The idea to have a reverse auction on a good that is not homogeneous is also ludicrous. If the government can recoup 20 cents on the dollar for those toxic assets, it will be lucky. Remember that those assets will be pushed from people with little competence (banks) to incompetent ones (government).
There are other solutions. My favorite one is the Swedish one: have the government take equity positions, thus recapitalizing, force write-offs of bad assets, dilute shareholder value (shareholders are supposed to carry risk, remember), and then sell the stake once things are back to normal. This keeps incentives in the proper place, as banks continue to service the loans. The cost to tax payers was relatively minor when a similar situation happened in Sweden in 1992. Americans may not like this idea of partial nationalization, though. Alternatively, let those who are sitting on plenty of cash recapitalize, like in the Middle East or in Asia. UBS did this earlier in the year twice, as it was not expecting a bailout.
Another one is to get all problematic institutions through bankruptcy court. No tax payer money is involved (well, a little, to pay the courts) and it force the bad assets to be written off, and all can start afresh.
But stop scaremongering and claiming something needs to be done immediately and hastily. We have seen with the Iraq war and the Patriot Act how this can go wrong.
In a nutshell, here is what is wrong: If the government buys the toxic assets, it will face a very serious adverse selection and buyer's remorse problem: it will only get the worst ones, and at a price well above the market. The idea to have a reverse auction on a good that is not homogeneous is also ludicrous. If the government can recoup 20 cents on the dollar for those toxic assets, it will be lucky. Remember that those assets will be pushed from people with little competence (banks) to incompetent ones (government).
There are other solutions. My favorite one is the Swedish one: have the government take equity positions, thus recapitalizing, force write-offs of bad assets, dilute shareholder value (shareholders are supposed to carry risk, remember), and then sell the stake once things are back to normal. This keeps incentives in the proper place, as banks continue to service the loans. The cost to tax payers was relatively minor when a similar situation happened in Sweden in 1992. Americans may not like this idea of partial nationalization, though. Alternatively, let those who are sitting on plenty of cash recapitalize, like in the Middle East or in Asia. UBS did this earlier in the year twice, as it was not expecting a bailout.
Another one is to get all problematic institutions through bankruptcy court. No tax payer money is involved (well, a little, to pay the courts) and it force the bad assets to be written off, and all can start afresh.
But stop scaremongering and claiming something needs to be done immediately and hastily. We have seen with the Iraq war and the Patriot Act how this can go wrong.
Wednesday, October 1, 2008
What is the FDIC thinking?
I have been trying on this blog to focus on other things than the current financial situation that everybody else is covering, but it is getting really difficult. The government is trying to find ways to get lending institutions to lend again, and guess what the FDIC is doing?
Preventing them from lending. That's right. The FDIC is going through the banks, looking at their balance sheets, readjusting the risk measures of the loans (I am fine with that), downgrading to junk anything that is related to real estate. That is problem number one: Not every real estate loan is poorly performing. In fact, most are still paying their mortgage every month, and will be until maturity. Forcing bank to basically write off every real estate loan is poor risk management. The consequence for most banks is that their rating with the FDIC is tanking, they must pay higher premiums to the FDIC and must recapitalize.
But it gets worse. The FDIC forces bank not to make loans, unless they are backed by cash. Banks are even asked to call back loans of well capitalized borrowers that were performing just fine. The FDIC is taking a wholesale approach killing all real estate loans, severing long-standing business relationships and basically negating all government efforts to get lending going again.
The FDIC has a mission, ensuring depositors can get to their money if needed. But it should not act in isolation of the other agencies, and it should not kill performing, sane business relationships. We definitely need to reduce the alphabet soup and merge the regulating agencies so that they can cooperate.
Preventing them from lending. That's right. The FDIC is going through the banks, looking at their balance sheets, readjusting the risk measures of the loans (I am fine with that), downgrading to junk anything that is related to real estate. That is problem number one: Not every real estate loan is poorly performing. In fact, most are still paying their mortgage every month, and will be until maturity. Forcing bank to basically write off every real estate loan is poor risk management. The consequence for most banks is that their rating with the FDIC is tanking, they must pay higher premiums to the FDIC and must recapitalize.
But it gets worse. The FDIC forces bank not to make loans, unless they are backed by cash. Banks are even asked to call back loans of well capitalized borrowers that were performing just fine. The FDIC is taking a wholesale approach killing all real estate loans, severing long-standing business relationships and basically negating all government efforts to get lending going again.
The FDIC has a mission, ensuring depositors can get to their money if needed. But it should not act in isolation of the other agencies, and it should not kill performing, sane business relationships. We definitely need to reduce the alphabet soup and merge the regulating agencies so that they can cooperate.
Tuesday, September 30, 2008
What is a CEO worth?
Now that Congress seems due to pass this horrible bailout bill, let us reflect a little on one provision that seems to have sweetened the deal: limits to executive compensation. CEO pay has been controversial for a while now, so it is natural to ask whether they are worth it.
This is what Marko Terviö does using an assignment model and data from 1000 publicly traded US firms. First about the assignment model: its idea is to match firms and CEOs with different characteristics. Outcomes depend on the distribution of those characteristics, and as they are in fixed supply, the price of ability does not necessarily reflect marginal productivity.
The market value of a firm is pivotal here, as it is not only dependent on its current characteristics (and CEO), but future ones as well. Also, a firm contains capital that can be transferred to others. The current surplus of a firm is the product of CEO ability, firm size, a growth factor and capital. This may seem oversimplifying, but you needs to keep managerial ability observable by deduction.
Matching this model with Compustat data, the top 1000 CEOs appear to contribute between US$21 and 25 billion in 2004 (about 0.15% of market capitalization), and they have been paid $7.1 billion for it, including option packages. CEOs seem to be of little impact, but still a bargain. But what if all CEOs were replaced with the best one? The surplus gain would be $3.2-3.4 billion, rather modest. The reason is that the best are already matched with the largest firms.
This is what Marko Terviö does using an assignment model and data from 1000 publicly traded US firms. First about the assignment model: its idea is to match firms and CEOs with different characteristics. Outcomes depend on the distribution of those characteristics, and as they are in fixed supply, the price of ability does not necessarily reflect marginal productivity.
The market value of a firm is pivotal here, as it is not only dependent on its current characteristics (and CEO), but future ones as well. Also, a firm contains capital that can be transferred to others. The current surplus of a firm is the product of CEO ability, firm size, a growth factor and capital. This may seem oversimplifying, but you needs to keep managerial ability observable by deduction.
Matching this model with Compustat data, the top 1000 CEOs appear to contribute between US$21 and 25 billion in 2004 (about 0.15% of market capitalization), and they have been paid $7.1 billion for it, including option packages. CEOs seem to be of little impact, but still a bargain. But what if all CEOs were replaced with the best one? The surplus gain would be $3.2-3.4 billion, rather modest. The reason is that the best are already matched with the largest firms.
Monday, September 29, 2008
Polls are useless
We are getting poll results every day on the presidential election. Even at other times, polls are used on a regular basis to elicit which way the public leans on policy matters. Is it a good idea to do so?
John Morgan and Phillip Stocken would probably say polls are of very limited use. There are several issues at hand. First, there is the sample size, with many polls aggregating the opinions of 1000 people or less, the statistical significance of the result may be very low, especially for close outcomes. With small samples, polls work reliably only when the population is relatively homogeneous. But then you do not need polls.
Second, there is strategic behavior, especially in larger polls, where responses tend to follow ideology instead of truth-telling. Inferring outcomes from polls without taking into account strategic behavior can be very misleading. Luckily the authors provide estimators that correct for such biases. But this raises the question: If the polity knows such estimators are used, would it not adjust its strategy accordingly?
Third, poll results differ from referendum or election results. The problem is that in a limited sample poll, it is impossible for voters to convey credible information in equilibrium. We need referendums, as I called for the other day.
The critical point here is that the polled ones have information that the pollster does not have, and that it is costless to convey information in a poll. As an example, the article takes the case of Oregon, where it was contemplated whether to lower the minimum wage for tipped workers. To gain information about the economic effects of such a policy change, restaurant owners were polled. It is clear that it was in their best interest to act strategically instead of revealing what they really know about the industry. They faced no negative consequences if lying, and they knew they could influence policy their way by lying.
John Morgan and Phillip Stocken would probably say polls are of very limited use. There are several issues at hand. First, there is the sample size, with many polls aggregating the opinions of 1000 people or less, the statistical significance of the result may be very low, especially for close outcomes. With small samples, polls work reliably only when the population is relatively homogeneous. But then you do not need polls.
Second, there is strategic behavior, especially in larger polls, where responses tend to follow ideology instead of truth-telling. Inferring outcomes from polls without taking into account strategic behavior can be very misleading. Luckily the authors provide estimators that correct for such biases. But this raises the question: If the polity knows such estimators are used, would it not adjust its strategy accordingly?
Third, poll results differ from referendum or election results. The problem is that in a limited sample poll, it is impossible for voters to convey credible information in equilibrium. We need referendums, as I called for the other day.
The critical point here is that the polled ones have information that the pollster does not have, and that it is costless to convey information in a poll. As an example, the article takes the case of Oregon, where it was contemplated whether to lower the minimum wage for tipped workers. To gain information about the economic effects of such a policy change, restaurant owners were polled. It is clear that it was in their best interest to act strategically instead of revealing what they really know about the industry. They faced no negative consequences if lying, and they knew they could influence policy their way by lying.
Friday, September 26, 2008
Voting with your feet
Much of public economics relies on the assumption that people vote with their feet, following the idea of Charles Tiebout (Yes, there is link on IDEAS). Yet there not been a good test of it. While there has been empirical work, the problem lies with the scale of moving. Moving is costly, especially if it implies building new social networks, finding a new job and adapting to a new culture. Few people moves because Bush got elected. More people move locally when local amenities such as schools change in quality. Typical test where at the county of census tract level, which could be too coarse.
Spencer Banzhaf and Randall Walsh manage to test Tiebout's suggestion by using California data on neighborhoods defined as sets of half-mile diameter circles. They have demographic data (useful for controls) as well as data from the Toxic Release Inventory. This allows to study the response of households as air quality changes.
And yes, households move away when the air quality deteriorates. Public economics is saved.
Spencer Banzhaf and Randall Walsh manage to test Tiebout's suggestion by using California data on neighborhoods defined as sets of half-mile diameter circles. They have demographic data (useful for controls) as well as data from the Toxic Release Inventory. This allows to study the response of households as air quality changes.
And yes, households move away when the air quality deteriorates. Public economics is saved.
Thursday, September 25, 2008
Income and Democracy
There is an obvious correlation between GDP and democracy. Just think about OECD countries, all democratic, which are much richer that Third World economies, which are often not democratic. This correlation has often been a motivation for imposing democracy on some unsuspecting country, arguing it would improve its economy. But correlation is not causation. And even if there is causation, it could go the other way.
Daron Acemoglu, Simon Johnson, James Robinson and Pierre Yared use two strategies to try and find causality: First introducing country fixed-effects in a panel regression, which are supposed to take into account country-specific effect impacting jointly income and democracy. Second, use an instrumental variable approach, which gives sources of exogenous variation useful for estimating causation. In the first case, the correlation disappears, and in the second, no causal effect is found from income to democracy.
In the latter case, one can discuss forever whether the instruments are adequate, especially as their strength is not reported. Also, causation could actually go the other way (as advocates of imposing democracy onto other countries like to argue). Still it remains a puzzle why rich countries are democratic. The authors advance a few vague ideas (political and historical accidents, long term effects not identifiable in the short sample), but clearly much remains to be done here.
Daron Acemoglu, Simon Johnson, James Robinson and Pierre Yared use two strategies to try and find causality: First introducing country fixed-effects in a panel regression, which are supposed to take into account country-specific effect impacting jointly income and democracy. Second, use an instrumental variable approach, which gives sources of exogenous variation useful for estimating causation. In the first case, the correlation disappears, and in the second, no causal effect is found from income to democracy.
In the latter case, one can discuss forever whether the instruments are adequate, especially as their strength is not reported. Also, causation could actually go the other way (as advocates of imposing democracy onto other countries like to argue). Still it remains a puzzle why rich countries are democratic. The authors advance a few vague ideas (political and historical accidents, long term effects not identifiable in the short sample), but clearly much remains to be done here.
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