Top Economics graduate programs are not as good as you think

Along with business schools, Economics is where pedigree matters most in the placement of PhD students to academic positions. Students from top ranked (or considered such) programs have a job almost guaranteed in research universities, and students from lower ranked universities find it very hard to break into such universities no matter what their performance is. In part, this is due to the fact that we tend to hire faculty fresh out of graduate school, while other fields go first through post-docs, and that publication delays imply that graduating students have typically no publication. Thus one has to rely on reputations only (or actually read their papers, but then are you going to read the papers of all students from lower ranked programs?).

John Conley and Ali Sina Onder find that while there is indeed a steep gradient across program rankings, there is an even steeper gradient within programs. They use student rankings within programs and cohorts and their publication output after six years, that is, when they are up for tenure. Looking at AER equivalents, they find that the top Toronto student is equivalent to the number three from Berkeley, for example. And to illustrate how steep the gradient is, the median Harvard student has after six years only 0.04 AER equivalent publications, despite coming from the #2 program. This means that more than half of Harvard students are not tenurable in any research-oriented institution.

I see two major conclusions from this: 1) Stop worrying so much about where PhD students are graduating from. It is OK to hire students from lower ranked programs as long as they excelled in those programs. 2) Even the top places should acknowledge that not all students should take research positions and need to prepare them for other ones, like industry, government or purely teaching jobs. These students are screwed twice: they are sent to tenure-track positions that they will never get tenure in, and they are woefully unprepared for the jobs they should take.

Strategic self-ignorance

There are times were we kind of feel we have done something stupid and do not want to know the result. For example, the grade of a test or how a recently bought stock is faring. Such situations are linked to regret aversion, where you consciously try to block available information after a decision has been taken. What about blocking readily available information before you take a decision?

Linda Thunström, Jonas Nordström, Jason F. Shogren, Mariah Ehmke and Klaas van 't Veld relate to the case of temptation, where you consciously block out information about the consequences of your action. Specifically, think about a delicious but calorie-laden meal. You kind of know it is bad for your health, but you decide not to look at the calorie count, although it is available. And that is what they had people do in a experiment where they invited people for lunch with two option: a low and an high calorie meal. It was, however, not obvious which one was high calorie, and participants could look it up. 58% chose not to and ate significantly more calories. How do the self-ignorant differ from the control group? It should not surprise anyone that they smoke more, have lower incomes, know less about nutrition and are more impatient. More interesting is that they are over-represented among males, educated and older people. Having a higher body-mass index leads to less self-ignorance. I wonder whether some of those results are endogenous to the setup of the experiment, where all those questions about nutrition are asked, which may lead people to become more conscious about their weight, especially less educated ones.

PS: too bad the equations in the paper are unreadable. Never use the Word equation editor...

What's up with the labor income share?

The labor income share in national income has been generally decreasing across industrialized countries for about three decades now. The consequences of this can be large, as this means a major reallocation of economic surpluses towards capital income (and the fact that Cobb-Douglas production functions become less appropriate). This trend has been exacerbated with the last recession, much to the dismay of many who see the rich capitalists screwing the labor force.

According to Loukas Karabarbounis and Brent Neiman that is at least not the entire story. Rather they emphasize that this drop in the labor income share is due to an increase in capital accumulation as a consequence of the decline in the price of investment goods. The drop cannot be attributed to changes in industrial composition, as it is also happening within industries. Note that this decline in investment good prices is often taken a symptom of technological progress, which means that for the first time since the industrial revolution, technological progress is leading to a decrease in the share of the production surplus that workers can capture. It just so happens that technology nowadays is labor-decreasing, or at least less labor-augmenting that it is capital-augmenting, and I do not think there is much that we should do about it at the technology level. At the fiscal level, that may be another question, though.

When to borrow from friends

When should I borrow from friends or from banks? With friends, I would typically get a lower interest rate, but I could risk losing a dear friendship. With banks, I pay more in interest and have to bring collateral, but I can walk away with relatively little damage. There are some situations where one should be preferred to the other.

Alexander Karaivanov and Anke Kessler study this question in the context of a world where borrowers can default strategically and there is limited enforcement of loan contracts. First they show that the optimal informal loan (from friends or relatives) features zero interest rate and zero collateral. This is because friendship is an efficient enforcement mechanism. That would typically happen with smaller, less risky loans. Then Karaivanov and Kessler show that if there is sufficient risk in the loan, one should go for a formal loan. The reason is that the collateral is divisible. In an informal loan, you either keep or lose the friendship. With a formal loan, you may still keep part of the collateral if things go bad. Using household data from Thailand, they find that their model lines up nicely with the data.

Textbooks do not matter

I have complained before, and I am far from being the only one, that textbooks are too expensive. But we still use them because we think they are useful, or because we are too lazy to come up with class material ourselves. Beyond the benefit for the lazy teacher, do textbooks actually bring something to the classroom?

Maria Kuecken and Marie-Anne Valfort looks at a case where textbooks are sometimes simply not available, classrooms in 11 Sub-Saharian countries. And it turns out the availability of textbooks does not matter, whether owned by each pupil or shared. It is only in one case, the richer kids, where there is a noticeable improvement in school achievement for shared textbooks. So it looks like teachers manage to adapt well to the absence of textbooks. And I think there is virtue in working without them: students have to listen to the teacher, learn to take notes or absorb material on the spot, and they are more active in the classroom. I wish I could go without textbooks, but unfortunately rules are rules. And publishers also need to make a living, right?

The option of suicide

Suicide is a trigger strategy and when to pull the trigger is a decision that involves forming expectations over future outcomes. It is a difficult decision, as future outcomes are very uncertain, if not difficult to quantify.

Shin Ikeda models the suicide decision as the decision to exercise an American option on future wages. Seen this way, the suicide option is straightforward to quantify once you have wage profiles of suicide candidates (to determine timing) and non-candidates (to determine future wage profiles, their distribution and how they may differ form suicide candidates). From anecdotal evidence, anxiety seems to be an important factor, thus modeling at least risk aversion right is very important, as well as bankruptcy. Unfortunately, this is not at all how the paper proceeds. Individuals are risk neutral, but returns are adjusted for market risk. Individuals hold no assets or debt, except their human capital. The wage process is identical for everybody. It is then no surprise that the results are not realistic, indicating that the strike price corresponds to 90% of the average initial wage in perpetuity, meaning that a majority of workers is at suicide risk at some point during their life. Any study in the value of life literature gives numbers much higher than this value, and this is because people value more than just wages. Instead of only looking at money flows, one needs to consider concepts like utility and preferences...

Babysitting and labor market outcomes

It is well established that what happens early in life matters a lot for adult outcomes. But some adult life choices may rather be influenced by event later in childhood, like what to study in college or which profession to take on, controlling for all the cognitive skills that seem to be largely set by then.

Zeynep Erdogan, Joyce Jacobsen and Peter Kooreman look at the impact of having worked as a teenager, and in particular as a babysitter, on fertility and labor market outcomes. Results are a mess, and I suspect that endogeneity and selection bias have a lot to do with it. The authors, though, find one rather strong result: Working during 10th grade has a positive impact on labor market outcomes and delays fertility. It is rather strange that having babysat (at a specific age) would encourage a woman to have children later. But babysitting in general leads to having more children, according to their results. That all looks like spurious correlations to me, especially as instrumental variable results looks very different from OLS ones.

Human capital and corruption

It is commonplace to assume that corruption is bad, although the evidence is far from clear about this. Empirical investigations are typically at the macro level and have very little to say about the micro channels of corruption. In fact there is very little structural modelling or estimation in this area.

Spyridon Boikos concentrates on the impact of corruption on the accumulation of human capital using an endogenous growth model. Two channels are investigated: the first is about public resources being misdirected being education and production sectors, and the second is complementarity between human and physical capitals. Putting this to the data, it is found that corruption does not have that much impact in the education sector, and it is conjectured that corruption does not have the same bite in the education sector as in the rest of the economy. I cannot help thinking that the model misses the big elephant in the room in terms of human capital and corruption: a very common form of corruption in this regard is bribing for entry into schools, passing exams and even getting diplomas. This means that the signalling effect of diplomas is getting lost, and hence the incentive to get an education vanishes, in particular for the talented ones. And for those who attend a school, there is little incentive to learn.

Which academic field contributes most to economic growth?

If you have sat on any inter-disciplinary academic committee, you must have witnessed frustrating discussions about how one field is more useful in some respect than another, especially when resources are involved. And irremediably people compare apples and oranges, as academic fields can be very different and their metrics impossible to compare.

Cristiano Antonelli and Claudio Fassio decided to open this Pandora box and concentrate on one impact: economic growth. They perform a cross-country study and take the number of graduates in each field as an indicator of academic output, and see where that leads us in terms of economic achievement. They make the distinction between engineering, hard, social, medical sciences, and humanities in a 11-year panel of 16 OECD countries. The horse race ends with two clear winners, engineering and social sciences, and two big losers, medical sciences and humanities, the latter having a significant negative contribution to growth.

That said, should we believe those results? Beyond the obvious issue with panel cross-country regressions, the problem is that we are still comparing apples to oranges. In some countries, medical studies are at the graduate level only, while it is undergraduate elsewhere. There are also stark difference for Economics as well. In the US, many students graduate in that field and have actually only two years of classes in this major, having to take general education classes first for two years. In Europe, Economics students spend their whole four years on the topic. And the same applies to other fields. Thus counting students, and especially if you want to make the claim they are specialized in a particular field, is rather heroic. I would not yet claim social sciences have won this battle.

AEA elections are on, you know for whom to vote

As explained in a previous post, write in Gregory Burge for every slot in the AEA executive, and no one else.

Groom yourself to publish better research?

There is plenty of evidence that being beautiful helps you on the job market. First impressions count a lot, and physical appearance is likely the main factor in first impressions. But does beauty matter in situations where there are no such first impressions? Take the case of scholarly publishing: editors and referees do not see a picture of the author(s), thus it should not matter. If it still matters, it must be that beauty is correlated with something that makes your more likely to get published, say, confidence or more subtly that beautiful people are more healthy, and thus should have had less illness disruptions in schooling and have more human capital. Anyway, we need some evidence.

Alexander Dilger, Laura Lütkenhüner and Harry Müller want to offer some. They asked attendees at a conference of business researchers about their happiness, took their pictures and had others judge these mug shots. They then looked for the publication records of their subjects over the next two years. It turns out that happy people publish more, but of course the causality could run the other way, as you may be happy that your research agenda is progressing well, especially when you are asked about your happiness at a conference in your research field. Maybe more interesting is that a trustworthy appearance is correlated with a better publication record. Is it really the appearance that matters here, or simply that a person who is capable of keeping himself in order is also more likely to be well organized to publish well? Also the population under study (n=49, by the way) is faculty from business schools. It is notorious that in business schools appearances matter a lot, and after law schools it is where it matters the most. Not the kind of sample I would use to make general claims about the research productivity of scholars as it relates to appearance.

The top 1 percent

Much has been written lately about the rise of the top one percent earners in the United States, yet it very little about why this rise has happened. Indeed, this rise in only partially visible elsewhere in the world, which may hint that factors that are not universal may play an important role, and thus there is potential for policy if you want to revert this rise.

Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez notice that the rise seems to be most pronounced in English-speaking countries, and they try to identify which factors could lead to such differences in the income share of the top one percent over time and space. They come to the conclusion that there are four factors in play: 1) Tax policy, and especially tax rates for top incomes. There is simply more left after taxes for top earners, but as the other factors show, the impact is larger than that. 2) Lower top tax rates lead to incentives that make it more worthwhile for the top earners to get a larger share of the surplus. This redistribution of the surplus would be consistent with the reduction in the labor income share and the stagnation of wages for large parts of the wage distribution. 3) Capital income is becoming independently more important, especially in Europe where inherited wealth makes a comeback. 4) The correlation between earned income (from labor) and capital income has increased a lot in the United States, widening the distribution of total income. Given all this, I find it difficult to imagine a model of optimal taxation that would not involve an increase in top marginal tax rates.

How many mortgage defaults resulted from lofty expectations?

A housing bubble is sustained by expectations of further increases in house prices. There is strong suspicion that this is what happened during the US housing boom preceding the last crisis, and that these expectations have triggered excessive mortgage borrowing. Actually verifying that claim is not that straightforward, though, as one needs to find extensive household level data.

Steven Laufer found this for Los Angeles County with panel data that tracks a property and all its mortgages. He comes to the sad conclusion that only 30% of mortgage defaults there were a result of household level shocks. The rest is all about borrowing and mostly extracted additional cash excessively with the expectation that the loan-to-value ratio would be reduced as house prices continue to grow. When this did not materialize, massive defaults resulted. Using the estimation model, Laufer finds that could have been mostly avoided by imposing the 80% loan-to-value ratio. Although this would have lowered house prices by a considerable 14%, this would have reduced defaults by 28%, as small number given the price drop but a large one considering the number of defaults. And house prices in LA are too high anyway.

The AEA executive is still not representative

A year ago, I modestly called on the AEA to open its ranks officers to those who are not at (mostly private) elite universities. They are not representative of the profession, as many of us work at lower ranked research universities, liberal arts colleges, government, industry and think tanks. They all deserve some representation as their interests differ quite a bit from big shots with almost guaranteed grants and easy access to top journals and conferences.

At the time, I suggested to write in Gregory Burge (link corrected) on the election ballot. As the AEA did not disclose election results (if it did, please tell me where), I have no idea whether it had any impact. I suggest to try again this year. Last year, I posted about this when I got the ballot, which may have been too late. This year, I make the call earlier, so that more people can adjust their vote. Indeed, the candidates this year are:

For President-elect:
Richard Thaler, The University of Chicago Booth School of Business

For Vice-Presidents:
David Card, University of California, Berkeley
Judith Chevalier, Yale School of Management
N. Gregory Mankiw, Harvard University
Jeffrey Wooldridge, Michigan State University

For Executive Committee:
Dora Costa, University of California, Los Angeles
Guido Imbens, Stanford Graduate School of Business
David Laibson, Harvard University
John Williams, Federal Reserve Bank of San Francisco

While there is at least someone for a non-university environment and three candidates from public universities, which is an encouragement, this is still far from representative. Vote for Gregory Burge (write-in) for every position.

The social pressure of overborrowing

The recent financial crisis has highlighted the sometimes very poor financial choices of households, in particular overborrowing. What leads people to borrow beyond their means or to take excessive risk of default or bankruptcy? Is it because of predatory lending with perverse incentives for loan underwriters? Plain stupidity of the borrowers? Or rational exuberance?

Dimitris Georgarakos Michael Haliassos and Giacomo Pasini look at Dutch data and find rather something that looks like social pressure. Indeed, they find that borrowing is heavier among those who consider themselves poorer than their peers. In other words, they are trying to keep up with the Jones in the sense that they want to display the same material wellbeing as their peers, on a borrowed dime. I do not know how much peer pressure there is in the Netherlands, but I can imagine a series of countries where such pressures would be important, where you need to fit in by having the right car or the right house, or by taking the right vacations. And it seems unavoidable that some people will overextend themselves in such an environment.