Thursday, December 31, 2009

The development cost of informality and low debt enforcement

There is a huge literature trying to understand why total factor productivity is much higher is some countries than others. The literature is huge because this is a hugely important question, but also because this is something no one has been able to really model efficiently. There is a lot of punting, especially with reduced-form cross-country regressions that can only highlight correlations, if that, but not causation,

So it is refreshing to see a paper that puts some structure in all that. Hernan Moscoso Boedo and Pablo D'Erasmo build a model (you know, a theory with more than a linear equation...) where firm adopt technologies, some inefficient, and react to various incentive stemming from informality and debt enforcement. The latter two are aspects that have been long identifies as potential sources of underdevelopment. The paper shows that this mechanism can explain up to 60% of total factor productivity differences. This is definitely an interesting way to approach this question.

Wednesday, December 30, 2009

Life expectancy, quality of the environment, and mutliple equilibria

The recent debacle in Copenhagen over a climate change treaty has highleghted a large rift between developing and developed economies over what should be done and how. The way it was presented, the issue was about a right to develop like the currently rich ones did, by polluting your way to wealth. Thus, the rich should either allow the poor to pollute, or compensate them for avoiding the pollution they would entitled to.

But reading a paper by Fabio Mariani, Agustín Pérez-Barahona and Natacha Raffin got me thinking that there is another reason. Think about why we care about the environment. It is because we live in it. Now, life expectancy is markedly shorter in developed economies, thus it would make only sense that they would care less about the environment. What the paper highlights is that there is a potential for multiple equilibria; As people living in polluted environments have shorter lives they care less about the environment, which is then more polluted. This makes it even more necessary to provide them with a transfer to entice them out of this loop.

Tuesday, December 29, 2009

Wages in high-end prostitution

I reported earlier on the literature trying to understand why prostitutes are so well paid. I concluded that this was because of the risk, but this could not explain the full wage premium. The rest must have to do, for example, with foregone marriage opportunities due to the stigma of prostitution.

Lena Edlund, Joseph Engelberg and Christopher Parsons look at a prostitution market where there is no risk, the high-end escort service industry. These workers do not work on the street and thus have a better control on who they do business with. Also, they are less visible, which should help a little with the stigma.

One is to expect that the price of an escort decreases with age. But it appears to do so very little. In fact, there is a clear hump at the very ages where the probability of marriage is the highest in the general population. Thus, foregone marriage opportunities are clearly important. Furthermore, Edlund, Engelberg and Parsons find that those escorts whose activity has no impact on the marriage market (does not offer sex, transsexual) do not have such a hump. Finally, in places where most of the business is with travelers, the premium is lower.

Monday, December 28, 2009

Are wages really that rigid?

The New Keynesian theory has come under increasing assault because its basics assumptions, price and wage rigidity, look more and more tenuous in the data. Now that we have much better data sets, for example, we realize that prices of everyday goods fluctuate a lot. This may be a recent phenomenon, as these data sets come from the databases that retailers use nowadays for scanners, and all this information technology has considerably reduced the cost of changing prices. So much for the now obsolete menu costs.

What about wages, then? Wages are typically set for at least a year, and collective bargaining sets wage schedules for about three years on average. But people change jobs, get promoted, get bonuses, so it is difficult to measure well wage rigidity. Still, there is some consensus that there is at least some nominal downward rigidity, as it is believed that there is some psychological barrier to reducing nominal wages. I am not that convinced, as the current recession has shown plenty of examples of nominal wage decreases. But I need more than anecdotal evidence.

There now also a study of wage rigidity across European firms, where one would suspect the most evidence of this given the labor market institutions. Martina Lawless, Jan Babecký, Philip Du Caju, Theodora Cosma, Julián Messina and Tairi Rõõm show that there is rigidity, and that it can be related very closely to the various theories that have been put forward to justify these rigidities: efficiency wage theory, insider-outsider theory, and collective bargaining. What I take from this: wage rigidity is for real, at least in Europe, but you cannot just assume it in a theory, you need to properly model its origin. Indeed, as this paper shows, rigidity is flexible as economic conditions change.

Thursday, December 24, 2009

Sex choice and poverty

In many cultures, there is a strong preference for male offspring. While the human rights movement and the emancipation of women has in many cases curtailed preferential treatments, at least the most visible ones, new technologies like ultrasound have allowed this practice to flourish in some parts of the world. China and India, in particular, report unusually high male/female ratios. This surplus of males must have consequences on the marriage market, especially for the less desirable ones: the poor.

Lena Edlund and Chulhee Lee study this with the background of Korea. Sons are appreciated because they have sons, thus a married son is preferred to a married daughter, who is preferred to a single son. When the country was poor, however, single sons were still appreciated because they could provide old age support to their poor parents. As the country, and its poor, got richer and with the introduction of an old-age pension system, the value of the single son drops significantly and the sex ratio gets closer to normal.

What puzzles me in all this is why the poor did not favor daughters. They were relatively rare, thus could garner a substantial bride price. Thus there should have been a surplus of male children in rich families and of female children in poor ones. The paper does not provide any evidence of this in the data, but it seems to be a natural consequence of the model to me.

Wednesday, December 23, 2009

Drinking and Sex

Is alcohol abuse tied to risky sexual behavior? If so, and alcohol abuse is widespread, all the sex education you do is for naught, as people incapacitated by alcohol tend to do silly things with adverse consequences.

Ana Isabel Gil Lacruz, Marta Gil Lacruz and Juan Oliva Moreno use Spanish data to estimate the relationship between too much drinking and risky sex. While they cannot estimate the relationship directly, they find for indirect ways to do so. While each method can be criticized, they all point in the same direction: alcohol leads to risky sex. This shows that alcohol abuse prevention programs are particularly useful, as they have the side benefits of reducing the incidence of sexually transmitted diseases and unwanted pregnancies.

In conclusion, be careful with the bottle during the end-of-year festivities, or you will end up with more headaches than a simple hangover.

Tuesday, December 22, 2009

Why the Catholic Church should not abolish celibacy for priests

Priests in the Catholic church have to make a vow of celibacy, a tradition that is currently under pressure because it is a serious hindrance to the recruitng of new priests. Indeed, such a vow implies a serious commitment that men are less willing to make compared to Malthusian times where population control was a matter of survival and being a priest was a good economic choice.

Men-Andri Benz, Reto Foellmi, Egon Franck and Urs Meister claim the Catholic Church should resist the calls for the end of celibacy. Their reasoning is again about commitment. It allows the Church to signal to its believers that its priests are more conservative, and this triggers more donations. While it reduces the pool of candidates for priesthood, the celibacy vow selects the right ones for the task of showing conservative values. All this, of course, assuming that conservative values will remain strong, at least among Church donors.

Monday, December 21, 2009

Divorce and labor division in the household

Marriages can be a volatile affair, especially when the spouses have little incentives of staying together. Traditionally, marriage has offered one big economic advantage over celibacy: specialization. And once spouses are locked into their specific tasks, divorce becomes very costly as the husband was not good at household tasks while the wife would not have fared well on the labor market.

But with the dramatic increase in female labor market participation in the past century, this has changed. As women have better opportunities on the market, they do not feel tied to marriage as much. The conjecture is then that the higher the income share of the bread-winner, the more stable the marriage is. Kornelius Kraft and Stefanie Neimann study this using the ever-giving data-set, the German Socio-Economic Panel, and confirm these conjectures except for one. The income proportion theory is not gender-neutral: female bread-winners are more likely to divorce than male ones.

I find this particularly interesting because it gives a good explanation for the increase in divorce rates across all countries. And do not tell me it is because divorce laws changed. These laws were modified under pressure.

Saturday, December 19, 2009

Two years of blogging

It is now two years that I am blogging here. While two years seems like a re rather short time, it adds up to about 450 posts. All in all, imagine reading 400+ papers and provide your opinion about them. In retrospect, this is a huge task!

But I enjoy doing it, and it appears a growing readership does, too. While it obviously hampers the time I can devote to my own research, I still enjoy it. Again, I would hope this would generate a bit more discussion, and it has improved over last year. But still, do not hesitate to discuss my opinions or offer your own about the papers. And I especially encourage the discussed authors. Few took the opportunity so far.

Speaking of comments. The increase in popularity of Economic Logic implies also that it appeared on the radar of spam commenters. I try to keep up with them, but I have only so much time. Hence I have now started moderation of comments on older posts. Comments are still welcome, but given that for non-current posts the signal-to-noise ratio was becoming really low, I had to intervene.

Finally, consider a donation. I could be doing consulting work or writing more papers instead of this blog. There is a clear opportunity cost for me. So if you were pondering giving something to the lady that brings your daily junk mail, go for me instead...

Thursday, December 17, 2009

Local authorities under-invest in disaster prevention

In the United States, the individual states and local authorities are supposed to be in charge of disaster prevention and protection, while the federal government provides insurance against disaster occurrence. And as this insurance is fully with perfect commitment, prevention is sub-optimal.

Timothy Goodspeed and Andrew Haughwout look at the second-best insurance contract where the states provide prevention in a non-cooperative fashion and cannot be monitored. It turns out it is really difficult to coax states to provide appropriate prevention. Fundamentally, this is because of the time consistency problem of the federal government and its soft budget constraint. Once disaster has happened, it is difficult to say no to immediate aid. This is not unlike the problem of humanitarian aid, that keeps going to the same places because they provide no effort for prevention as they know they are insured. Or the banking system.

As long as the insurer wants good things for people, this time-consistency problem will remain. But it can be mellowed by applying a hard budget constraint. This takes strong commitment, which is unlikely in a democracy, as politician cannot afford to refuse emergency aid. Then, why not let the federal government be in charge of prevention investment as well?

Wednesday, December 16, 2009

Is education bad for growth?

Despite the fact that models usually show that education is good for national income, the empirical evidence is mixed. The typical reason provided is that there are inefficiencies in the provision of education, or that raising the funds for public education is distortionary.

Rossana Patrón focuses on the latter using a growth model with an informal sector where households allocate their time to education, formal and informal work. Formal labor income is taxed to finance public education, along with indirect taxes in the formal sector. The economy may end up on the wrong side of the Laffer curve because any increase in the tax rate discourages labor, and in particular formal labor. Thus a government should only raise taxes if the distortionary effect is swamped out by the effect on human capital accumulation.

Now this is all very intuitive, and we would not really have needed a complex model to figure this out. Where such a model becomes really useful is that it allows to quantify things, in particular when there are ambiguities such as the one above. With realistic parametrization, it may turn out that we are far from an ambiguity and that raising taxes for education is a no-brainer (or not). But theory that tells you rather intuitive results and that anything can happen somewhere in the parameter domain is not useful.

Tuesday, December 15, 2009

The gold standard as a commitment technology

The Gold Standard is now part of economic history, and the only times your hear it proposed as a viable monetary regime is on delusional websites put together by people who seem to have found the solution to all of the world's problems in monetary policy. And there are those that believe that gold is the safest asset out there and thus money should be based on it (and one should first question why gold has any value in the first place). So, the Gold Standard is basically a non-starter in the profession nowadays.

Thus, one should highlight the courage of Elisa Newby for looking at the Gold Standard as a possible monetary regime in modern times, and for doing some serious work. Her idea is that the Gold Standard can act as a commitment device, which is particularly useful when monetary policy needs to be significantly relaxed for a while, like during a war or a major economic crisis. As long as it is clear that the monetary authority will return to the Gold Standard, economic agents will continue to trust the local currency even if its gold parity has been suspended. But if the old standard is not reestablished, then the monetary authority has completely lost credibility, and thus will endogenously choose to adhere to the old parity. Note that this also solves the time consistency problem.

Does this mean the Gold Standard is a perfect monetary policy? Note that in this example, it is really effective when it is not applied. But in normal times, it is still subject to all the flaws that lead to its demise.

Monday, December 14, 2009

Should old women pay for the health of old men?

Several years ago, Richard Posner conjectured that old women should pay for the health care of old men. The reason is that old women tend to live longer and appreciate the company of men, thus they would be happier if they lived longer. This is a purely theoretical argument as in all industrialized economies health care is state provided, at least in retirement. But note it leans on one important assumption: old women are happier if married.

Christoph Wunder and Johannes Schwarze test this using the German Socio-Economic Panel, an endless source of insights. And they find that widows are just as happy as married women quite rapidly after the loss of their husbands. I would conjecture that retirees are quite prepared for such eventualities, and the loss of a partner affects them less than earlier in life.

However: what about the men? Would they like to live longer? Is the marginal utility of an additional year of life at age x higher for a man than for a woman? This will never be measurable, but this should be the real question to ask.

Friday, December 11, 2009

Gay couples are different, even on the labor market

When people get married, their labor supply tends to decrease. This may come from the fact that this provides opportunities for specialization in market and home production, in particular through child rearing. When looking at unattached vs. partnered or married individuals, the prediction, and the observation, is thus that the latter work less.

Amélie Lafrance, Casey Warman and Frances Woolley verify this for homosexual individuals. For lesbians, no difference with the rest of the population, but for gays, surprise. Attached or married gays work more. This runs counter to any intuition, except if there is some particular selection into marriage. Puzzling.

Thursday, December 10, 2009

Why is Argentina poorer than Canada?

Up to the 1930's, Argentina and Canada were very similar countries: rich, sparsely populated, income mostly from natural resources and agriculture, lots of immigrants, similar GDP per capita. Then after World War II, the economic fortunes of those two countries drifted apart. What happened?

Germán González and Valentina Viego think that Canada benefited from a rich and large neighbor that was a nice complement to Canada. Argentina, however, did not have this advantage and fell into a trap that made it more and more reliant on its core products and prevented it for following a "normal" development path towards industrialization. This conclusion comes from a fairly standard growth accounting exercise that highlights how Argentinian economic efficiency did not keep up with Canada's starting in the 1930's, primarily due to higher technology adoption in Canada. The latter is clearly helped by the vicinity of the US, while Argentina compounded things by adopting an ill-advised import substitution policy.

Wednesday, December 9, 2009

File sharing is welfare enhancing

Intellectual property for music is rapidly eroding, and the big music labels are complaining loudly about this. They argue that file sharing and other illicit duplication is eroding their revenue and thus the artists' (and some other people's) income. We have shown previously that less copyright is better for artistic creation, and thus welfare, But let us abstract from this and ask whether file sharing in itself is bad for society.

Jean-Jacques Herings, Ronald Peeters and Michael Yang address this using a model where consumers can choose the medium of the music they acquire every period, and music label are forward looking in their pricing strategy, as consumers lock into their medium choice, to some extent. There is thus an incentive to keep CD prices low, both to attract current sales, but also to entice consumers to buy CDs is the future as well. Also, file sharing keeps monopolistic behavior of the music industry at bay. The results: while file sharing reduces the music industry's profits, it increases the amount of music enjoyed by the population, and thus welfare. We should do not the same with our research in Economics. Wait, we already do

Tuesday, December 8, 2009

What intertemporal policy objective to take?

How should policies take into account future generations? This is a tough question to answer because future generations are not present to offer their opinion, and because there is uncertainty about what the future holds. This is especially true with climate change, the availability of natural resources, and the environment in general.

Humberto Llavador, John Roemer and Joaquim Silvestre try to tackle this tricky issue and explore several social welfare criteria. Typically, we use some discounted utilitarian function, which can, under certain circumstances, advocate the end of the world in finite time, and thus forget about some future generations as long as current ones gain sufficiently. Given uncertainty about future outcomes, this seems to be a dangerous route. I prefer more Rawlsian arguments, which dictate that one should optimize the outcome of the worst off generation, whichever that may be. This obviously prioritizes sustainability, as it would under most circumstances put some constraints on generations very far away under catastrophic scenarios. But this is what policy should achieve: foremost an insurance against the worst outcomes.

Llavador, Roemer and Silvestre also discuss other criteria. Not a simple read, but quite obviously an important topic in the current context.

Monday, December 7, 2009

The changing selectivity of US colleges

In the United States, there is this general impression that it is getting harder and harder to get into college. In particular, universities crow how the average SAT scores of entering classes keep increasing cohort after cohort. How is it in reality?

Caroline Hoxby shows that this increased selectivity is only true for top colleges. Half of the colleges have become less selective. And why these changes? Students have become more mobile and strive more to get into the best colleges. They care less about local option and want the best.

Still, it is an old tradition for Americans to move afar for college. Europe is just now moving in that direction, in particular thanks to the Erasmus initiative. While the quality of tertiary education institutions is much more uniform than in the US, the increased mobility could lead to dispersion not unlike the one we see now in the United States.

Saturday, December 5, 2009

The fuss about retirement plan choices in academia

When you start with an academic position at a US state college, you usually get a day to acquaint yourself with local authorities and procedures. You hear from a lot of important administrators, sign a lot of forms, and try to understand what you got into. One of those forms determines which retirement plan you chose to contribute to: the state defined-benefit plan for all state employees, or the alternative defined-contributions plan with TIAA-CREF for teachers. Not knowing really what each plan delivers, you typically go for the second one, as you may not get tenured and value the fact that TIAA-CREF is also available in other states. But that decision was not well-informed, rushed and, most importantly, irrevocable.

Over the following years, as you learn more about the retirement plans, you wonder whether you made the right choice. But you were fine with it as long as the stock market was doing well and your retirement funds were accruing nicely. Now is a different story, given the big losses on the stock market. At several universities, faculty are remembering that they did not really make a choice when they selected their retirement plans and are asking for the opportunity to switch plans, and in some cases to buy contribution years in the state plans.

This sounds like a case of trying to game the system to obtain a better retirement package. This is particularly true as those complaining the most are now tenured, thus ex-post it is optimal for them to be in the state system. But if they were truly making ill-informed decisions when they signed up, they may have a point. But try to prove it.

Where they may be more successful is when the state will realize that these faculty will now retire much later as their retirement account is now worth much less. If fact they may never retire. This means that faculty will become much older and expensive relative to new hires. Administrations may actually view offering state retirement packages as a cost efficient way to renew faculty. Or they may use golden parachutes to essentially replenish the depleted retirement accounts. Thus, faculty may not even need to complain...

Friday, December 4, 2009

Television, the root of the crisis?

Plenty has been blamed on TV, so why not the current crisis? Let's see. TV encourage consumerism by bombarding the viewer with ads about must-have items. "as see on TV" is considered a label of quality. Infomercials push you to buy products you do not need. Soap operas and prime time shows anoint consumerism. There are channels entirely dedicated to shopping. You see were I am getting at, TV is accused of encouraging (too much) consumption, and by extension consumption over one's means and excessive debt. And such behavior certainly a component in the current crisis. But let's not get ahead of ourselves with assertions heard on TV and taken as a fact.

Matthew Baker and Lisa George look at the survey of Consumer Finance and exploit the gradual diffusion to study whether households with earlier access to television ended up with higher indebtedness. And it turns out to be true, in particular for debt resulting from durable good purchases. This is essentially based on data from the 1950s and 1960s. As the marketing industry has perfected its sales pitch since, this impacts should have become more important, and perfected the drive to consume beyond means.

Thursday, December 3, 2009

We need public data on general trustworthiness

Trust is important for transactions, but can easily be exploited. So it is important to understand what creates it. I reported before that to create trust one must constantly remind people what is expected of them. But what consequences does trust have? It is well known that an economy with higher levels of mutual trust will perform better. What about individual trust and individual performance?

Jeffrey Butler, Paola Giuliano and Luigi Guiso find, using the European Social Survey, that the relationship is non-monotone. People who consider themselves little trustworthy think the same of others, transact less and end up with lower income. However, people think they are very trustworthy think others are as well, end up being cheated more than average and have lower income income as well. Only the middle-of-the-road guys get it tight. Butler, Giuliano and Guiso thus argue that this is really an issue of information about the general level of trustworthiness in an economy. If being were better informed, they wold do better. We should publish a trustwothiness index n a regular basis, just the the CPI or consumer sentiment.

Wednesday, December 2, 2009

Do rising top incomes mean higher growth?

Does more inequality increase growth? Theoretically, the relationship is ambiguous. Let us take to effects to illustrate this by focussing on the incomes of the richest. If these increase, the aggregate savings rate gets higher as the richest have typically a below average marginal propensity to consume. The higher savings rate leads to more capital accumulation, and thus higher wages for everyone and higher GDP. However, the same rise in top incomes puts more pressure on increasing redistribution, and we know that more taxation leads to more inefficiencies, say through diversion of resources into tax avoidance and through lower incentives to work. Which effects dominates, and there are others, is an empirical matter.

The literature is largely inconclusive on this. Cross-country regressions are particularly ill-suited for this, because the level of inequality in an economy can have many reasons that maybe correlated is some way with growth. Time-series studies are also problematic because of the possibility of a Kuzents curve: As an economy develops, on can expect inequality to rise and then fall. And in both cases, the measurement of inequality is always problematic.

Dan Andrews, Christopher Jencks and Andrew Leigh claim to do this better by focussing on just the top incomes (easier to measure than, say, a Gini coefficient) and by exploiting the pannel feature of their data. They conclude that a rise in top incomes, at least after 1960, has a positive impact on the growth rates in 12 OECD countries. Specifically, a 1% increase in the top income share leads to a 0.12% increase in the growth rate. If this income change is permanent, the growth rate change is permanent as well. On theoretical grounds, I find this hard to believe and that may be a result of the rather short period they are looking at (40 years in 5 year intervals). Imagine what this means in the context of a Solow growth model: The permanent shock means that the aggregate savings rate is higher. That leads to a higher capital level, but not a higher steady state growth rate. It looks like there is still a lot of work left in this literature.

Tuesday, December 1, 2009

The loss aversion of economic forecasters

Macroeconomic forecasting is tricky business, not just because it is difficult to predict the future. As a forecasters, you are risk averse and do not want to be caught dead wrong when you make a forecast that deviates from the consensus. Suppose you model (or your gut) tells you that GDP goes the other way from all other forecasters. If it turns out you were right, you win big, but the others have the excuse that they were the consensus. If you are wrong, you lose much more, as you deviated from the consensus. The best strategy is then to go with the consensus, whatever you actually found.

Is there really such an asymmetry in the forecaster's loss function? Jörg Döpke, Ulrich Fritsche and Boriss Siliverstovs explore this looking at 17 forecasters in Germany. They do not quite study the game I describe above, rather whether there is asymmetry in the under- and over-estimation of inflation and the growth rate. I found my question more interesting, but anyway, they find little evidence of asymmetry. They also find that forecasters work rationally, i.e., their forecasts are unbiased and they use all the information available. Overall encouraging results that should give very little space for playing the game I mentioned first.