Social Econ Blog

A few weeks ago, I posted about the long upper tail of the income distribution (or superstars). Yesterday's newspapers contained two stories which I think are relevant to our continued discussion of this topic that I want to point out.

First, Paul Krugman looks at the results I described and is worried that our society is tending toward a corrupt oligarchy. (The first link is to the TimesSelect page for subscribers; the second is to the Lexis-Nexis version for Harvard students (although I am not sure if this approach will work); if neither of the above work, Brad DeLong posts an excerpt and his thoughts here.) Krugman presents one alarming, though not totally crazy, view of the potential downside of growing upper-tail inequality. As I return to the series on inequality, I will try to illuminate the full set of issues related to this topic. That way, you can decide on your own whether or not you think Krugman is correct. For now, read it and ponder.

Second, "Da Vinci Code" author Dan Brown got sued for copyright infringement by two guys who wrote a book that made arguments similar to those which form the basis for Brown's book. I would expect higher income inequality to lead to more of these types of law suits. An economy that produces noticeably large returns to (somewhat randomly determined) superstars is ripe for such complaints.

First, in the presence of higher paid superstars, the expected benefits of filing such suits grows. A larger pot of money (and thus a higher potential reward) increases the expected return to filing a law suit for constant (or even slightly declining) probabilities of success.

Second, perceived "injustice" lowers the cost of litigation. We will discuss later humans' willingness to impose costs on themselves in order to punish those who have behaved "unfairly" or to right perceived wrongs. For now, it will suffice to point out that I am not surprised that some people feel slighted by someone else achieving great fame and fortune using a slightly modified version of their ideas.

Why?

People are always perplexed by the superstar economy. Why do athletes, movie stars, authors, etc. make such enormous returns for doing what appears to be so little? Sherwin Rosen's classic paper on Superstars argued that small, but perceptible differences in talent create very skewed compensation schemes in some fields. This occurs because everyone prefers to see the one extremely talented performer (instead of 10 mediocre ones). As such, most of the revenue in the market accrues to the top talents. (Check out the paper for a real description of his argument.)

His ideas seem correct and make it hard to argue that the existence of very highly paid superstars is unfair. If some people really are more talented then others (and thus provide a higher quality product then potential competitors), they deserve compensation for their ability to supply what people demand.

But what if differences in popularity (or superstarness) are not the result of pure, god-given talent? What if a large part of becoming a superstar is dumb luck? Or what if a large part of "talent" is produced? These, I think, raise more troubling questions for society to grapple with.

The case against Dan Brown essentially takes the view that talent is produced (I will ignore the dumb luck view for the time being). As such, those that contributed to his ability to perform should be compensated. The problem in this (and many other) cases revolves around ownership and fair compensation for use of ideas. Dan Brown got rich, perhaps in part, due to the fact that these guys provided ideas which he was able to turn into a best seller.

Patents and copyrights are supposed to make sure that those who generate useful ideas are compensated for them, but I am not sure how well this whole system works. We'll see how the case plays out. I need to think about this more, but I expect that the market for ideas is ripe with potential market failures.

Aha! Insight, here's what I think a substantial part of the problem is, although I am just now putting this all together so I may be off. Highly skewed distributions may tend to trigger thoughts about relative status. If someone in my reference group gets to the top of the distribution, I might become more aware of (and dissatisfied with) my own place. I may be particularly upset if I feel that I contributed in some meaningful way to that person's success, yet I do not rise up the fame, income, status distributions in proportion to my contribution. As such, people who contribute to star's success do not just want to be paid some absolute fee for their work done at the time. They want some of the backend. They want their income, etc. to rise (but probably not fall) with the star in order to reduce the gap in relative income.

Let's just use class as an example. On this blog and in class, I share my ideas with you, and I am training you to be more productive. I am paid a fixed fee for providing this service. This fee is the same for all tutorial leaders. Assume (and this not very realistic) that the compensation is proportional to the expected effect that tutorial leaders have on their students. That is, I get some function of the average effect of all tutorial leaders on their students. What I am arguing here is that, instead of being compensated in proportion to the expected effect of all tutors, I want to be compensated in proportion to the actual outcomes of my own students.

Many would argue that I should be compensated based upon my effect on my own students. If I am a more productive teacher, then I should get paid more. By tying my compensation to my effect on my own students, I have the proper incentives to do a good job. While that may be true (assuming that it is possible to measure my effect on my students -- which is probably not that easy to do), this scheme could be implemented by figuring out my expected effect on my students. I am arguing for something different.

I am arguing that a distribution which is highly skewed upward makes me prefer compensation based on the actual, not the expected, effect I have on students. Given that there is some chance that one of you will go on to fame and fortune, I don't want to be left behind. Even though my expected compensation does not depend on whether or not actual or expected outcomes are used, my concerns about my status relative to you (my former students) might lead me to prefer actual outcome based compensation. If you shoot up in the distribution, I want to shoot up some too. Otherwise, I will feel really bad about myself and you.

As such, in order to reduce the likelihood that I will feel ill will toward you should you go on to fame and fortune writing relationship advice columns, I will be refunding a small amount of my compensation to you in return for a percentage of your future earnings.

Ok, probably not, but would such a system work in equilibrium? Would it produce better outcomes?

Walk around the Yard and you'll hear the campus tour guides selling people on how great the faculty is at Harvard and how you want to come here to learn from these brilliant minds. Instead, here you are learning from little ol' me.

The faculty here really are brilliant though. This article from the most recent Harvard Magazine discusses the excellent research on behavioral economics happening right here. Read it and learn:

That overwhelming majorities of people would choose to save 200 people with certainty over a one in three change of saving 600, but will choose a one in three chance of saving 600 people over 400 people dying.

That on the same day the price of Shell stock in London traded at a different price than Royal Dutch stock in Amsterdam -- even though they are the same company.

That "if you ask people, ‘Which do you want right now, fruit or chocolate?’ they say, ‘Chocolate!’ But if you ask, ‘Which one a week from now?’ they will say, ‘Fruit.’" (Probably not that big of a surprise to anyone but 1980s economists.)

That placing a photo of a women on an advertisement has the same effect as 5 percentage point reduction in the interest rate on attracting men to a bank's loan promotion.

That France hates America more than Vietnam does.

And a number of other interesting challenges to the simple, rational, economic agent.

When I was deciding between attending Harvard or MIT for graduate school, the best advice I got on making the decision came from Marty Weitzman. He thought that people spent too much time worrying about this stuff. He advocated what he deemed the "20-second rule." His idea was that, when making a big decision, one should relax and clear one's head for 20 seconds and then go with whatever pops into your head once its over.

While it might seem strange for an economist to not advocate obsessing over the complete set of costs and benefits, I am a fan of the "20 second rule". Psychologists in a recent issue of Science suggest that this approach may be correct. They conclude "that purchases of complex products were viewed more favorably when decisions had been made in the absence of attentive deliberation."

Two mixed race parents produce twins -- one looks white, one looks black. Wild.

If we could get a bunch of these kids we could learn alot about the effects of skin color on people. Alas, I doubt we'll ever be able to accumulate a large enough sample (although the comments to the original article suggest that maybe we can).

What do we think would have happened to mixed race twins in ancient times or the middle ages or in the South during slavery? Clearly, there weren't alot of mixed race parents to draw from, but can you even imagine? How do you process this if you don't understand genetics?

People appear to be struggling to find the economics in the Cohen piece. Cohen's argument centers around the tradeoffs associated with the implementation of a specific incentive. As such, it is fundamentally an economic argument.

Just a reminder, here are some of the basic elements of microeconomics.

1) There are agents or decision makers
2) Each agent must make a decision(s) from a set of possible choices
3) Each agent has preferences over the set of choices, or the agent has an objective.
4) Each agent is constrained in its choices. That is, it faces scarcity, so it can't simply choose whatever it wants. As such, the agent faces tradeoffs.
5) Each agent makes choices to maximize its pursuit of the objectives. That is, it makes choices as long as the benefits of the choice exceed the costs, or, more specifically, as long as the marginal benefit of the choice exceeds the marginal cost.
6) Agents respond to incentives. If something changes the marginal benefits or marginal costs of some behavior, agents will adjust.
7) Further, it may be helpful to recall from your micro classes that agents weigh expected benefits and expected costs when faced with uncertainty and they discount future benefits and future costs when making decisions inter-temporally.

Growing up, I am certain all of you encountered, and perhaps embraced, the notion of fairy tale romance. This view posits the existence of some perfect mate who we are destined to meet and live with happily ever after.

That is, one can find love without costs. Somewhere out there a perfect match awaits us -- someone who is a far better match than any alternatives (i.e., the relationship product from pairing you with this person far exceeds the relationship product from any other possible pairing). Further, this person is so perfect that you will never have to engage in costly bargaining (because they have no traits you find annoying or vice versa and you agree completely on who should do what and how things should be allocated). Finally, you WILL meet this person (there are no search costs). You need only keep an eye out and overcome the few obstacles that stand in the way.

There is a reason we describe such romance as a fairy tale. Real love comes with a variety of costs -- search costs, forgone opportunities, bargaining costs. The importance we assign to these costs plays an enormous role in determining how we date and marry.

Some people believe strongly that a Mr. or Ms. Right exists and can be found with appropriate searching . Such people essentially assume that partnering with the "wrong" person imposes large costs because they forego the option of pairing with someone substantially better (more productive) and staying with the wrong person requires lots of extra bargaining and negotiation.

This approach to dating makes sense if one believes that people are very complicated and very hard to change. Under these assumptions, pairing with the "wrong" person substantially lowers an individual's welfare. As such, it makes sense to incur large search costs (date alot) in order to find the "ideal" mate. Further, we want to make dissolving imperfect matches fairly easy because resolving incompatibilities whenever they are found may be extremely costly.

The alternative view assumes people are relatively simple and capable of change. As such, relationship success hinges not on finding Mr. or Ms. Right, but rather it hinges on people having the right attitude and being able to figure out how to make things work. Under this view, searching wastes of energy and awareness that someone better exists only makes it more difficult to come to terms with what is, in fact, a good relationship.

The extreme version of this approach is arranged marriage. In arranged marriages two relative strangers are paired off and essentially told to "make it work." Many do, although it is important to note that such success does not indicate that imperfect matches and bargaining costs are irrelevant. Indeed, such "make it work" approaches to relationships are typically accompanied by large barriers to divorce and strong gender norms which govern the relationship. This suggests that people need to be pushed in order to "make it work."

So which assumptions are correct? Which approach to dating produces the best outcome for individuals? for society?

I don't know. Part of me worries that people make themselves worse off by consistently worrying about if there might be someone better available, and worse, people quit otherwise successful relationships because they view it as cheap (don't have to incur bargaining costs and a better match exists). If people overestimate the cost of bargaining with their partner or their chances of finding someone substantially better, then people might be made better off in the long run if we made it more difficult for them to break-up. On the other hand, if most people don't make these mistakes regularly, then making it more difficult to break-up only forces many people to stay in bad relationships longer then is necessary (imposing a big loss on social welfare).

My brother emails an interesting question. Essentially, he wonders if all this reality TV voting affects individuals' propensity to vote in "real elections." This is an interesting question. I do not have strong priors about which way I expect the effects to go. The easiest, and perhaps most likely, answer is that they are totally separate activities, and, as such, no relationship exists between them. However, one could argue that viewers of these shows internalize the importance (or futility) of voting and are thus more (less) likely to vote in regular elections.

While I don't know if I should expect a positive, negative, or neutral relationship between reality TV viewing/voting and regular voting, I do think that it is possible to look for this relationship empirically. So let's practice the empirical methodology I discussed in class last week.

We want to examine the relationship between reality TV viewing (or voting) and voting in regular elections. What constitutes simple evidence?

A reasonable start consists of a simple comparison of the fraction of reality TV viewers (or voters) who vote in a regular election to the fraction of non-viewers who vote in the regular election.

What data are necessary to compute even this simple relationship?

We need individual level data which includes information about each individuals' viewing of reality TV and about their voting in elections.

Are there obvious problems with the simple comparison?

Clearly, the set of people who watch (and vote) for reality TV shows differs from the set of people who don't watch. As such, it is likely that there are some omitted variables which bias the simple comparison. E.g., reality show viewers are much younger than the overall population. Young people, independent of reality shows, vote less in regular elections. As such, the simple approach attributes some of the effect of age on voting to watching reality shows. This is clearly undesirable.

What is the ideal evidence?

At the very least, we would like to compare very similar people who differ only in their viewing of reality TV. That is, we would like to control for a variety of factors like age, race, gender, etc. Yet, even with a large set of controls, a selection problem still exists. What if the unobserved characteristic(s) which explains why otherwise similar people differ in their TV viewing also explain why they differ in their voting behavior? In this case, we falsely attribute differences in voting to reality TV viewing when they should be attributed to these unobserved characteristics.

As such, ideally, we would randomly assign people into a groups which do and do not watch the reality show and then compare the voting behaviors between these two groups.

Running an experiment seems like it would be pretty hard, is there something else we might try?

Yes, we can look for a natural experiment or instrumental variable -- something which randomly changes two otherwise similar people's propensity to watch a voting reality show, but does not change their propensity to vote (except through the change in TV viewing). I would suggest that, in the case of a show like American Idol, we can use Idol finalists' hometowns as instruments.

I would be shocked if Idol ratings do not shoot up in the hometowns of those who make the finals. The fact that an individual lives in the same area as someone who makes the finals (or semi-finals since that is before anyone votes) is random. Thus, I expect that living in the same place as someone who makes the finals randomly increases the propensity to watch American Idol. As such, we can, essentially, compare these people who were "randomly" exposed to Idol with similar people who were not exposed. If their propensities to vote in regular elections differ (all else equal), then these differences are the result of watching Idol.


Wow, that sounds very cool, can I do this for my term paper?

Yes, you can. However, there are a couple of remaining problems. To my knowledge, none of the data sets which ask people if they voted in, say, the last presidential election ask people if they watch American Idol. The National Election Study certainly doesn't. Maybe one of the PEW Center's datasets does (I believe they have questions about which news channel you watch, so maybe they have stuff like this as well). Whether or not one voted in the last election is a common survey question, the trick will be to find a dataset which has it and information about TV viewing. You will also need data on where the survey respondent lives, and you will need a significant number of respondents to be from the same areas as the Idol finalists. This could be an even more significant problem.

As such, I think a slightly different approach is more feasible. Gather panel data on voter turnout for communities (this is actually not that difficult) and then relate changes in voter turnout to having an Idol finalist in the period between elections. This is what as known as a differences in differences approach. You compare voter turnout in communities before and after they had an Idol finalist to a similar set of communities without Idol finalists. Any differences in the changes in voter turnout between the two sets of communities across the two periods is attributed to the presence of an Idol finalist (assuming a few things I won't go into here).

Let me know if you are interested in working on this.

My sister demands (and receives) a post about voting. She continues to complain that, even though I might have opinions about who should win shows like American Idol or Dancing With the Stars, I refuse to vote. She wants your opinions.

Many economists share the view that voting is irrational. The probability of my vote deciding an election is essentially zero, so the expected benefit to me of voting is zero. Voting is costly, so MB less then MC implies don't vote.

We observe people voting, though, so we need to explain this. Some argue that voting is consumption. I.e., even though it doesn't matter, I enjoy the fact that I get to express my opinion. Others argue that society imposes costs on those who don't vote. This is why we give out stickers saying "I voted" and why a large fraction of people lie about the fact that they voted (it is an empirical regularity that surveys asking people if they voted show a much higher percentage of people voting then actually voted -- guilt is about the only explanation for why someone would lie to an anonymous surveyor).

This is essentially what is happening to me right now. I know my sister is going to ask if I voted, and I know that she is going to "punish" me for my lack of interest. Why not avoid the nagging and take the five seconds to vote? My best guess is that either after 25 years, I am totally immune to my sister's whining or (and this is more likely) I actually enjoy annoying her. Further, no one else in my reference group is going to punish me for not voting (in fact, they are likely to punish me for voting and for watching these shows in the first place), my vote is not going to influence the outcome, and my life is not affected either way (I view the emotional response to my favorites winning or losing as perfect substitutes -- I either get validation or I get to complain, looks like a win-win to me), so it is pretty easy for me to not vote.

That said, I disagree with my economist colleagues who argue that people shouldn't waste their time voting. To me, it only makes sense if I don't care about the outcome or I know the distribution of those voting matches the population distribution.

The only way voting is irrational is if I know that a lot of other people are going to vote. Obviously, if everyone thinks everyone else is not going to vote, then the best strategy is to vote. The argument outlined above relies on me knowing that a large number of other people are going to vote, so I can get a free ride off them.

But what if the distribution of preferences of the group of free-riders is different from the group of for sure voters? In this case the failure of the free-riders to show up, actually changes the outcome. Thus when economists try and convince people to not vote, they may be shooting themselves in the foot.

Consider the following super-simplified example. Imagine a population that consists of roughly equal proportions of two types of people -- rational maximizers and others. A vote is to take place. If forced to vote, the rational maximizers are much more likely to choose A, and the others are more likely to choose B. However, one day, Ed, one of the rational maximizers starts thinking and realizes that his vote is very unlikely to matter. Ed explains his logic to several of his collegues. They marval at his rationality and spread the word. On the day of the election, all of the rational maximizers stay home, most of the others vote. B is chosen by an overwhelming majority. Was it still rational not to vote? Maybe individually, but collectively it was likely not a good choice. So unless you are confident that the set of people who are likely to opt out of voting are taken equally from both sides, you probably should vote and convince others who share your views to vote.

// posted by BW @ 12:04 PM 6 Comments

Getting off the relationships topic for just a second -- eBay is fascinating. People bidding on eBay continue to make economists look bad by not behaving like we expect them to.

First, there is new research which suggests that people ignore shipping costs (i.e., fail to do simple addition).

eBay sellers can boost profits by setting a low opening bid price and charging higher shipping charges, according to recently published research by Haas Professor John Morgan.

Morgan and co-author Tanjim Hossain, an assistant professor at Hong Kong University of Science and Technology, held 80 auctions of new music CDs and Xbox video games to test how consumers respond to different price schemes. In the eBay study, they varied the opening bid price and shipping charges on identical CDs, ranging from Britney Spears to Nirvana, and video games, including Halo and NBA 2K2.

In theory, dividing a price into these two pieces should have little effect on overall demand for a good, the economics professors note. A perfectly informed and fully rational consumer will merely add together the two parts of a price to obtain the total out-of-pocket price for an item and then decide whether to buy and how much to bid based on this total price. But that’s not what happened in their eBay auctions. Instead, they found that lowering the opening bid price while raising shipping charges attracts earlier and more bidders and ultimately leads to higher revenues compared with doing the reverse. Those findings suggest consumers pay less attention or even completely overlook shipping costs when making bids, the professors conclude.

Second, eBay is a second price auction. That is, winning bidders don't pay their bid. They pay the price bid by the second highest bidder. One of the things that I was forced to prove during my first year of grad school is that the optimal strategy for bidders in a second price auction is to figure out how much the good is worth to you and bid that amount. People don't behave this way. They bid, and when someone outbids them, they bid again and again. This is weird. Steven Landsburg explores this phenomenon in more detail here.

Tyler Cowen admits he's a square and takes on the polygamy wing of economics. He asks, in my opinion, the right questions -- basically, does allowing polygamy make society better off? Economists frequently fall into a trap of noting how some group of individuals can be made better off by some alternative arrangement while forgetting to think about other implications.

The economic justification for polygamy is simple. One of the core assumptions of economics is that more choices make people better off. If people freely choose to engage in polygamy, then they must be better off then they were under monogamy -- otherwise they would have chosen to be monogamous. Thus, allowing them to choose polygamy improves their welfare.

But what if your choice to be polygamous makes society worse off? What if, as Cowen suggests, polygamous relationships encourage the production of more children at the expense of each child's quality and this produces long-run negative externalities in the form of lower growth. Should we, as Cowen argues, "encourage family structures that spur human capital formation"? Do we beleive, as he does, that "polygamy does not do the trick"?

As a helpful hint for completing your first paper assignment, let's outline the key assumptions of this argument. First, individuals choosing to engage in polygamous relationships will produce more children with less human capital. Second, that more kids with less human capital imposes a cost on future generations in the form of foregone growth. Third, that the individuals choosing polygamy fail to internalize (or care about or offset) these effects when making their choice. Finally, that the discounted loss in future well being offsets the total (current and future) gains from legalized polygamy.

If you believe this set of assumptions (or something similar), supporting restrictions on polygamy may make sense. Note, that before pledging your support to the anti-polygamy group, you should ask yourself one final question -- is there a different policy choice that achieves the same goal (increasing future growth) at a lower cost? (This, of course, assumes that lost human capital is the only reason you oppose polygamy. If you have other reasons, then you need to consider if their is a cheaper way to achieve all of your goals.)

UPDATE -- Alex Tabbarok disagrees with Tyler's argument.

Steven Landsburg ponders two interesting questions about ending relationships:

Why men pay to stay married (and women pay to get divorced).

Is divorce just a break down in negotiations?

While economists have not yet provided full justifcation for Freud, Raquel Fernández, Alessandra Fogli, and Claudia Olivetti argue that men do "marry their mom" in that men who's mothers were skilled or worked were more likely to marry women who are skilled or worked. The paper can be found here (much of it is quite technical, but the results might be interesting), and here is the abstract:

This paper argues that the evolution of male preferences contributed to the dramatic increase in the proportion of working and educated women in the population over time. Male preferences evolved because some men experienced a different family model one in which their mother was skilled and/or worked. These men, we hypothesize, were more inclined to marry women who themselves were skilled or worked. Our model endogenizes the evolution of preferences in a dynamic setting and examines how it affected women's education and labor choices. We present empirical evidence based on GSS data that favors our transmission mechanism. We show that men whose mothers were more educated or worked are more likely to marry similar women themselves.

There is evidence that they might. Steven Landsburg discusses the evidence and the debate in two columns in Slate. The reseach it is based on is by Gordon Dahl and Enrico Moretti. Thier paper can be found here. Here is the abstract to the paper:

This paper shows how parental preferences for sons versus daughters affect divorce, child custody, marriage, shotgun marriage when the sex of the child is known before birth, and fertility stopping rules. We document that parents with girls are significantly more likely to be divorced, that divorced fathers are more likely to have custody of their sons, and that women with only girls are substantially more likely to have never been married. Perhaps the most striking evidence comes from the analysis of shotgun marriages. Among those who have an ultrasound test during their pregnancy, mothers carrying a boy are more likely to be married at delivery. When we turn to fertility, we find that in families with at least two children, the probability of having another child is higher for all-girl families than all-boy families. This preference for sons seems to be largely driven by fathers, with men reporting they would rather have a boy by more than a two to one margin. In the final part of the paper, we compare the effects for the U.S. to five developing countries.

What do you think is going on?

In comments below, Jenny points us to two interesting pieces on current trends in "dating" among high school students. Try and read them, I'd like to discuss them in class (probably next week).

As you read them ask yourself a few questions. First, do the authors convince you that things are really different from how they used to be? Why or why not? If you think that there are real trends, what is causing them? That is, why are people engaging relationships differently than they used to? How are the incentives different? Finally (and this gets back to the previous post on hook ups), are you at all concerned by this description? Do you think that these behaviors will have long term consequences for how these people will approach relationships in the future?

In the modern love match system, individuals essentially try and get the best deal that they can in their relationships. Essentially, they wake up every day and ask themselves is the expected benefit of remaining in this relationship (how happy has this person made me in the past and how do I expect things to get better or worse in the future) higher than the expected cost of leaving this relationship and re-entering the market (e.g., how much of a hassle would it be to end the current relationship, who would you likely match with if you were to re-enter the market, how hard would it be to find them)?

Before class on Thursday please think about (and, if you are so inclined, post in comments) what are the key determinants of benefits and costs that people consider when making this choice.

Update -- One way to potentially help focus your thinking is to ask yourself why someone would want to be in a relationship versus being single? This should help point you toward the basic costs and benefits of being in a relationship.

Part of the process of developing and maintaining relationships involves gift giving. Why? There are lots of reasons, I am sure, but here is a very simplistic use of economic tools which offers a compelling explanation.

For simplicity, I will just describe gift giving while courting. Two people, Dave and Diana, are getting to know each other. Dave realizes that he quite likes Diana and would like to keep seeing her. He wants to let Diana know how he feels. He's said it too her, but talk is cheap. Diana has heard how great she is from lots of suitors. Dave wants to strongly signal his interest. What can he do?

He can give Diana a gift. By giving Diana a gift, Dave signals Diana that he is enjoying a large net benefit from being with her (that is, the benefits of the time he spends with her exceed the costs). Dave would not be willing to spend resources signaling his affection if he were only marginally interested. Diana realizes that Dave would not want to spend resources if he were only marginally interested, and thus now trusts that he is really interested (of course there is the looming question about what exactly Dave is interested in, but, for now, assume that Dave is an upstanding young gentleman).

What exactly should Dave give?

This article suggests that he should give "an extravagant gift that has no resale value." This is because "women feel confident that they have found a strong and committed mate when they receive an extravagant gift. And men avoid gold-diggers by giving only gifts that have no intrinsic value."

I agree with this premise in many ways, but I actually have some slightly different views on what kinds of gifts Dave should give. I will save this discussion for class, but feel free to discuss your own thoughts on gift giving in the comments.

For the same DnD article discussed in the previous post, the reporter asked me to "briefly explain the economics of dating."

Here is my prepared response:

The economics of dating focuses on a few key questions:

Basically, we want to know who meets whom; after meeting, who dates whom; once dating, who continues to date/get married, etc., and why. We are also interested in understanding when this market may fail – i.e., what prevents potentially good matches from being formed?

To figure this out, one needs to understand some basic features of the social network, understand the sources of relationship productivity, and understand the bargaining process within relationships.

Understanding the social network helps us understand who is likely to meet whom and what information are they likely to have (or to lack) about potential partners.

Relationship productivity is usually referred to as “chemistry”, but it is really productivity. In dating economics one focuses on what makes one pairing of people more productive then another. This is very important because ultimately we will only consider being in relationships with people with whom we can achieve a certain level of satisfaction (or utility).

Finally, dating economics focuses on how the relationship product is allocated through bargaining. (E.g., I will go shopping with you and endure you trying on 27 pairs of jeans in exchange for you not nagging me during the game -- this is massively over simplified, but you get the idea. In reality, most relationship bargaining is not this explicit, but it still goes on.)

Ultimately, two things lead to the end of the relationship: breakdowns in relationship productivity and breakdowns in intra-relationship bargaining. Once an individual no longer believes that they will be better off staying in the relationship versus reentering the market, they leave, and the relationship ends.

The economics of dating is about exploring and understanding the myriad of issues which affect this process.

Last Spring, Diversity and Distinction heard about our class, and interviewed me for an article (scroll to page 18) about "hook ups."

The reporter was kind enough to send me prepared questions. Here is my complete response to her question "is hooking up optimal?":

Well, that really depends on what you mean. You can think about it at two levels: the individual level and the social level.

Individuals.

Amongst the individuals actually hooking up, if we assume that they are rational (in the economic sense) and fully informed, arguing that their behavior is sub-optimal is difficult. They choose to do it, so it must be their best available option (otherwise they would have chosen the alternative).

If the effects of hooking up are felt only by those involved, then the social planner should only intervene if he/she feels that the decision is not based on full information or that he/she somehow "knows better" then these individuals what is good for them.

On the information issue, as long as both sides are fully aware of the situation (e.g., that this is just short-term consumption -- a random hook-up), then I don't see grounds for concern. If information is asymmetric, i.e., one party is just looking to hook-up while the other is thinking that this is part of developing a lasting relationship, then maybe we should care (depending on how you trade off one party's gains versus the other's losses).

Another potential information problem arises if individuals do not understand the long run consequences of their actions. It is possible, although I have no idea to what extent, that the effort that is invested in hooking-up could be spent in some alternative manner which would produce better lifetime outcomes. That is, hooking up may have large opportunity costs that people don't fully account for. For example, some argue that dating is a learning process. When you date you learn about yourself, about what you desire in a partner, about how to effectively bargain in relationships, etc. If the effort spent hooking-up crowds out investments in dating, then the individuals might be making themselves worse off in the long run.

[Note -- One could also argue the complete opposite. Dating has nothing to do with personal growth. When people are ready for a "real" relationship they settle down. Dating in college, which has a low probability of producing a long term mate, is purely consumptive and may distract people from making productive long run investments in their human (classes) and social (friends and activities) capital. So allowing people to satisfy physical urges by hooking up rather then involving themselves in distracting relationships is a good thing.]

Alternatively, one might argue that individuals don't care enough about their future selves relative to their current self and they take actions which effectively "screw" their future selves (this is known as hyperbolic discounting).

So if individuals lack perfect information, or if they are hyperbolic discounters, then society might decide that hooking-up is sub optimal and want to reduce it -- even though no one other then those choosing to hook up is affected.

Society

The above analysis assumes those engaing in hook-ups pay all of the costs and reap all of the benefits. This may not be the case. If hooking up produces spillovers (positive or negative), then these necessarily must be accounted for and included in the analysis before establishing the efficiency (which I prefer to the term optimality) of hook-up culture.

As such, we must ask, "how are those not engaging in hook up culture affected by it?"

At the most basic level, one might raise concerns about public health and safety. If hook up culture spreads diseases, that is bad and wasteful for society. More subtly, hook up culture may (and I stress that this is purely speculation) spawn clearly undesirable behavior like rape or other sexual misconduct. Also, hooking up potentially increases the probability of people abusing alcohol (because alcohol is very effective at lowering "prices" in the hook-up market). In all three of these examples, those seeking to hook up do not bear the full cost of behavior. As a result of people seeking to hook up, others must incur costs preventing the spread of disease, discouraging sexual misconduct and caring for its victims, and keeping drunk people under control.

Slightly less obvious are the effects of a large hook up market on the traditional dating market. As the market for hook ups grows stronger, it becomes more attractive to the marginal dater (either because the price of hooking up falls or peer pressure to particpate in hook ups grows). This reduces the supply in the dating market and makes that market less productive (e.g., it is harder to meet people, there are fewer events designed to facilitate dating matches, ...). If, for some reason, the dating market is better then the hook up market (or that it is more important to have a large functioning dating market then a large hook up market), then a growing hook up market might be bad.

Even more problematic, if it is impossible to distinguish people who want to date from people who want to hook-up, the dating market can fail. If people interested in hook-ups don't care if the hook-up with a dater or player (or even worse if they prefer daters), then they might show up in both markets. If an unsuspecting dater gets "preyed" upon by a player, they may be more hesitant to enter the dating market. Eventually, this can lead the entire dating market to unravel. So all the would-be daters are made substantially worse off by the inability to distinguish players. If there are ways to separate people (and this is hard), then this is not a problem.

Ultimately, I think the key to determining the efficiency of hook ups is understanding how dating versus hooking up affects people. If dating is important for personal development (i.e., it develops human capital that can be employed to improve all relationships) and one needs to be dating consistently to maximize this development, then it is important to, at least, make sure that those who would be interested in dating can do so. Further, one may also want to actively discourage hook ups to improve the overall dating market and prevent people from making "a mistake."

Starting on Thursday, we will start examining relationships -- who do we date, why do we break-up, is their dating market failure at Harvard, ... I hope to post as many of my various thoughts and models as I can over the next week. I know that this is one of the more popular topics in the course, so I will also try and post links to a variety of interesting articles I have found over the years.

To start, check out this article by Tim Hartford on "The economic case for polygamy" from Slate. Economists like to make this provocative argument. I first encountered it in Steven Landsburg's The Armchair Economist. Landsburg argues that monogamy stems from men not wanting to compete as hard for women. That is, men formed a cartel in order to restrict their supply and discourage competition. He argues that, if given the chance, men are more likely then women to pursue polygamous relationships. As such, if polygamy were legal, there would be intense competition for women which would give women the upper hand in relationship bargaining. To counter this pressure, men colluded to create and enforce a one man, one woman rule which improved their bargaining position. Hartford picks up this argument and examines the evidence that men or women in societies with gender imbalances (due to war, prison, or selective abortion) have worse relationship outcomes.

I once tried to investigate these effects myself in a couple of ways. First, I wanted to exploit random variation in the gender mix within school cohorts to examine dating and relationship outcomes in US schools. A quirk of nature created a severe gender imbalance in my school cohort (in my middle school, guys outnumbered girls 2 to 1 -- not surprisingly, we were "the worst class" to pass through the school in as long as anyone could remember). As such, the women of my class should have faced more competition for their attention, and I want to know what they bargain for. Unfortunately, the dataset I wanted to use lacked precise information on gender ratios and did not include enough schools with significant deviations from 50-50 mixing to allow for identification.

My second approach was to examine relationship outcomes for tall girls or short males. I know many girls, like my 6'2" "little" sister, adopt a rule that they won't date anyone who is shorter than they are. As such, we might expect that tall girls and short males to face weaker bargaining positions (and tall men and short women strong positions) in the market for dates. I did a little work on this, but don't recall being that successful. In principle, this should work. Perhaps, someone should consider investigating this for their term paper.

Is a distribution of income in which those at 99.9th percentile make 10 times as much as those at the 90th percentile, make 29 times as much money as those at the median, and make 90 times as much as those at the 20th percentile, and where the gaps between those at the top and those at the middle and bottom are growing, fair? Is such a distribution efficient?

Answering these questions is not nearly as simple as many believe. There are several key questions that need to be address before one can hope to assess the equity and efficiency of such a distribution. E.g., what is the time horizon of the distribution? Does this distribution describe individuals’ or families’ relative earnings for a single hour? A day? A year? A lifetime? Several generations? Obviously, these distinctions matter. Depending on how much mobility there is across time, the distribution of income described above (which roughly describes the distribution of annual income in the US in 2001) could look very different if the incomes of several generations are included. (E.g., in a world with lots of mobility, those at the top today come from families who were poor yesterday, so if we include parents and children together things balance out and the distribution is not nearly as wide.)

Further, how does this distribution compare to the distribution in previous periods (using a consistently defined period like a decade)? That is, how much income growth is there and how is it distributed? Is the entire distribution of inflation adjusted income shifted right, so that every position in the distribution is better off than it used to be, or are some (or all) positions worse than they were before?

Finally, are there acceptable tradeoffs between inequality and growth? E.g., is higher income inequality acceptable if all parts of the income distribution have grown (so everyone is absolutely better off, but some are relatively worse off)? Or would we prefer to exchange some amount of income growth for less inequality?

These questions form the foundation for much of the debate about social policy in the US and around the world. The answers to these questions define who is rich and who is poor, how we feel about them, and whether and what might need to be done to address any potential concerns. Yet, very rarely do people clearly articulate their assumptions about these issues when discussing them. As such, people talk past each other, fail to communicate, and ultimately become more and more frustrated with each other.

Over the next several weeks, I plan to return to these questions in hopes of both clarifying your (and my own) thoughts on these important issues and showing how economists try and clarify discussions by focusing people’s attention on the essential assumptions that underlie their point of view.

Eventually, I will provide a few basic facts about Americans' attitudes about these topics. Following that, I plan to discuss the potentially growing disparity in relative income (regardless of time horizon) by describing the trends in income inequality and mobility. Next, I will describe growth across the income distribution for several different periods. Once I have provided a reasonable description of where we are, I will speculate on where we may be heading based on what we think is driving current trends. Finally, we will discuss if where we are (and where we are heading) seems like where we want to be in terms of both equity and efficiency. If so, why are we satisfied? If not, where would we like to be and what might we do in order to try and get there.

I am not sure what the schedule will be, and this is slightly off topic for where we are in the course. But, part of the beauty of a blog is that I can post things as I am motivated to get them done, and they will still be here later.

For Tuesday, I would like you to read two papers. Charles Manski's "Economic Analysis of Social Interactions" and Ed Glaeser's "Psychology and the Market." You should be able to find these papers on your own. These papers provide some key tools which we will use throughout the rest of the semester, so please read them before class.

For the email assignment, please email me a list of groups you consider yourself to be a part of and briefly discuss how your affiliation with that group affects your choices (i.e., how do you think your behavior would differ if you were not a part of that group?).

Also, remember to order/purchase Leil Lowndes How to Talk to Anyone. We'll need it for our discussion of social skills in a few weeks.

Tyler Cowen shares some interesting thoughts on the toilet seat issue after reading a different formal approach to the problem.

Here are a few views:

1. Economizing hand motions is the key, so just leave it "as is" when done. It might be needed in that same position again.
2. Such matters should be arranged to please your wife. It is signaling and a symbolic recognition of her value. The only question is what you get in return, but if you get anything at all it is worth it.
3. Avoiding midnight surprises is the key, which means always leave it down.
4. Many women don't like the idea that guests could show up and see the insides of their toilet bowls.

#2-4 all point in the same direction, and I don't give a damn about #1. But somehow I, like many other men, fail to optimize on this question. The more interesting question is why this remains a issue.

Here goes:
1. Women keep it an issue, rather than delivering decisive argumentation, to test their men and their sense of commitment.
2. Men cannot help but rebel against the female ethic of caring, especially when it concerns something so infantile as a toilet seat.
3. Existential freedom. I once had a European roommate, and it drove me crazy that he closed all the doors around the apartment. Perhaps an occasional open seat is a quixotic demand that our universe show true randomness and openness.
4. Men prefer to focus more intensely on a smaller number of issues and this isn't one of them. But obviously that explanation can no longer apply to me.

As I mentioned in the previous post, I think that people undervalue experiences (or memories). Given that I am trying to train you to think like economists, I thought I would make my argument more formally. This way, hopefully, you'll be able to see the assumptions which my hypothesis is built on and assess for yourself whether or not you think that they are bogus.

Economists believe that people make decisions on the margin. That is, if the marginal benefit of an activity exceeds the marginal cost, then the individual will engage in the activity. When I argue that people undervalue experiences, I am, in economics terms, effectively saying that people misperceive the marginal benefit of activities.

How can this be?

Well, what constitutes the benefits of a given activity?

1) There is the direct consumption (enjoyment) of the activity while I am doing it. Further, if there is any investment (e.g., skill acquisition) involved in the activity, then the discounted, expected benefit of that investment will also be included.
2) There is the enjoyment of reliving the experience privately later on through memory.
3) There are the benefits of reliving the experience publicly through stories. These benefits have two parts. First, there is the fun of telling the story and enjoying the attention and responses of others. Second, sharing our experiences with others (particularly others who have similar experiences themselves) is an essential part of creating and maintaining social connections which provide enormous returns (e.g., friendships, favors, etc.) over longer periods.

In arguing that people underconsume experiences, I am arguing that they are failing to appropriately assess at least one of these potential benefits.

Is this likely? Is it likely that people just forget (or don't realize) that their memories are valuable?

Explanations which rely on people making systematic mistakes are generally unsatisfactory to economists. We view humans as rational, and, as such, they should not consistently make mistakes. Yet, for me to believe that people are not optimally engaging in activities, I have to believe that they do. More specifically, at least one of these specific assumptions must be true:

1) People forget memories when making decisions. That is, numbers 2 or 3 above just don't factor into the decision at all.
2) People underestimate the probability that a given experience will be memorable. People are aware that memories are useful, but they incorrectly assign essentially a zero probability to the likelihood of any given experience being memorable.
3) People underestimate the chance that a given experience will be useful in creating and maintaining social relationships. Given the uncertainty about who you will meet and what they will respond to, people incorrectly believe that the expected ex post social benefit of a given activity is close to zero.
(These last two could also alternatively be thought of as people being more risk averse than I imagine them to be.)
4) People understand that experiences are durable, but they substantially discount the future.
5) People don't properly assess even the direct, contemporaneous consumption benefits from the activity.

Which of assumptions are likely true? I don't know. That is an empirical question. However, if I want to continue to argue that people underconsume experiences at least one of these must be true.

On a related note, a great Calvin and Hobbes 3 day series agrees with (heck, it helped to shape) my view and suggests that paternalistic intervention can improve outcomes. I can't figure out how to link to it, but I will describe it. (For devotees, it can be found on page 9 of Attack of the Deranged Mutant Killer Monster Snow Goons.)

Calvin: C'mon Hobbes, we have to go outside.

Hobbes: We HAVE to?

Calvin: Yeah, Dad won't let me watch TV. He says it's summer. It's light late, and I should go run around instead of sitting in front of the tube. Can you believe it?! What a dictator!

Hobbes: How cruel it is to be forced to play.

Calvin: I'll show him. I'll refuse to have fun.

[The second day shows Calvin and Hobbes having fun.]

[The final day]

Dad: It's getting dark Calvin. Time to come to bed!

Calvin: But Hobbes and I were catching fireflies. Can't we stay out a little longer?

Dad: Ha! First you didn't want to go out, and now you don't want to come in! See, by not watching TV, you had more fun, and now you'll have memories of something that you DID, instead of something fake that you just WATCHED.

Calvin: Nothing spoils fun like finding out it builds character.

Tyler Cowen provides some interesting links.

This article describes the growth in the "experience economy" -- i.e., people may be more interested in spending money creating memories. I can't remember if I've discussed this in class yet, but I have long argued that people undervalue (and thus underconsume) experiences by failing to recognize that they are a similar to a durable good (like a car or a washing machine). Nine years later, I continue to consume the rainy afternoon I spent reading Der Spiegel at Cafe Prueckel in Vienna eating warm Milchrahmstrudel with a vanilla cream sauce.

This article suggests that the downside risk of seeking out experience (e.g., you get hurt or sick) may not be that bad (because as long as it doesn't kill you, you'll have more character).

Finally, don't get too emotional, however, because you may not be able to remember things.

Peter Kennedy is very talented at making sense of econometrics. For those studying econometrics, I recommend his book A Guide to Econometrics. I have found it useful quite often. For free you can also obtain his interesting articles on what to do if you get the wrong sign and the ten commandments of applied econometrics (which I learned about in this blog post).

Here's the short version of the 10 commandments (see the paper for explanations):

1. Thou shalt use common sense and economic theory.
2. Thou shalt ask the right questions.
3. Thou shalt know the context.
4. Thou shalt inspect the data.
5. Thou shalt not worship complexity.
6. Thou shalt look long and hard at thy results.
7. Thou shalt beware the costs of data mining.
8. Thou shalt be willing to compromise.
9. Thou shalt not confuse significance with substance.
10. Thou shalt confess in the presence of sensitivity.

Richard Cohen wrote a column on Wednesday for the Washington Post questioning the value of algebra. For your first paper assignment, I want you to write an editorial (max 1200 words) evaluating Cohen's argument. It should be clear from your essay whether or not (or on what points) you agree or disagree with Cohen. That is, your paper should put forth a clear thesis and defend it.

Some advice: Effectively completing this paper requires being able to clearly summarize Cohen’s argument. To do that you should focus on what assumptions he makes. Most arguments of this nature (yours included) boil down to a series of assumptions. Identifying the assumptions that Cohen makes – regarding objectives, tradeoffs, relationships, etc. – and the logical relation between them is the essential (and hopefully obvious) first step in evaluating his argument and constructing your own.

Your argument should reveal that you examined Cohen's argument and constructed your own using the basic tools of economics that we covered in class this week. However, you should try to avoid using too much economic jargon. You should think of your audience as consisting, not of just economists, but rather the set of readers of the Washington Post.

Grading – When I grade papers I do the following. I first read all the papers to get a basic sense of the distribution. I then read each carefully while trying summarize your points in my own words to make sure I understand them. As I do this, I comment on the strengths and weakness of your points and how they are made (i.e., how clear and engaging your writing is). While doing this I am looking for demonstration that you clearly understand the argument Cohen makes and a clear, thoughtful analysis of that argument and its conclusions using economic tools. That is vague, but it unfortunately is the best I can do.

I enjoy amusing (or shocking) people by applying economics (particularly economic jargon) to situations they don't expect it to be applied to (like love). However, I don't think I have ever even come close to this:

But back to whores: Edlund and Korn admit that spouses and streetwalkers aren't exactly alike. Wives, in truth, are superior to whores in the economist's sense of being a good whose consumption increases as income rises--like fine wine. This may explain why prostitution is less common in wealthier countries. But the implication remains that wives and whores are--if not exactly like Coke and Pepsi--something akin to champagne and beer. The same sort of thing.

...

Yet according to data assembled from a wide variety of times and places, ranging from mid 15th-century France to Malaysia of the late 1990s, prostitutes make more money--in some cases, a lot more money--than do working girls who, well, work for a living. This held true even for places where prostitution is legal and relatively safe. In short, streetwalkers aren't necessarily being paid more for their increased risk of going to jail or the hospital.

Notwithstanding Jerry Hall's quip when she was married to Mick Jagger, about being "a maid in the living room and a whore in the bedroom," one normally cannot be both a wife and a whore. "Combine this with the fact that marriage can be an important source of income for women, and it follows that prostitution must pay better than other jobs to compensate for the opportunity cost of forgone-marriage market earnings," Edlund and Korn conclude.

The previous post on social influences in the music industry hints at something which seems to be occurring (or at least it is being noticed) more frequently. That is, many phenomena seem to follow a distribution with a very long upper tail. In the case of the music post, there were a few songs which grew more and more popular and then a bunch of songs which "never quite make it."

Given the lack of (or only small) differences in quality between those become superstars and those who languish in obscurity, is the distribution of outcomes "fair?" There is a certain tendency to think that people get what they deserve. We think that if someone becomes a superstar it must be because they somehow have greater talent or put in more effort. But what if this is not the case? Are we ok with a system in which many outcomes are determined by what are essentially big lotteries which pay randomly selected individuals huge sums and most others very little? A system where even though I am just as hot as Brad Pitt (and let's be honest I obviously am), he gets to be a treated as "royalty" while I am just, well, me? If yes, why? If not, why not and what should/can we do to fix it?

I don't know the answers to these questions, but I hope to explore them somewhat in this space. (Regardless, it is kind of interesting that the US has essentially created a system where we quasi-randomly select "royalty" -- which is essentially what celebrities are in the US in some bizarre sense. Perhaps even more bizarrely, instead of providing us "protection" or whatever, our "nobles" provide distraction -- largely in the form of gossip. This says something deeper about modern life, but I am not sure what.)

Anyhow, to start our examination of the upper tail, I recommend checking out this interesting paper by Ian Dew-Becker and Robert Gordon which looks at the growth of the long upper tail in the distribution of income between 1966 and 2001. It is all very interesting, but most relevant for us are the sections toward the end on micro evidence.

A few teaser findings:

Between 1966-2001, "of the total increase in real labor income of over 2.8 trillion dollars, less than 12 percent went to the bottom half of the income distribution. More of the income change accrued to the top one percent than the entire lower 50 percent, and more accrued to the top1/100 percent than to the entire lower 20 percent. The small share going to the bottom half reflects not just growing inequality of real hourly wages, but a smaller number of hours worked at the bottom."

Over 35 years, inflation-adjusted annual wages for those at the middle of the income distribution increased by a total of only 11 percent (from $23,667 to $26,251 for an average of 0.3 percent a year), but the annual wages for the top .01 percent increased by 617 percent (from $442,626 to $3,172,691 for an average of 5.63 percent a year).

Matt Gentzkow and Jesse Shapiro (two graduates of the College who were also in the Ph.D. program with me) have a new paper out indicating, at least in the early days of TV, watching TV in pre-school didn't negatively effect child achievement. Their identification strategy (i.e., how they create a convincing estimate of the causal effect of TV) is quite clever and is a good example of how good economists (like Gentzkow and Shapiro) think about empirical problems. I recommend checking it out. The abstract:

We use heterogeneity in the timing of television's introduction to different local markets to identify the effect of preschool television exposure on standardized test scores later in life. Our preferred point estimate indicates that an additional year of preschool television exposure raises average test scores by about .02 standard deviations. We are able to reject negative effects larger than about .03 standard deviations per year of television exposure. For reading and general knowledge scores, the positive effects we find are marginally statistically significant, and these effects are largest for children from households where English is not the primary language, for children whose mothers have less than a high school education, and for non-white children. To capture more general effects on human capital, we also study the effect of childhood television exposure on school completion and subsequent labor market earnings, and again find no evidence of a negative effect.

Meanwhile, another study indicates that playing video games may delay brain aging.

How important are social influences in determining a song's popularity? This experiment suggests that they are (unsurprisingly) pretty important.

Here's the basic idea. Randomly assign a bunch of teens into two groups. In one group, participants choose songs from unknown groups based solely on title and group and then rate the songs. This establishes the "quality" of the songs. In the second group, people see the same lise of songs, but also see how often each song has been downloaded. In the end, "Researchers found that popular songs were popular and unpopular songs were unpopular, regardless of their quality established by the other group. They also found that as a particular songs' popularity increased, participants selected it more often."

Over at Marginal Revolution, Tyler Cowen wonders why more people don't post bonds (see below) with family or friends in order to incentivize themselves to exercise. He offers four hypotheses for why this doesn't work (and thus why it isn't done) -- friends and family make poor enforcers of this type of thing, money given to a spouse is not really much of a loss to you, you really don't want to exercise, you don't want to be obliged to exercise (because this will likely lead you to avoid thinking about exercise altogether). He likes the last hypothesis, and I agree.

More generally, I wonder why we try and modify our behavior by raising prices rather than benefits. The idea behind posting a bond is to raise the price of the activity that you want to avoid (in this case sitting on your butt). While that uses fine economic intuition, I wonder why not try and raise the benefits of what you actually want to do (e.g. exercise) first.

Personally, I try and make exercise a social engagement. When I have been able to coordinate a regular exercise schedule with a friend, I exercise. When I try and exercise on my own, I fail miserably. By coordinating with a friend, I raise the benefit of the activity because we get to hang out, chat, and (some of the time) alleviate the pain and boredom with stimulating conversation. Further, I want to show up because I don't want to let my friend down.

So here's some unsolicited advice, when you are trying to change behavior think about how the behavior can be modified by affecting both the benefits and the costs. If you can achieve the desired outcome by making the desired activity more desirable (as opposed to making the undesired activity more costly), do it.

Check out this interesting series on money in Forbes. Seriously, check it out. It includes several very interesting articles.

I particularly liked this quote from a column on the relationship between money and happiness:

Economists have suddenly realized that money can't buy you happiness? This is like the squarest kid at school suddenly discovering beer, girls and music in his 30s. The rest of the world had worked it out already.

I wonder what these beer, girls, and music things he refers to are?

As I mentioned in class today, one hypothesis for the growth in the popularity of economics is a decline in the demand for skills (e.g., written communication) that some other concentrations are assumed to specialize in producing. Formal letters and memos have been replaced by IM, email, and cheap voice communication (e.g., cell-phones). Exclusively intuitive/verbal arguments have been replaced by increasingly empirical and theoretical arguments/reports.

While new technologies make communication cheap, we clearly make a trade-off between quality and quantity. People frequently write e-mails as if they were speaking. Crafting an email which carefully conveys our thoughts and feelings is costly, so we cheat and just type the words that we would say. However, this evidence suggests that a substantial proportion of recipients misconstrue the tone of our email. Given that there can be real costs associated with unclear or misinterpreted communications, people who are more skilled at conveying their thoughts quickly and clearly via email should have more porductive email exchanges. Perhaps, these sort of findings will encourage more investment in written communication skills and (if these forms of communication are important and if these concentrations actually create/reveal people with better written communications skills) offset some of the trend toward analytic/quantitative concentrations.

Thursday, we will be reviewing the basic statistical and empirical tools that we will rely on throughout the course. In order to prepare, please read this and the 970_papermanual from here. This first is a basic review of the use of statistics from the BBC. The second is a document that I wrote for this course entitled "My First Economics Paper: A primer on writing empirical papers in economics." This document includes a lot of technical detail on using stata, etc., you should feel free to skim through these parts at this point. I will force you to use them later to complete the stata parts of the empirical exercise. Be sure to read sections 1, 2, and the review of regressions in section 6.

For Thursday's email assignment (sent to me by 11AM on Thursday)

In class Tuesday, we discussed the fact that there a very large number of economics concentrators at Harvard. We discussed a variety of hypotheses relating to this. E.g., economics is more valuable on the job market(with sub hypotheses associated with signaling and human capital (skill) investment), or economics is easier and has thus lower costs. Pick one of these stories (or another one that you have thought about pertaining to concentration) and briefly discuss how you might go about gathering evidience to support your argument (i.e., test your hypothesis).

One way to try this is to focus on the simple question if my story is true, then we should observe X.

Also, don't feel that you have limit your thinking to data that actually exists. Feel free to imagine that you can get whatever data you want.

At this website http://www.myheritage.com/ you can upload photos, and it will tell you what celebrities you resemble. The matches are (obviously) very imprecise and seem to contain a fair amount of randomness. (When I first heard about this site the blogger had uploaded a picture of the actual celebrity and was told that the match was less than 70%.) As such, in order to reduce the noise and increase the precision of my information, I chose to increase the sample size by uploading several pictures of myself and note which celebrities repeated.

So who do I apparently resemble (i.e., who showed up frequently)?

Emma Watson (Hermoine from the Harry Potter movies)
Anthony Hopkins
Scarlett Johansson
David Beckham

I really don't know what to make of all this. The thing I think I found most interesting is the proportion of the matches of different genders. I examined a few other people I had photos of. Some people, like me, were pretty much 50-50 in terms of the gender of the matches. Other people were largely male or largely female in the responses. I am curious if the "gender slant" affects how people percieve you or interact with you (and thus affect how you ultimately behave).

Who do you resemble?

In the comments to my post about lawns below, Jimmy makes some interesting points:

"When people buy property, they're also buying status. Owning your own home is a sign of financial stability and wealth (versus renting). When people are envisioning their first home, they probably envision cut grass (as is the convention for a nice home). Thus, if a homeowner were to let his or her grass grow out, the homeowner would be losing some of that status that he or she covets. Biologically, having a clean lawn is like the tail on a peacock. It serves no purpose, but to survive in spite of it is a symbol of strength. The high cost of maintaining a lawn is exactly what makes maintaining a lawn attractive. "

There are two nice insights here. First, individuals' preferences are shaped by observing those who act before them. I have a lawn because those who had houses before me had lawns. Later, when we discuss fads, norms, and convention formation formally, we will see that this instinct to follow along is an essential part of the models used to explain these phenomena.

Second, I like the recognition that lawns may serve an important signaling value (do you all still cover signaling and screening in 1010a and 1011a?). Here is an activity which is more costly for some (like me apparently) to undertake. As such, those for whom lawn care is relatively cheap can use their nice lawns to signal others something about their type. But what? What does having a nice lawn signal to others that makes engaging in this costly activity valuable? That is, what is the return to the investment in the costly signal? Can it really just be signaling that I have the resources (or in Jimmy's words the "strength") to maintain a lawn, or is there something else?

As an aside, I have similar questions about living rooms as I have about lawns. Why do many people still build houses with living rooms (and formal dining rooms)? I have spent substantial time in a variety of houses in my life, and in every house that has a separate living room that I've ever been in, the family uses it like once a year. I've been in many houses that didn't have them, and I certainly didn't miss them. Given how expensive each square foot of housing is, why not spend the money on space that is actually useful. Is there also signaling value in spending thousands of dollars on rooms that never get used?

(Needless to say when I build a house it is unlikely to have either a living room or a lawn.)

On the most recent episode of The OC, Seth and Summer's relationship was in trouble. Summer had caught Seth lying again, and she demanded that he do "something big" in order to regain her trust. After his initial attempts failed, Seth wrote out a list of his various transgressions and instructed Summer to give it to his parents if she caught him lying again. Knowing that Seth now had the appropriate incentives to be trustworthy, Summer took him back. Kudos to Seth for using such sound economic reasoning to solve his relationship woes.

Economists refer to this activity as "posting a bond." Many economists argue that firms should demand similar commitments from employees. The idea is that if I have placed a large sum of money in an account that the firm gets to keep if I am caught violating the terms of our work agreement, then I will be less likely to slack off because the marginal cost of shirking, etc. is much higher.

Please remember to let me know when you are free to meet up for the "get to know each other" conversations. I am always available before and after sections. I am happy to meet for lunch at Pfoho before class (or any day for that matter) and over dinner after class.

Below are the readings for Tuesday. Please read the Becker piece before class. The Lazear piece is also an interesting exploration of the application of economic tools to topics that (until recently) people didn't really think of as economics. The Choi piece is, obviously, an extreme example of the application of economic tools to "non-standard" economics problems. This piece is highly technical, so just click the link and get a sense for what he's arguing (and more importantly how he's thinking about the problem).

Becker, Gary (1993) “Nobel Lecture: The Economic Way of Looking at Behavior.” Journal of Political Economy 101 (3): 385-409.

Lazear, Edward P. (2000) “Economic Imperialism.” Quarterly Journal of Economics 115 (1): 99-146.

Choi, J.P. (2002) “Up or Down? A Male Economist’s Manifesto on Toilet Seat Etiquette”

Note, I am not providing links to the Becker and Lazear pieces. One skill I want to make sure that you posess/acquire is the ability to find articles on your own. So this time (and occassionally through the term), I will force you to do a little extra work. I assure you that both of these articles are on the internet, so it shouldn't be that much work.


Before 11AM Tuesday, please send me an email in which you briefly address two questions:

1) What is economics?

2) Why are you majoring in it?

One of the great annoyances of teachers and professors is dealing with cheaters. Universities take this stuff quite seriously.

(Random aside -- one of my favorite Harvard memories was during the second final exam I took here. The whole proctor system was something I'd never experienced before and didn't really understand. Anyhow, at the end of the exam, the proctor is doing whatever it is they do -- counting blue books and checking names. We are milling about chatting and people start to come into the classroom for whatever was taking place next. The dude flipped out and started screaming about how they were "ruining the integrity of the exam." Startling at the time, but now just high comedy.)

Professors, however, have a tougher decision problem. Reporting the student and dealing with the bureaucracy is annoying (and thus costly), and it is unclear what the benefit to the professor is (this may explain why the university leaves them out of administering final exams). Later, we will discuss who really cares about cheating and what might be done about it. In the meantime, here is an amusing discussion by some faculty based on their experiences. From the comments:

I caught a student one time, but didn't do anything about it on that test. I always give the same tests (same questions, same order) to the entire class - on the record, this eliminates any effect the order of the questions may have on student performance (off the record, it's easier to grade one set of tests than two). Anyways, it was a multiple choice test. One person had the exact same answers as another, and I knew where they were sitting in the class. On the next exam, I kept the questions in the same order, but changed the order of the answers on one test. Using slate of hand, I dealt my alleged cheater the test with the different ordered answers off the bottom of the stack of tests. He ended up with something like an 18 (and had nearly identical answers to the same person as he did on the first exam), which balanced out the 80 something he received on the other test. Problem solved, and no paperwork, and no hearings.

How many of you had lawns at your houses growing up? How often did you actually play on them?

Growing grass at home, I presume, was done out of a desire to have a space where kids could play and (maybe if the yard were big enough) have lawn parties on. However, given that kids don't play outside in the grass (at least not at home -- I did a little when I was young, but not since I was 10 or 11 and I think I was more of an exception) and no one has lawn parties, why do people still go to great lengths to maintain lawns? Particularly, after children have grown, what is the benefit that justifies the cost? Is it really that much prettier than the alternative? I guess there may be some sort of pet argument, but do pets really need well manicured grass?

Just so it is clear. I like grass. I love big grass fields in parks and on college campuses and even golf courses. I am merely wondering why the convention is to have grass at home -- particularly in urban or suburban settings where there is likely a park or school nearby.

Tyler Cowen, an economics professor at George Mason and co-author of a popular economics weblog (marginal revolution -- which I will likely link to frequently), has written a paper discussing what social scientists can learn from reading novels (and what humanities students might learn from reading models). Given that I have been assigning movies for 5 years, I clearly agree that fictional works can help highlight important aspects of human behavior. It is an interesting argument. Check it out if you wish.

If you enjoy combining literature and economics, you might also want to check out Michael Watts' The Literary Book of Economics. This book "uses seventy-eight selections from classic and contemporary fiction, drama, poetry, and prose to give flesh to more than twenty major economic concepts, issues, and themes."

At the heart of any microeconomic analysis are the objectives and constraints faced by the relevant agent. In order to help you better understand my decisions throughout the course (and to reiterate the value of an economic framework for understanding decisions), I will frequently pull back the curtain and let you peek into my mind by outlining what I believe the relevent objectives, constraints, andtradeoffs are in the given situation.

In that vein, let me start off this blog by outlining the objectives that will largely shape the choices I make throughout the course.

1) Develop intuitive economic framework that students can (and will) employ to more deeply understand questions and issues throughout life.
2) Provide and develop empirical skills that will prepare students for their remaining undergraduate work and for life in general. I hope to cultivate the intuitive and technical skills necessary to provide good empirical description of topics and the to test causal hypotheses.
3) Improve students ability to express thoughts and arguments verbally (via both the spoken and written word).
4) Facilitate the creation of functioning social relationships among all members of the tutorial (including myself).
5) Respect the process – do not care only about ends, but also the means. I want to class to be challenging, fair, and fun. I think that it is important to create an experience that people remember fondly.
6) Provide deeper understanding of social interactions and economics -- what are the relevant questions and currently known answers in this area.

This course explores the role of social interaction in economic outcomes. Traditional neoclassical economic theory has tended to ignore the role of social forces in explaining behavior. While economics is built around the notion agents indirectly affect each other via the pricing mechanism, etc., standard economics assumes that individual actions (or preferences) do not directly affect the behavior of others. That is, economists have long excluded things like culture, norms, and peer pressure from their analysis.

Clearly, though, these things appear to matter. Starting at birth, the environment we inhabit helps to shape individuals’ preferences, constraints, and expectations and thus the choices that they make. Parents, siblings, friends, teachers, and society at large exert a great deal of influence over individuals and their choices/outcomes.

Social influence does not operate in one direction. Individuals exert “pressure” on those around them as well. These efforts are frequently rewarded as some individuals are more successful in social environments. Social attributes ranging from appearance to personality to the number of friends one has (and who they are) have long been argued to affect individual successes.

In this course we will explore the burgeoning economic literature relating to these issues. We will see how social forces can be added to the economic framework, and how their effects might be estimated empirically. In the process, we will examine several related questions: how do social forces affect preferences and behaviors; why do members of the same group behave similarly; how do we select the groups we belong to (marriage units, neighborhoods, clubs, …), and how much (and in what ways) does the group affect me; how does individual identity affect decisions; to what extent do I treat members of different groups differently and why; what are the implications of this for individual and group outcomes; what determines what is fashionable; why do we observe fads; why are there conventions and norms; where do they come from (e.g., why do people in some countries drive on the left side of the road, while in others they drive on the right); what determines status and how does one achieve it; what are the effects of the generation of status in terms of inequality and envy; how do groups (families or societies) deal with equity concerns (that is, what are people entitled to, what is just or fair).

Throughout our examination of these topics, my primary goal is to get you to approach these questions, not solely as smart, observant people, but as economists. That is, the primary goal of this course is to develop your economic reasoning skills (both the theoretical/intuitive ones and empirical ones). By the end of the course, my hope is that when confronted with a question or situation you will be able to make a cogent economic argument about what is going on, and understand (basically) what you would need to be able to convincingly identify the effect you hypothesize empirically.

Welcome to Everybody's Doin' It. I am really looking forward to this semester. The course has been great the past four years, but I think I have made a few exciting changes to how the course is going to operate. It think we are going to have a lot of fun (oh yeah, I'll try and make sure you learn something too).

Here is your assignment for Thursday's class:


1) Read Steven Landsburg's "Grade Expectations: Why grade inflation is bad - and what to do about it." http://slate.msn.com/id/33044

2) Watch any or all of the following movies:

Mean Girls -- Lindsay Lohan, Tina Fey

Can’t Hardly Wait – Jennifer Love Hewitt, Seth Green

Van Wilder -- Ryan Reynolds, Tara Reid

Braveheart – Mel Gibson

Star Wars: Episode IV – Mark Hamill, Harrison Ford, Carrie Fisher


While watching the film(s), ask yourself the following question – what about these movies would interest an economist?

Let me clarify. Contrary to popular belief economists are "normal" people (well, not really, but we're not that different from normal people). That is, there are likely many things that economists might find interesting about these films that are unrelated to economics. I am not interested in these things. I am interested in what an economist might find economically interesting in these films. Think about key plot elements or character choices, and ask yourself why these things occur. Is there anything in your explanation that resembles economics to you?

Your mission is to then write a short blurb (a paragraph, a page, whatever you want) about what the interesting economic issues in the film are (as you perceive them) and email it to me (bward@fas) by 11AM on Thursday.

Note - DO NOT STRESS ABOUT THIS IN ANY WAY! I am not going to be evaluating/grading these paragraphs. I just want to know what you thought, and I want to get a sense of what you all think economic questions are, so that I know where we're at. So don't freak out or worry about the fact that you are writing and turning something in (and I know some of you are going to try - I know I might have when I was an undergrad
- but don't this is certainly not worth the cost).

I am assuming that all of you have access to TV/VCR/DVD and can obtain a copy of one of these films from somewhere. If this assumption is incorrect, just let me know, and we can work something out.

Once again, welcome to the course, and I look forward to meeting you all on Thursday.