Social Econ Blog

Review session in library study room 504

2010-06-06T21:59:00.000-04:00

Final review session Sunday evening 7 pm

2010-06-04T14:05:00.002-04:00

OK, finding space has been tricky and the large meeting rooms at the Millar Library seem to be our only option. We can't officially reserve a room but the librarian assures me we should be able to get one. We'll plan to have a room for 7-8 pm Sunday evening for a review session. We'll be in one of the three large meeting rooms, and while the circulation desk for privacy reasons can't tell you which one, they can direct you, and we'll try to have someone there to help find the room. I'll see if they can put a little sign up.

You can also call me of you can't find us. I don't want to post my number online so email me if you don't already have it.

If we need to go later than 8 we will, but we don't want people showing up an hour in and wanting to go over everything again.

Required reading for Monday 5/24

2010-05-19T13:21:00.003-04:00

We'll be discussing the economics of water management on Monday. Read Water is an economic good: How to use prices to promote equity, efﬁciency, and sustainability. You should come away with a better understanding of how water pricing can be used for water management, and the components of the total costs and benefits of water resources.

Some policy analysis examples

2010-05-18T18:49:00.003-04:00

For those of you interested in seeing examples of policy analyses from a benefit-cost framework, here a few examples:

There's quite a bit of variation in how these analyses are actually conducted and they don't always follow all of the steps we would like to see in theory for various political or practical reasons. These should give you a little insight though into what your report might look like.

These aren't required readings for Wednesday. Bryce hasn't posted anything so I don't think you have to worry about any.

Reading for Monday May 17th

2010-05-14T01:23:00.003-04:00

Resilience and Sustainable Development: Building Adaptive Capacity in a World of Transformations connects several issues we've discussed through the idea of resilience as an approach to sustainability in a joint effort by many of the leaders in the area of sustainable development. You should come away from this paper with an idea of how resilience as a policy target relates to risk, uncertainty, ecosystem services, diversity, disturbance, and poverty. Don't worry it looks long but it's 22 pages of content and written for a non-technical audience.

We'll have your outlines and lit reviews back on Monday, but we encourage you to keep making progress.

Uwe Reinhardt on the assumptions of benefit-cost analysis

2010-05-07T10:52:00.001-04:00

As part of a different post, Princeton economist Uwe Reinhardt posted a memo he uses as part of his classes that outlines some of the history and assumptions that lurk in welfare economics (aka benefit-cost analysis). I encourage you to check it out:

“How We Economists Bastardized Benthamite Utilitarianism and Became Shills for the Wealthy.”

Reading for next Monday

2010-05-06T13:13:00.002-04:00

For class on Monday, please read:

"Sustainability: An economist's perspective" by Robert Solow

and

"Climate Change and Discounting the Future: A Guide for the Perplexed" by David Weisback and Cass Sunstein

You should be able to find both with a google search.

Monday Game Theory reading

2010-04-29T18:06:00.002-04:00

I'll give an introduction to the tools of game theory and applications to environmental problems on Monday. Read pages 127-137 in Gibbons "An introduction to applicable game theory." You might skim the rest of the article if you're interested in the topic but it gets a bit more technical than we'll go in class.

Here's the link to the PSU download if the above doesn't work for you.

We'll go over the important points but try to come away with an understanding of the structure of the analysis (games, players, payoffs, strategies), what is meant by an equilibrium, and how we identify equilibria. Think about opportunities to apply the concepts for environmental problems, and what kinds of challenges likely arise to using these tools and models in the real world.

More on Cap and Trade vs Taxes

2010-04-26T16:17:00.002-04:00

If you are looking for an additional explanation of the difference between a cap and trade scheme and a carbon tax, I think this document does a nice job:

The Basic Economics of Carbon Permits Versus Carbon Taxes

Required reading for Wednesday 4/28/10

2010-04-23T01:30:00.002-04:00

We'll continue to discuss implemented and proposed approaches to carbon mitigation at the multi-national scale on Wednesday. Read "The European Union Emissions Trading Scheme: Origins, Allocation, and Early Results". The article is on pages 66-87 of the journal issue available here.

Several other articles in the issue are directly relevant to topics we're discussing, but aren't required. Topics I discuss on Monday in class will identify the points from the article to be sure to catch.

A. Denny Ellerman, Barbara K. Buchner . The European Union Emissions Trading Scheme: Origins, Allocation, and Early Results. Review of Environmental Economics and Policy, Volume 1, Number 1 (January 2007), pp. 66-87.

EU ETS

2010-04-23T01:26:00.002-04:00

You're focused on your proposals for Monday so you don't have to do much prep for Monday. We'll hold the substantial readings for Wednesday. If you have time though, read through the Wikipedia description of the European Union Emission Trading Scheme. It will be useful reference for Wednesday and after as well.

Required reading for Wednesday 4/21/10

2010-04-16T18:56:00.003-04:00

The definitive economic analysis of climate change was lead by economist Nicholas Stern, typically referred to as the Stern Review. A good place to start, and your reading for Wednesday, is Chapter 2 on the economics of climate change. If you'd like more context you can skim the overall report summaries or other chapters here (not required).

This reading provides a box identifying the key messages of the chapter. You should focus on these themes while reading the chapter.

Climate Mitigation - topics for Monday and Wednesday

2010-04-16T18:39:00.003-04:00

Monday and Wednesday we'll be talking about taxes and payment/market-based approaches to pollution management and ecosystem service provision. You don't have any assigned readings for Monday so you can focus on your Policy Analysis proposal, but here are a few useful brief introductions to topics we'll discuss, and they should serve as good references later for you.

Paul Krugman has a very simple comparison of taxes vs. cap-and-trade here as a nice introduction.

Canadian economist Stephen Gordon gives you a little more detail in his comparison here.

Haab and Whitehead have a more detailed explanation from the perspective of polluting firms.

After reading these posts and our discussion in class, you should understand the basics of taxes and cap-and-trade programs and their pros and cons, from a carbon perspective. The same ideas applied to carbon can be applied to other pollutants and ecosystem services, with varied success. We'll get to more on that later.

Salmon costs, benefits

2010-04-13T11:58:00.002-04:00

The definitive study on the existence value of salmon in the Northwest is Layton, Brown and Plummer (1999). For an increase in salmon returning to Puget Sound, they found values ranging from $200-$550 per fish. This does not include use values such as recreation and fishing, and is based on households in the Northwest only. Adjusting for inflation the high end gets a little over $700.

A recent state audit in Washington found expenditures by the state of $768 for each blackmouth chinook salmon caught in Puget Sound.

Looks like the current price of a whole salmon at Pike Place Market right now is $72.

A fishing trip with a charter company in Puget Sound right now costs $170.

Required Reading for Next Monday

2010-04-08T12:21:00.003-04:00

Next week we will continue to explore the value of natural capital and, in particular, how do we actually calculate dollar values for this stuff.

Please read chapter 7 from these EPA guidelines.

We also recommend this newer, draft EPA document (chapter 4 has the relevant content, but the rest of the document you might find interesting).

These figures from chapter 4 provide a nice summary:

From the Archive: Valuing Lives (required reading)

2010-04-08T10:49:00.002-04:00

One more from the archive. You should read the article linked below before class on Monday (we will post additional readings for next week later):

The discussion of valuing lives in the comment thread below is great. In case anyone is still struggling with the approach used by economists, Steven Landsburg (an economics professor at Rochester who also writes a column for Slate) provides more discussion and several examples in this column. He also cites some evidence that shows that lives today are more valuable than lives in the past (because we are richer):

So, how do we find out how much a life is really worth? One of the best ways is to measure how much extra you have to pay someone to take a dangerous job. If lion tamers and elephant tamers have comparable skills and comparable working conditions, but lion tamers earn $20,000 a year more than elephant tamers, it's probably because that's what it takes to compensate someone for the risk of being eaten by a lion. And if that risk amounts to, say, an extra half-percent probability of dying on the job, then you figure that the value of a life must be $20,000 per half-percent, or $40,000 per percentage point, or $4 million.
So, once you carry out that experiment, how much does a typical life turn out to be worth? Professors Dora Costa of MIT and Matthew Kahn of Tufts point out that it depends on exactly when you asked the question. As incomes have risen, so has the value of life. The increase is more than proportional: A 10 percent rise in income is generally associated with about a 15 percent rise in the value of a life. Between 1940 and 1980, according to Costa and Kahn, the value of a life increased from about $1 million 1990 dollars to between $4 million and $5 million 1990 dollars.
(Other researchers, notably Harvard's Kip Viscusi, have found higher numbers. Viscusi estimates that the value of a life in 1970 might already have been as high as $8 million 1990 dollars.)

If lives tomorrow may be worth significantly more than lives today, I think this poses some additional difficulties for figuring out what to do about long term environmental problems.

From the Archive: An "interesting" view of natural capital

2010-04-08T10:31:00.001-04:00

From another old blog post:

General Counsel for the Department of Defense, William Haynes II resigned yesterday. Haynes was in charge of the tribunals for Guantanamo detainees and is reported to have said:

"I said to him that if we come up short and there are some acquittals in our cases, it will at least validate the process," Davis continued. "At which point, [Haynes's] eyes got wide and he said, 'Wait a minute, we can't have acquittals. If we've been holding these guys for so long, how can we explain letting them get off? We can't have acquittals. We've got to have convictions.'"

Furthermore, he's one of the primary authors of memos supporting torture and total executive authority (essentially arguing that when the President is acting as Commander-in-Chief he get's to do whatever he wants -- regardless of the law).

But before he got around to torture and detainees Haynes offered a very interesting argument about how bombing natural capital (bird nesting sites) was good because it would increase the value of the remaining natural capital:
In this amazing brief, Haynes argued that bombing a nesting site for migratory birds would benefit birdwatchers, since “bird watchers get more enjoyment spotting a rare bird than they do spotting a common one.” Moreover, he added, the birds would benefit as well, since using their nests as a bombing range would minimize “human intrusion”. The judge’s comment on this novel line of argument: “there is absolutely no support in the law for the view that environmentalists should get enjoyment out of the destruction of natural resources because that destruction makes the remaining resources more scarce and therefore more valuable. The Court hopes that the federal government will refrain from making or adopting such frivolous arguments in the future.” (pp. 27-8)” ...

From the Archive: Overharvesting Fisheries

2010-04-08T10:30:00.002-04:00

From an old blog post:

...a couple of economists published an article in Science that pointed out that over-harvesting the fisheries was (surprise) not profit-maximizing for the fishermen. They report:

A new and compelling argument for reducing fish harvests – the profit motive – could persuade world fishers to endure the short-term pain of lower catches for the long-term gain of higher returns for their labor, according to authors of a ground-breaking study on fisheries over-exploitation.

They say their findings, published in the journal Science Dec. 7, will help overcome a key cause of over-fishing – industry opposition to lower catches – by demonstrating that when stocks are allowed to recover, profits take a sharp turn upward.

“It has always been assumed that maximizing fishing profits will lead to stock depletion and possibly even extinction of some commercial species,” says co-author Quentin Grafton, research director at the Crawford School of Economics and Government at the Australian National University (ANU) and one of the co-authors of the paper “Economics of Over-exploitation Revisited.”

“But our results prove that the highest profits are made when fish numbers are allowed to rise beyond levels traditionally considered optimal. In other words, bigger stocks mean bigger bucks.”

The simple reason is “the stock effect”: when fish are more plentiful and thus easier to catch, fishers don’t have to spend as much on fuel and other costs to fill their nets – profits are higher.

Krugman on Climate Change

2010-04-08T01:35:00.003-04:00

Paul Krugman has a nice summary article in the NYTimes about climate change economics. You all should read it. It even includes his own quick Enviro Econ 101:

Environmental Econ 101
If there’s a single central insight in economics, it’s this: There are mutual gains from transactions between consenting adults. If the going price of widgets is $10 and I buy a widget, it must be because that widget is worth more than $10 to me. If you sell a widget at that price, it must be because it costs you less than $10 to make it. So buying and selling in the widget market works to the benefit of both buyers and sellers. More than that, some careful analysis shows that if there is effective competition in the widget market, so that the price ends up matching the number of widgets people want to buy to the number of widgets other people want to sell, the outcome is to maximize the total gains to producers and consumers. Free markets are “efficient” — which, in economics-speak as opposed to plain English, means that nobody can be made better off without making someone else worse off.
Now, efficiency isn’t everything. In particular, there is no reason to assume that free markets will deliver an outcome that we consider fair or just. So the case for market efficiency says nothing about whether we should have, say, some form of guaranteed health insurance, aid to the poor and so forth. But the logic of basic economics says that we should try to achieve social goals through “aftermarket” interventions. That is, we should let markets do their job, making efficient use of the nation’s resources, then utilize taxes and transfers to help those whom the market passes by.
But what if a deal between consenting adults imposes costs on people who are not part of the exchange? What if you manufacture a widget and I buy it, to our mutual benefit, but the process of producing that widget involves dumping toxic sludge into other people’s drinking water? When there are “negative externalities” — costs that economic actors impose on others without paying a price for their actions — any presumption that the market economy, left to its own devices, will do the right thing goes out the window. So what should we do? Environmental economics is all about answering that question.
One way to deal with negative externalities is to make rules that prohibit or at least limit behavior that imposes especially high costs on others. That’s what we did in the first major wave of environmental legislation in the early 1970s: cars were required to meet emission standards for the chemicals that cause smog, factories were required to limit the volume of effluent they dumped into waterways and so on. And this approach yielded results; America’s air and water became a lot cleaner in the decades that followed.
But while the direct regulation of activities that cause pollution makes sense in some cases, it is seriously defective in others, because it does not offer any scope for flexibility and creativity. Consider the biggest environmental issue of the 1980s — acid rain. Emissions of sulfur dioxide from power plants, it turned out, tend to combine with water downwind and produce flora- and wildlife-destroying sulfuric acid. In 1977, the government made its first stab at confronting the issue, recommending that all new coal-fired plants have scrubbers to remove sulfur dioxide from their emissions. Imposing a tough standard on all plants was problematic, because retrofitting some older plants would have been extremely expensive. By regulating only new plants, however, the government passed up the opportunity to achieve fairly cheap pollution control at plants that were, in fact, easy to retrofit. Short of a de facto federal takeover of the power industry, with federal officials issuing specific instructions to each plant, how was this conundrum to be resolved?
Enter Arthur Cecil Pigou, an early-20th-century British don, whose 1920 book, “The Economics of Welfare,” is generally regarded as the ur-text of environmental economics.
Somewhat surprisingly, given his current status as a godfather of economically sophisticated environmentalism, Pigou didn’t actually stress the problem of pollution. Rather than focusing on, say, London’s famous fog (actually acrid smog, caused by millions of coal fires), he opened his discussion with an example that must have seemed twee even in 1920, a hypothetical case in which “the game-preserving activities of one occupier involve the overrunning of a neighboring occupier’s land by rabbits.” But never mind. What Pigou enunciated was a principle: economic activities that impose unrequited costs on other people should not always be banned, but they should be discouraged. And the right way to curb an activity, in most cases, is to put a price on it. So Pigou proposed that people who generate negative externalities should have to pay a fee reflecting the costs they impose on others — what has come to be known as a Pigovian tax. The simplest version of a Pigovian tax is an effluent fee: anyone who dumps pollutants into a river, or emits them into the air, must pay a sum proportional to the amount dumped.
Pigou’s analysis lay mostly fallow for almost half a century, as economists spent their time grappling with issues that seemed more pressing, like the Great Depression. But with the rise of environmental regulation, economists dusted off Pigou and began pressing for a “market-based” approach that gives the private sector an incentive, via prices, to limit pollution, as opposed to a “command and control” fix that issues specific instructions in the form of regulations.
The initial reaction by many environmental activists to this idea was hostile, largely on moral grounds. Pollution, they felt, should be treated like a crime rather than something you have the right to do as long as you pay enough money. Moral concerns aside, there was also considerable skepticism about whether market incentives would actually be successful in reducing pollution. Even today, Pigovian taxes as originally envisaged are relatively rare. The most successful example I’ve been able to find is a Dutch tax on discharges of water containing organic materials.
What has caught on instead is a variant that most economists consider more or less equivalent: a system of tradable emissions permits, a k a cap and trade. In this model, a limited number of licenses to emit a specified pollutant, like sulfur dioxide, are issued. A business that wants to create more pollution than it is licensed for can go out and buy additional licenses from other parties; a firm that has more licenses than it intends to use can sell its surplus. This gives everyone an incentive to reduce pollution, because buyers would not have to acquire as many licenses if they can cut back on their emissions, and sellers can unload more licenses if they do the same. In fact, economically, a cap-and-trade system produces the same incentives to reduce pollution as a Pigovian tax, with the price of licenses effectively serving as a tax on pollution.
In practice there are a couple of important differences between cap and trade and a pollution tax. One is that the two systems produce different types of uncertainty. If the government imposes a pollution tax, polluters know what price they will have to pay, but the government does not know how much pollution they will generate. If the government imposes a cap, it knows the amount of pollution, but polluters do not know what the price of emissions will be. Another important difference has to do with government revenue. A pollution tax is, well, a tax, which imposes costs on the private sector while generating revenue for the government. Cap and trade is a bit more complicated. If the government simply auctions off licenses and collects the revenue, then it is just like a tax. Cap and trade, however, often involves handing out licenses to existing players, so the potential revenue goes to industry instead of the government.
Politically speaking, doling out licenses to industry isn’t entirely bad, because it offers a way to partly compensate some of the groups whose interests would suffer if a serious climate-change policy were adopted. This can make passing legislation more feasible.
These political considerations probably explain why the solution to the acid-rain predicament took the form of cap and trade and why licenses to pollute were distributed free to power companies. It’s also worth noting that the Waxman-Markey bill, a cap-and-trade setup for greenhouse gases that starts by giving out many licenses to industry but puts up a growing number for auction in later years, was actually passed by the House of Representatives last year; it’s hard to imagine a broad-based emissions tax doing the same for many years.
That’s not to say that emission taxes are a complete nonstarter. Some senators have recently floated a proposal for a sort of hybrid solution, with cap and trade for some parts of the economy and carbon taxes for others — mainly oil and gas. The political logic seems to be that the oil industry thinks consumers won’t blame it for higher gas prices if those prices reflect an explicit tax.
In any case, experience suggests that market-based emission controls work. Our recent history with acid rain shows as much. The Clean Air Act of 1990 introduced a cap-and-trade system in which power plants could buy and sell the right to emit sulfur dioxide, leaving it up to individual companies to manage their own business within the new limits. Sure enough, over time sulfur-dioxide emissions from power plants were cut almost in half, at a much lower cost than even optimists expected; electricity prices fell instead of rising. Acid rain did not disappear as a problem, but it was significantly mitigated. The results, it would seem, demonstrated that we can deal with environmental problems when we have to.
So there we have it, right? The emission of carbon dioxide and other greenhouse gases is a classic negative externality — the “biggest market failure the world has ever seen,” in the words of Nicholas Stern, the author of a report on the subject for the British government. Textbook economics and real-world experience tell us that we should have policies to discourage activities that generate negative externalities and that it is generally best to rely on a market-based approach.

Open fishery game

2010-04-06T12:12:00.002-04:00

Here's a link to an Excel file holding the fishery game spreadsheet (scroll down to "Download Now") I put together and tried to use in class on Monday. I had some parameter differences that confused things, but you can manipulate any cells in yellow to get a sense, and walk through a few rounds of decisions. A graph to the right of the columns plots the overall annual state. The first sheet is blank and the second is an example of the most rapid exhaustion possible. Ignore the error messages for cells below

This isn't an assignment, just something to play with if you're interested. A few questions to think about:

What happens to a company that doesn't buy boats as quickly as possible but rather waits?

Are there any signals that the fishery is being depleted? If a company knows the fishery is nearing depletion, is it better to accelerate harvest or slow down? From an individual company's perspective, is it ever better to not send a boat to fish?

From a purely profit-based motive, how would you identify the best strategy for a company? How would this strategy be dependent on the strategies of other companies?

Think about how you would design rules for a fishery to prevent depletion. We'll be looking at policies and incentives for fishery management in more detail later.

Required Readings for Wednesday (4/7/10)

2010-04-05T22:36:00.003-04:00

We'll discuss ecosystem services on Wednesday.

The first reading comes from the Millenium Ecosystem Assessment: Ecosystems and Human Well-Being. Read the first two paragraphs of the Foreward (p. ii), the entire Preface (p. v-ix), and the Summary for Decision-Makers (p. 1-24). If the link doesn't work, use http://www.millenniumassessment.org/en/index.aspx and of the Synthesis Reports, go to the Overall Synthesis.

The second reading by Costanza et al. (1997) addresses an attempt to assign values to global ecosystem services. It's from the journal Nature, and available with PSU's online access (and elsewhere if you google the title).

Costanza, R., R. D'arge, R. De Groot, S. Farber, M. Grasso, B. Hannon, K. Limburg, S. Naeem, R.V. O'neill, J. Paruelo, R.G. Raskin, P. Sutton and M. Van Den Belt. 1997. The value of the world's ecosystem services and natural capital. Nature 387: 253-60.

Contact me if you can't access the readings.

Reading for Monday

2010-04-03T12:03:00.002-04:00

Sorry for the delay getting this posted. Please try and read the two articles below before class on Monday:

Garrett Hardin's original article in Science that described the tragedy of the commons.

One of Ostrom (and co-authors) follow-up articles, also in Science, but not easily linked. You should be able to find it on your own:

Ostrom, E., J. Burger, C.B. Field, R.B. Norgaard and D. Policansky. 1999.
Revisiting the commons: Local lessons, global challenges. Science 284:
278-82.

Also, don't forget, our first small quiz is on Monday. 1-2 questions based on the review material from Wednesday.

Elinor Ostrom and the Commons

2010-04-01T10:49:00.004-04:00

Last fall, Elinor Ostrom shared the Nobel prize for economics (here are some other links on the prize). Her work focuses on one of our topics for Monday -- the Tragedy of the Commons -- in particular how people solve this problem. Here's an excerpt from a recent interview (I recommend reading the whole thing):

Fran: Many people associate “the commons” with Garrett Hardin’s famous essay, “The Tragedy of the Commons.” He says that if, for example, you have a pasture that everyone in a village has access to, then each person will put as many cows on that land as he can to maximize his own benefit, and pretty soon the pasture will be overgrazed and become worthless. What’s the difference between your perspective and Hardin’s?

Elinor: Well, I don’t see the human as hopeless. There’s a general tendency to presume people just act for short-term profit. But anyone who knows about small-town businesses and how people in a community relate to one another realizes that many of those decisions are not just for profit and that humans do try to organize and solve problems.

If you are in a fishery or have a pasture and you know your family’s long-term benefit is that you don’t destroy it, and if you can talk with the other people who use that resource, then you may well figure out rules that fit that local setting and organize to enforce them. But if the community doesn’t have a good way of communicating with each other or the costs of self-organization are too high, then they won’t organize, and there will be failures.

Fran: So, are you saying that Hardin is sometimes right?

Elinor: Yes. People say I disproved him, and I come back and say “No, that’s not right. I’ve not disproved him. I’ve shown that his assertion that common property will always be degraded is wrong.” But he was addressing a problem of considerable significance that we need to take seriously. It’s just that he went too far. He said people could never manage the commons well.

On a sort of related topic, I recommend this post (and the original post it cites) about how comedians deal with intellectual property violations in a field without copyright law.

More Externalities -- Toxins and Consumer Products

2010-03-31T10:26:00.003-04:00

David Leonhardt argues that the US is not doing enough to regulate the toxins in our consumer products in the NYTImes:

Every society needs to make a choice about how to prioritize consumer safety. If you try too hard to avoid problems, you can end up stifling daily life. Outlawing gasoline, for instance, would doubtless reduce pollution and respiratory disease, but no one is suggesting such a step. Europe, with its hostility to genetically modified foods, arguably errs on the side of being too cautious about chemicals and other such substances.
But the United States clearly seems to be on the other side of the line. We are not taking toxic risks seriously enough.
Several common diseases, like certain cancers and developmental disorders, have been rising in recent decades, and scientists are not sure why. In some cases, evidence suggests chemicals may be the reason.
Nobody can be sure, though. The science is not far enough along, partly because our regulation of toxins is so limp. Companies don’t have to release much of their internal safety data. And regulators face a terribly high burden of proof. They can often take action only after they have demonstrated that a substance is harmful — a task that corporate secrecy can make impossible.

To be clear, much of the article is not directly about the negative externalities associated with chemical use. Rather, Leonhardt is mainly focused on another source of market failure -- lack of information. For the market to work "properly", all the parties to a transaction need to have full information about what they are buying. Leonhardt's main argument is that consumers are frequently ill-informed about the chemicals they are consuming (and the long term effects of that consumption on their health and well-being). As such, he argues that the government should be more involved in obtaining information from manufacturers and informing consumers about the risks of various products (or perhaps more directly involved in the protection of consumers by preventing the manufacture and sale of "dangerous" products).

Externalities Example -- Bees and Pesticides

2010-03-30T11:37:00.002-04:00

As some of you may know, honey bees (who are play a big role in how we feed ourselves) have been hammered by some mysterious plague dubbed "colony collapse disorder". New research suggests that pesticides may be a major contributor to this problem:

For years the news has been the same: Honey bees are being hammered by some mysterious environmental plague that has a name -- colony collapse disorder – but no established cause. A two-year study now provides evidence indicting one likely group of suspects: pesticides. It found “unprecedented levels” of mite-killing chemicals and crop pesticides in hives across the United States and parts of Canada.

A classic negative externality.

EC 443/553 -- Preparation for class Wed

2010-03-30T10:56:00.002-04:00

Based on the first class survey and several questions and comments I received during the break, I think we need to do some basic review. So before class on Wednesday please review the following concepts (google them, look them up in wikipedia, or in old textbooks you may have lying around):

Supply and Demand
Price elasticity
Income elasticity
Market equilibrium
Consumer and Producer Surplus
Deadweight Loss
Marginal Cost
Marginal Benefit
Marginal Utility
Diminishing Marginal Utility
Market Failure
Externality
Public Good/free rider problem
Monopoly
Moral Hazard
Adverse Selection

Gross Domestic Product (GDP)
Economic Growth

Check back later, I may add more as I think of them.

Behavioral Economics and Thanksgiving

2009-11-26T11:13:00.000-05:00

From Ezra Klein:

It happens every year. It's not that you resolve to be virtuous on Thanksgiving, just reasonable. Two plates of food, and no more. One piece of pie, and that's enough. But when you're sitting at that table, staring at that food, there is no more self-control. No more reasonable. You stop when you can hardly breathe.

Or maybe I'm projecting. This column, however, will not be about exercising self-control at the table. It's Thanksgiving! Rather, this column will be about something far more powerful: exercising some economic principles.

For a long time, economists operated under the "rational actor model." Human beings were thought to be rational creatures who correctly weighed costs and benefits and calculated the best choices for themselves. Then some economists met some human beings and realized we don't really work like that. The result has been the rise of "behavioral economics," which attempts to build the responses of actual human beings into its models.

MIT economist Dan Ariely is a pioneer in the field. His bestselling book "Predictably Irrational" is as good an introduction to the discipline as you'll find. Human beings, he argues, aren't just irrational: They are irrational in predictable ways and in predictable circumstances. That means we can plan for that irrationality beforehand, when we're still feeling rational.

I asked Ariely how he would set up his Thanksgiving feast to limit overeating without having to exercise self-control. His answer was to construct the "architecture" of the meal beforehand. Create conditions that guide people toward good choices, or even use their irrationality to your benefit.

"Move to chopsticks!" he exclaimed, making bites smaller and harder to take. If the chopsticks are a bit extreme, smaller plates and utensils might work the same way. Study after study shows that people eat more when they have more in front of them. It's one of our predictable irrationalities: We judge portions by how much is left rather than how full we feel. Smaller portions lead us to eat less, even if we can refill the plate.

Speaking of which, Ariely suggests placing the food "far away." In this case, serve from the kitchen rather than the table. If people have to get up to add another scoop of mashed potatoes, they're less likely to take their fifth serving than if they simply have to reach in front of them.

"Start with a soup course," he says. That is what economists refer to as a default: Rather than putting everything on the table for people to choose, you begin by making the choice for your guests. If the first course is relatively filling and relatively low in calories, everyone will eat less during the rest of the meal.

Indeed, it's not a bad idea to limit the total number of courses. Variety stimulates appetite. As evidence, Ariely brings up a study conducted on mice. A male mouse and a female mouse will soon tire of mating with each other. But put new partners into the cage, and it turns out they weren't tired at all. They were just bored. So, too, with food. "Imagine you only had one dish," he says. "How much could you eat?"

What you eat, of course, is also important. Studies show that people aren't very consistent in the amount of calories they eat each day, but they're very consistent in the volume of food they eat each day. Thanksgiving is an exception to that consistency, but probably not to the underlying rule. Satisfaction doesn't depend on caloric intake; low-calorie, high-fiber foods and foods high in water content are filling. Thus, the more broccoli rabe there is at the table, the better.

Speaking of which, take a page out of the pilgrims' book and make sure all the food at the table was cooked by someone in the house. Economists believe that the obesity epidemic is largely attributable to the rise in food we don't make for ourselves. In 1900, it was hard to snack on potato chips because it was time-consuming for a member of the household to make potato chips. Today, of course, things are different, and there is a surfeit of vending machines and drive-throughs and supermarkets. But on Thanksgiving, make like you're in Plymouth, and ensure all of the food is homemade. There will be fewer calories available if Grandma's stuffing isn't supplemented with bowls of chips and cheese.

For all that, Ariely's main advice is not to worry too much about Turkey Day. "I don't think Thanksgiving is a time to watch your diet," he says. "How many calories can you put away in a day? Maybe 5,000 or 6,000 calories, if you really try hard." The problem, he says, is another human irrationality: remembering to pay attention to the season's big meals but not the everyday ones in between. The solution to overeating, Ariely says, "comes from [making] small changes across many normal meals."

That seems rational. But if you insist on trying to cut back at Thanksgiving, Ariely does have one more piece of advice: "Wear a very tight shirt."

EC 303 HW 3 solutions

2009-11-19T23:25:00.001-05:00

Ec303 Hw 3 Solutions

Ec 303 Quiz 2 solutions

2009-11-13T10:16:00.001-05:00

Quiz2 Solutions

EC 303 assignment

2009-11-13T10:14:00.000-05:00

EC303 – Assignment 3

Well, then

2009-11-09T18:39:00.002-05:00

Dick Armey on Larry Summers, and, by extension me and my friends:

"I don’t consider Larry Summers a serious economist," [Dick] Armey said. “You can get a Ph.D. from Harvard without ever having seriously considered the subject.”

From the Archive: Terrorism and Economics

2009-11-02T09:51:00.001-05:00

Given our brief discussion of terrorism and economics in metrics on Friday, here's an old post on some the stuff we talked about:

Today, we will discuss terrorism. Economics provides a great deal of insight into the problem of terrorism. The decision to commit a terrorist act is just that ... a decision. As such, we can identify the relevant tradeoffs and design policies that should reduce the probability of terrorist acts.

Terrorism has its roots in group level hatred. The suppliers of group level hatred are frequently the demanders in the market for terrorist acts (though they needn't be the same people), and the people who demand hatred are usually the people who end up actually carrying out (or supplying) terrorist acts. The whole thing is further confused by the fact that frequently demanders and suppliers of terrorism are the same people.

As such, if we hope to be successful in our "War on Terror", we need to focus on policies that dramatically change either the supply or demand of terrorists. And this ultimately requires reducing the supply and demand of hate.

To begin, focus only on the market for terrorist acts. A key component in our current strategy is negative deterrence. Gary Becker's classic model of criminal behavior suggests that criminals tradeoff the expected benefits (probability of success * value of success) of a criminal act against the expected costs (probability of being caught * penalty). Much of our current terrorism policy is designed to increase the probability of detection and increase the penalties associated with participating in terrorism. This effectively raises the price of terrorist acts by shifting the supply curve up.

The effectiveness of supply side polices is limited, however, by the amount of substitution available in the terrorism production function and the low price of terrorist acts. If we raise the price of attacking a government building, terrorists can attack shopping malls; if we profile all middle-eastern looking men, terrorists can recruit people who look different. Ultimately, the biggest cost faced by terrorists is probably the lives of any suicide attackers. Reducing the supply of suicide bombers would likely making committing terrorism more difficult. However, consumers of terrorist acts have done a good job of convincing their "employees" that there are substantial eternal rewards for their sacrifice. But even reducing the number of willing suicide bombers won't make a huge impact. Killing people in public places is unfortunately cheap. Benn Steil and Robert Litan estimate:

...acts of terror are cheap to carry out. The truck bomb used at the World Trade Center in February 1993 cost $400. The cost of training and support of the 19 individuals who participated in the 9/11 airline hijackings is estimated at only $500,000. Terrorist operations since 9/11 have been even cheaper: the October 2002 Indonesia bombings cost $50,000; the November 2003 Istanbul attacks cost less than $40,000; and the March 2004 Madrid bombings, carried out with dynamite and cell phones, cost less than $10,000. As Defense Secretary Donald Rumsfeld admitted in a memorandum leaked to the press in October 2003, "The cost-benefit ratio is against us! Our cost is billions against the terrorist cost of
millions."

(Source) Ultimately, there is not a whole lot that we can do to make the price of terrorist acts prohibitively high.

Even if we were successful at increasing the price of terrorist acts, the reduction in the equlibrium quantity of terrorist acts depends on the elasticity of demand. Peter Boettke and Christopher Coyne argue in their paper "Liberalism in the Post-9/11 World" that the demand for terrorist acts is highly inelastic (this approach is similar to Becker, Murphy, and Grossman's work on the failure of the "War on Drugs"). As such, supply-side policies are unlikely to reduce terrorist acts.

Reducing terrorism, then, requires fundamentally changing preferences for terrorist acts and prompting an inward shift in the demand curve. Unfortunately, this is extremely difficult. Some of the policies Glaeser outlines in the "Political Economy of Hatred" (e.g., increase ties between groups, promote hating the haters, etc.) will likely have some effect. However, it is important to note that blanket prescriptions like reducing poverty and increasing education are not likely to automatically improve things (Krueger and Maleckova document no relationship between income and education and individual decisions to be terrorists and only small relationships between country level poverty and education and terrorism). Indeed, some rich dude can always set up and fund his own terrorist group (see Al Queda and SPECTER).

So how does the war in Iraq fit into all of this? Initially, it was about reducing the probability of attack by raising the price of engaging in terrorism. The fear was that Saddam Hussein would provide WMD to terrorists, so we needed to intervene in order to "raise the price" of this type of terrorist attack. At the same time, we would "shock and awe" other states who might be willing to sell weapons to terrorists. Thus further raising the price of terrorist activities.

After this rationale turned out to be based in fantasy, the rationale changed to "bringing democracy to the middle east". Setting aside the question of why you would choose to promote democracy from the barrel of a gun in Iraq rather than working to increase democracy in semi-democratic places like Turkey or Egypt, the idea of reducing terrorism via democracy, I guess, works like this -- Creating a democracy in Iraq is supposed to generate more freedom and tolerance. This, in turn, should increase ties with the West and lead to less hatred of the West and more intolerance of terrorists and terrorist groups. This should reduce the supply of terrorists, reduce the demand for terrorism, and make it harder for those who do still demand terrorist acts to operate.

This is not a crazy theory in the abstract, but, in practice, there are a number of problems. The historical record for producing liberal democracies at will is not very good. Boettke and Coyne also consider this issue. They point out that of the 15 times the US attempted reconstruction efforts from 1898-1996 only four were democracies after 10 years. As they remind us, economics predicts that "conflict should not persist where gains from exchange exist." However, in most reconstruction efforts (and Iraq in particular) a number of barriers exist that prevent peaceful bargaining. I encourage you to check out their interesting arguments.

The Economic Cost of Harboring Terrorism

2009-11-02T09:50:00.000-05:00

Another interesting paper on the economics of terrorism:

10. The Economic Cost of Harboring Terrorism
by Efraim Benmelech, Claude Berrebi, Esteban F. Klor - #15465 (LS PE POL)

Abstract:

The literature on conflict and terrorism has paid little attention to
the economic costs of terrorism for the perpetrators. This paper
aims to fill that gap by examining the economic costs of committing
suicide terror attacks. Using data covering the universe of
Palestinian suicide terrorists during the second Palestinian
uprising, combined with data from the Palestinian Labor Force Survey,
we identify and quantify the impact of a successful attack on
unemployment and wages. We find robust evidence that terror attacks
have important economic costs. The results suggest that a successful
attack causes an increase of 5.3 percent in unemployment, increases
the likelihood that the district's average wages fall in the quarter
following an attack by more than 20 percent, and reduces the number
of Palestinians working in Israel by 6.7 percent relative to its
mean. Importantly, these effects are persistent and last for at
least six months after the attack.

http://papers.nber.org/papers/W15465

Cool Graph, II

2009-10-29T11:38:00.002-04:00

Here's a interesting chart on the ideological positions of state legislatures relative to their US congressional counterparts. Given this graph it is not at all surprising that California is screwed (particularly given its various supermajority rules):

The estimates are based on state legislative voting, which might make you wonder how you could possibly compare legislators in one state with those in another. The trick is that some state representatives (for example, Barack Obama) also end up in Congress. There are enough of these overlap cases that you can put legislators from all 50 states on a common scale.

...

Here’s Boris’s graph showing the estimated positions of Democratic and Republican legislators in all 50 states in the past decade:

Neat Graph

2009-10-29T11:30:00.001-04:00

Longer post:

The chart below gives a nice summary of state attitudes on gay rights issues, based on estimates from national polls. It’s from a new paper, by Jeffrey R. Lax and Justin H. Phillips, both of Columbia University, that was recently published in the American Political Science Review. (Methodology for the survey estimates is on page 32 here.)

Bubbles are placed to represent public opinion on a gay rights issue, with bubbles farther to the right indicating greater public support. For example, the red bubble on the line for California shows that slightly less than half of Californians say same-sex couples should have the right to marry.

Filled-in bubbles signify that the policy has been adopted in that state (either by legislative or judicial action). The red bubble for California, for example, is not filled in, indicating that gays in the state are not currently allowed to marry.

Jeffrey R. Lax and Justin H. Phillips Opinion is estimated using data from 1994-2008, weighted toward the most recent levels of support. Policy is as of June 2009.

So who is more liberal on gay issues: the public or the public servants who write and interpret law?

Let’s take a look at the graphic above, keeping an eye on the dashed vertical line in the middle that designates 50 percent support for any given policy. Bubbles to the right of that line have support from the majority of a state’s population; bubbles to the left of the line have support from less than half the state’s population.

Notice that there are many more unfilled bubbles on the right side of the line (representing policies that the majority of people support but that have not been put into effect) than there are filled bubbles on the left side of the line (representing policies that the majority of people do not support, but that have been implemented anyway).

Something for the new economics think tank to consider

2009-10-29T11:17:00.000-04:00

Fair prices?, by Daniel Little: We live in a society that embraces the market in a pretty broad way. We accept that virtually all goods and services are priced through the market at prices set competitively. We accept that sellers are looking to maximize profits through the prices, quantities, and quality of the goods and services that they sell us. We accept, though a bit less fully, the idea that wages are determined by the market -- a person's income is determined by what competing employers are willing to pay. And we have some level of trust that competition protects us against price-gouging, adulteration, exploitation, and other predatory practices. A prior posting questioned this logic when it comes to healthcare. Here I'd like to see whether there are other areas of dissent within American society over prices.

Because of course it wasn't always so. E. P. Thompson's work on early modern Britain reminds us that there was a "moral economy of the crowd" that profoundly challenged the legitimacy of the market; that these popular moral ideas specifically and deeply challenged the idea of market-defined prices for life's necessities; and that the crowd demanded "fair prices" for food and housing (Customs in Common: Studies in Traditional Popular Culture). The moral economy of the crowd focused on the poor -- it assumed a minimum standard of living and demanded that the millers, merchants, and officials respect this standard by charging prices the poor could afford. And the rioting that took place in Poland in 1988 over meat prices or rice riots in Indonesia in 2008 are reminders that this kind of moral reasoning isn't merely part of a pre-modern sensibility. (For some quotes collected by E. P. Thompson from "moral economy" participants on the subject of fair prices see an earlier posting on anonymity.)

So where do contemporary Americans show a degree of moral discomfort with prices and the market? Where does the moral appeal of the principles of market justice begin to break down -- principles such as "things are worth exactly what people are willing to pay for them" and "to each what his/her market-determined purchasing power permit him to buy"?

There are a couple of obvious exceptions in contemporary acceptance of the market. One is the public outrage about executive compensation in banking and other corporations that we've seen in the past year. People seem to be morally offended at the idea that CEOs are taking tens or hundreds of millions of dollars in compensation -- even in companies approaching bankruptcy. Part of the outrage stems from the perception that the CEO can't have brought a commensurate gain to the company or its stockholders, witness the failing condition of many of these banks and companies. Part is a suspicion that there must be some kind of corrupt collusion going on in the background between corporate boards and CEOs. But the bottom line moral intuition seems to be something like this: nothing could justify a salary of $100 million, and executive compensation in that range is inherently unfair. And no argument proceeding simply along the lines of fair market competition -- "these are competitive rational firms that are offering these salaries, and therefore whatever they arrive at is fair" -- cuts much ice with the public.

Here is another example of public divergence from acceptance of pure market outcomes: recent public outcries about college tuition. There is the common complaint that tuition is too high and students can't afford to attend. (This overlooks the important fact that public and private tuitions are almost an order of magnitude apart -- $6,000-12,000 versus $35,00-42,000!) But notice that this is a "fair price" argument that would be nonsensical when applied to the price of an iPod or a Lexus. People don't generally feel aggrieved because a luxury car or a consumer device is too expensive; they just don't buy it. It makes sense to express this complaint in application to college tuition because many of us think of college as a necessity of life that cannot fairly be allocated on the basis of ability to pay. (This explains why colleges offer need-based financial aid.) And this is a moral-economy argument.

And what about that other necessity of life -- gasoline? Public complaints about $4/gallon gas were certainly loud a year ago. But they seem to have been grounded in something different -- the suspicion that the oil companies were manipulating prices and taking predatory profits -- rather than an assumption of a fair price determined by the needs of the poor.

Finally, what about salaries and wages? How do we feel about the inequalities of compensation that exist within the American economy and our own places of work? Americans seem to accept a fairly wide range of salaries and wages when they believe that the differences correspond ultimately to the need for firms to recruit the most effective personnel possible -- a market justification for high salaries. But they seem to begin to feel morally aggrieved when the inequalities that emerge seem to exceed any possible correspondence to contribution, impact, or productivity. So -- we as Americans seem to have a guarded level of acceptance of the emergence of market-driven inequalities when it comes to compensation.

One wonders whether deeper resentment about the workings of market forces will begin to surface in our society, as unemployment and economic recession settle upon us.

This could be interesting

2009-10-29T11:10:00.002-04:00

A non market oriented economics think tank:

[F]inancier George Soros is announcing a $50 million effort to speed things along. This week Soros is gathering some of the leading practitioners of the market-skeptic school, who were marginalized during the era of "free-market fundamentalism," among them Nobelists Joseph Stiglitz, George Akerlof, Michael Spence, and Sir James Mirrlees. He's also creating an "Institute for New Economic Thinking" to make research grants, convene symposiums, and establish a journal, all in an effort to take back the economics profession from the champions of free-market zealotry who have dominated it for decades, and to correct the failures of decades of market deregulation. Soros hopes matching funds will bring the total endowment up to $200 million.

Putting your econometics skills to use

2009-10-27T12:43:00.002-04:00

A student forwarded this set of advice on how to use econometrics to improve your dating:

1. Sampling:
Choose randomly in the age group that you are interested in, and date every
single one of the girls in the sample for the same amount of time (so, you’d
have to dump them when the time comes, or you need to keep them with you as
long as the time takes, if they want to dump you first). Then you rate them,
look at the distribution, calculate the mean, and the standard deviation.

2. Now for every girl that you date afterwards, we need to do a hypothesis test:
H0: this girl’s rating is rating is the same as the observed mean.
Suppose the previous sampling follow a normal distribution, then you can do a
t-stats on the current girl friend’s rating is significantly larger than the
sample mean, then congratulations, you’ve found your “significant” other.

3. But in order to save time so that you won’t end up wasting your time on the
girls who are not statistically “significant”, you can run a multi-regression
on the sample, with repressors such as height, weight, Body Mass Index, color
of hair etc. Find out which one plays a major role in your rating, then with
these rules, you can narrow your girlfriend pooling to look for the significant
other.

Health Care Costs and Wages

2009-10-21T09:33:00.002-04:00

Ezra Klein discusses the oft overlooked relationship between health-care costs and wages with MIT economist Jon Gruber:

"There are a few things economists believe in our souls so strongly that we have a hard time actually explaining them," he said. "One is that free trade is good and another is that health-care costs come out of wages." To put it another way: Economists are pretty united on this point. A firm's compensation for its workers is pretty static, and if relatively more goes to health-care costs, relatively less will go to wages, and vice-versa. But this isn't just a matter of theory. The following graph charts the percent growth in the median household income versus the percent growth in health-care costs since 1990. The correlation is striking:

The correlation between the two data sets is -0.8, which is incredibly high for this sort of thing. To give you an idea, I also ran the correlation between GDP growth and median wages over the period: It was 0.7, which is to say that there was a weaker connection between economic growth and median wages than between health-care costs and median wages.

There is, in other words, very good evidence that employers pass health-care savings onto employees. A Rand study by Dana Goldman, Neeraj Sood and Arleen Leibowitz examined a particular firm's response to a period of premium increases and found that "about two-thirds of the premium increase is financed out of cash wages and the remaining one-thirds is financed by a reduction in benefits." Another study by Katherine Baicker and Amitabh Chandra found that a 10 percent increase in premiums "results in an offsetting decrease in wages of 2.3 percent," which is fairly impressive given that income is much higher than health-care premiums.
There's good reason to think that if health-care costs can be tamed, wages will rise. But one of the big problems in health-care reform is that workers don't understand this connection. They think of health-care coverage as a "benefit," rather than a form of compensation engaged in a fairly zero-sum competition against their wages.

Superfreakonomics Smackdown

2009-10-21T00:14:00.001-04:00

Over the weekend, the internet discussion of the global cooling chapter in the forthcoming book Superfreakonomics (the sequel to Freakonomics) really heated up (har har). It's hard to quickly encapsulate the issues, but here's an attempt: Levitt and Dubner argue that reducing CO2 emmissions is too hard (people don't like to change their behavior), costly, and unecessary because we can cool the planet using very "easy and cheap" geoengineered solutions. In the process, they present a highly misleading (and illinformed) view of climate science and compare advoctes for CO2 reduction to a religious cult.

This created an internet firestorm -- particularly because the main climate scientist they rely on feels his views on the importance of CO2 emissions and geoengineering were misrepresented. Here's a very large collection of links on the issue. It can be a bit overwhelming, but I encourage you to read some of them. The authors "responses" can be found here (note -- there's a lot of attacking the messengers without responding to the message).

Education and Economic Growth

2009-10-20T09:45:00.002-04:00

As part of a continuing series on why Argentina fared so poorly during the 20th century, Ed Glaeser discusses the potential role for education to explain country growth. This relationship is hard to identify in a regression, but note how he can still reach a conclusion by relying on a variety of complementary pieces of evidence:

... an extra year of school is associated with more than a 30 percent increase in per capita income.
...
One explanation for the extraordinarily strong relationship between national earnings and education is that the correlation is largely spurious.

Perhaps, richer countries choose to become more educated, so that higher income causes higher levels of education rather than the reverse. Perhaps countries with other positive attributes, like better governments, are both richer and better schooled. The individual level research has labored hard to find so-called “natural experiments” — like mandatory schooling laws that start abruptly and relatively arbitrarily in a particular year in a particular state — that enable researchers to estimate the returns to education holding individual aptitude constant. Cross-country work is not nearly as well-identified and it never will be.

Yet there are reasons to think that the education-income relationship is not mere happenstance.

Historic educational enrollments predict subsequent income growth quite well, even when holding past income constant, which seems to reject the view that education is just following income. Moreover, the link between initial education and subsequent income growth has proven to be remarkably robust, surviving any number of country-level controls, including controls for governmental quality. I’m not confident that all of the measured cross-national relationship between schooling and income is real, but more evidence supports that interpretation than any obvious alternative.

If the link between country level income and education is real, then we need to understand why the link between schooling and education gets magnified at the country level. Why should there be a social multiplier that causes the schooling-income link to increase at higher levels of aggregation?

One hypothesis is that there are spillovers from education, and that human capital enables places to gain access to better technologies. Human capital externalities occur when one person’s education makes his or her neighbors more productive. Comparing people within a country only picks up the direct effect of more education on the person being educated, and won’t reflect any of these externalities. Comparing across countries picks up all the externalities that would occur if one’s persons schooling provided benefits for everyone around.

Within the United States, researchers have found that when holding an individual’s own years of schooling constant, that individual’s earnings increase by around 9 percent as the share of college graduates in that individual’s metropolitan area increases by 10 percent. If you work around skilled people, you earn more, either because you have learned from those people or because more skilled entrepreneurs make production more efficient. After all, Buenos Aires in 1900 had significantly fewer innovative technologies than did Chicago in the same year, perhaps because of lower levels of schooling.

But country-level income and education may also be closely linked because of politics. There is a very strong correlation between quality of government and education. My work with Felipe Campante suggests that the link between Argentina’s low level of education in 1900 and its poor economic performance over the next century reflects, in part, the fact that Argentina’s lower levels of education led to worse political outcomes.

Online STATA tutorial

2009-10-19T02:42:00.002-04:00

In addition to the paper manual, there are several fairly good STATA tutorials online that frequently show up when I google stata related topics. This one at UCLA has lots of really good stuff, and this one from Princeton has good coverage of the basics.

The future?

2009-10-16T13:57:00.002-04:00

I am not sure people will go for all of this, but I certainly can imagine some of this in our future. Regardless, I like that people think about this stuff.

10/GUI from C. Miller on Vimeo.

The value of school

2009-10-15T11:15:00.002-04:00

Here's one argument that most of the benefits from school are non-pecuniary (i.e., not money):

Experiences and skills acquired in school reverberate throughout life, not just through higher earnings. Schooling also affects the degree one enjoys work and the likelihood of being unemployed. It leads individuals to make better decisions about health, marriage, and parenting. It also improves patience, making individuals more goal-oriented and less likely to engage in risky behavior. Schooling improves trust and social interaction, and may offer substantial consumption value to some students. We discuss various mechanisms to explain how these relationships may occur independent of wealth effects, and present evidence that non-pecuniary returns to schooling are at least as large as pecuniary ones

Oreopoulos and Salvanes go on to make a back-of-the-envelope calculation of the size of the nonpecuniary effects. They suggest that

about three quarters of the schooling effect on selfreported life satisfaction is due to non‐pecuniary factors. A 12 percent increase in annual earnings would then imply that the total non‐pecuniary gains are equivalently worth another 16 percent increase in earnings (for a total of 28 percent).

Book of Odds

2009-10-15T10:58:00.004-04:00

A new website is launching which allows you to find the odds of ... well pretty much everything. A few that scrolled by just now:

1 in 10 the odds a man in the US does not own a pair of blue jeans

1 in 100,000 odd a man will be diagnosed with breast cancer in a year

1 in 4.76 the odds that an ever-married or cohabiting man has cheated during the relationship

1 in 9.09 the odds that an ever married or cohabiting man has cheated during the relationship

And here's an article for shark week fans -- you are twice as likely to be killed by a vending machine than a shark (do note this follow-up though which provides some important context).

Perhaps these will help people better maximize their expected utility.

Nobel

2009-10-14T01:46:00.003-04:00

The fake Nobel prize was handed out on Monday to Oliver Williamson and Elinor Ostrom. Here are some links that explain why they were honored (link, link, link, link).

For Ostrom, you can kinda boil it down to this Curb Your Enthusiasm clip.

From the archive: Women and negotiation

2009-10-14T01:42:00.002-04:00

I also neglected to pull this out of the archive:

I attended a conference yesterday on women professionals. Some interesting stuff was presented. I particularly enjoyed Linda Babcock's talk on women and negotiation. Babcock has written extensively on this topic. The results she presented yesterday were from this paper:

Two experiments show that sex differences in the propensity to initiate negotiations may be explained by differential treatment of men and women when they attempt to negotiate. In Experiment 1, participants evaluated candidates who either accepted compensation offers without comment or attempted to negotiate higher compensation. Men only penalized female candidates for attempting to negotiate whereas women penalized both male and female candidates. Perceptions of niceness and demandingness mediated these effects. In Experiment 2, participants adopted candidates’ role in same scenario and assessed whether to accept the compensation offer or attempt to negotiate for more. Women were less likely than men to choose to negotiate when the evaluator was male, but not when the evaluator was female. This effect was mediated by women’s nervousness about negotiating with male evaluators. This work illuminates how differential treatment may influence the distribution of organizational resources through sex differences in the propensity to negotiate.

For more on this topic, you can see facts and discussion of her book "Women Don't Ask" (with Sara Laschever) at this website. A taste:

Women Don't Like to Negotiate

In surveys, 2.5 times more women than men said they feel "a great deal of apprehension" about negotiating.

Men initiate negotiations about four times as often as women.

When asked to pick metaphors for the process of negotiating, men picked "winning a ballgame" and a "wrestling match," while women picked "going to the dentist."

Women will pay as much as $1,353 to avoid negotiating the price of a car, which may help explain why 63 percent of Saturn car buyers are women.

Women are more pessimistic about the how much is available when they do negotiate and so they typically ask for and get less when they do negotiate—on average, 30 percent less than men.

20 percent of adult women (22 million people) say they never negotiate at all, even though they often recognize negotiation as
appropriate and even necessary.

From the archive: Do girls cause divorce?

2009-10-14T01:37:00.002-04:00

We talked about this in class recently, but I neglected to post this:

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?

Gladwell Links

2009-10-14T01:25:00.002-04:00

First, here's Malcolm Gladwell's latest New Yorker article on the relationship between football and brain damage.

Second, here's an interesting TED talk from a few years back on how we ended up with so many varieties of spaghetti sauce.

EC 303 Quiz 1 Solutions

2009-10-14T01:23:00.000-04:00

Quiz 1 Solutions

EC 292 Assignment

2009-10-13T23:29:00.003-04:00

PS2

EC 303 assignment

2009-10-12T11:42:00.004-04:00

By next Wednesday (10/21), please complete the following:

From the Stock and Watson textbook please do the empirical exercises from chapters 4, 5, 6, 7, and 8 that use the data sets CPS04 and CollegeDistance (for most chapters these are the first and third empirical exercises). These datasets are available from the testbook website www.aw-bc.com/stock_watson in the student resources area.

In addition, please do problems 6.7 and 6.8.

Also, include in this assignment a brief discussion of topics you might wish to explore for your term paper.

Bet on your grades

2009-10-08T21:29:00.002-04:00

Back when we were discussing intertemporal choice in micro, we talked about making commitment contracts. Here's a website that lets you tweak the incentives you face with respect to your grades:

While hanging out together one Sunday afternoon, I mentioned to my friend Steven Wolf that I had an exam the following day and that if I were to study I was sure to get an A. (At the time, I was a student at University of Pennsylvania.) But I was enjoying my Sunday afternoon, and I told Steven that I had no intention of studying. That's when, in order to provide me with motivation, we made the following agreement: If I got an A on the exam, he would give me $100, and if I didn't get an A, I would give him $20. Steven and I quickly realized that lots of other students might like this kind of motivation. To that end, we began developing what is now Ultrinsic Motivator Inc.

They'll also let you hedge your grade risk by buying grade insurance. I love that you can now but insurance against my grading practices.

Return to blogging

2009-10-08T11:31:00.002-04:00

My apologies for the slow blogging of late. Hopefully, the crunch of deadlines will ease soon.

A key rule of thumb to keep in mind when using descriptive statistics to make an argument is "no naked numbers." Descriptive statistics alone are largely meaningless. They only take meaning when you have something to compare them to. Occasionally, we establish context by comparing them to the numbers our gut tells are high or low. This can be dangerous. You can end up looking like a real idiot if someone else bothers to actually place your numbers in context.

More on Internet Colleges

2009-09-26T10:33:00.002-04:00

From Free Exchange:

So, the question: are colleges selling an information-based product or an aura-based product (or something else altogether)?
There is no question that much of what counts as the educational part of college is digitisable and nearly endlessly duplicable. Texts and papers fall into this category, as do lectures and demonstrations. In the past, the economics of universities were based on provision of these things; books and experts were scarce, and so it made sense to gather students in one place, in proximity to those things, in order to learn from them. If this is all that underpins the modern institute of higher education, then it is only a matter of time until it vanishes.
But it may be the case that aura is more important than pieces of information where colleges are concerned. It could be that the key value is in being in a room with an expert and other interested students, in participating in dorm-room bull sessions, in napping on a pile of texts in a musty old library, and in running naked across the quad at three in the morning. These things can't be digitised and infinitely replicated. If the primary benefit from a university education is to be found somewhere in that aura, then many colleges will do just fine.
In fact, there are aspects of both that are important, in different contexts and to different students (and employers). Potentially, things could go either way for institutes of higher education. Of course, there are powerful lobbies waiting to do what's necessary to support the traditional university. Among them are alumni, who cherish their college experience and who control hiring practices, for the most part. There are university employees, who are often wealthy and influential. And there are television stations who make millions of dollars off of collegiate athletics. These groups may be every bit as committed to maintaining the status quo as have been record labels in the music industry, and more effective.
One other thing to think about; it could be that a key value of universities has nothing at all to do with what a student does while enrolled, and instead stems from the filtering mechanism of the admissions process. College degrees may be useful because the admissions department has done the difficult background work of identifying promising candidates for employment. They act as ratings agencies, in a sense, screening products and declaring them "safe" or "risky". It would be interesting if in the future there are organisations which play this role more explicitly, offering to investigate a candidate's history and skillset for a fee, and certifying qualified candidates, all in a fraction of the time and at a fraction of the cost of an actual university education.
But one way or another, the digital and internet revolution should ultimately reveal just what everyone is paying for when they write that tuition cheque.

From the Archive: Estimating the returns to selective colleges

2009-09-25T16:49:00.001-04:00

A post from a previous course:

Today, we discussed whether or not attending selective colleges was worth it. We focused primarily on ways in which selective colleges provided different consumption and investment opportunities than non-selective colleges and tried to relate these differences to differences in outcomes that individuals care about (e.g., more income or more happiness). But ultimately, whether or not attending a selective college causally changes individual outcomes is an empirical question.

Caroline Hoxby examined the returns to selective colleges for students entering college in 1960, 1972, and 1982. She finds substantial returns to attending more selective colleges. E.g., moving from a rank 3 to a rank 1 college increases earnings by 129 times the difference in tuition costs (controlling for aptitude). Further, she argues the rate of return has increased over time. A four page summary can be found here.

The Hoxby study, however, includes very few controls for unobserved differences in ability, motivation, etc. which may explain both attendance at selective colleges and higher earnings. Stacy Dale and Alan Krueger attempt to solve at least some of this problem by comparing people were accepted and rejected by similar colleges but chose to attend more or less selective colleges. Using this method, they find that incomes are not increased by attending more selective colleges. However, there are returns to attending more expensive colleges. Finally, regardless of what measure of college quality is used the returns to attending "higher quality" colleges are highest for those from disadvantaged backgrounds. A one page summary of this research can be found here.

Will your children go to college online?

2009-09-23T17:25:00.003-04:00

This article takes a look at the potential for internet competitors to draw students away from traditional colleges and universities. The economic story it tells is fairly compelling. If college is essentially about learning material in courses (and demonstrating some mastery of that material), there really is no logical reason that a cheap, "mass produced" online education (consisting of lecture videos, independent study, and 24/7 interactive on-line tutor access) shouldn't work (at least for a non-trivial fraction of students). The main challenge is whether or not on-line schools can overcome the accreditation and stigma hurdles that may reduce the value of student's investments in online classes (by preventing other schools or employers from recognizing the work completed online).

Of course, online education is not a clear substitute for all aspects of a college education (e.g., peer effects, social activities, etc.), but online schools are, in theory, sufficiently substitutable that it is not hard to imagine a very different higher education sector emerging. E.g., one where high school students apply to a college rating agency which rates students based on their "applications" providing students with external validation of their high school performance that they can use to impress employers (this is essentially what the Harvard admissions committee does). Meanwhile, they complete some basic foundational courses online (perhaps while still in high school). Then, is desired, they apply to spend a few years (depending on their field of interest) at a "college" where they participate in college social activities, get away from home while still living in a semi-structured setting, and participate in seminar classes (and labs for the sciences) on the topics of greatest interest to them. Maybe not everyone would choose this path, but I can imagine that variants on this path would appeal to many people.

Here's a small piece of the article:

In recent years, Americans have grown accustomed to living amid the smoking wreckage of various once-proud industries—automakers bankrupt, brand-name Wall Street banks in ruins, newspapers dying by the dozen. It’s tempting in such circumstances to take comfort in the seeming permanency of our colleges and universities, in the notion that our world-beating higher education system will reliably produce research and knowledge workers for decades to come. But this is an illusion. Colleges are caught in the same kind of debt-fueled price spiral that just blew up the real estate market. They’re also in the information business in a time when technology is driving down the cost of selling information to record, destabilizing lows.

In combination, these two trends threaten to shake the foundation of the modern university, in much the same way that other seemingly impregnable institutions have been torn apart. In some ways, the upheaval will be a welcome one. Students will benefit enormously from radically lower prices—particularly people like Solvig who lack disposable income and need higher learning to compete in an ever-more treacherous economy. But these huge changes will also seriously threaten the ability of universities to provide all the things beyond teaching on which society depends: science, culture, the transmission of our civilization from one generation to the next.

Advice from economists: don't buy an expensive engagement ring

2009-09-23T10:25:00.003-04:00

Tim Harford provides the history behind the engagement ring. The conditions that he says explain the practice no longer seem relevant, and yet, now the the engagement ring is a well-established cultural norm. Norms can change, though, should we start trying to change this one? The engagement ring seems to violate one of the principals of optimal relationship gift-giving I discussed in this old post.

Q: It doesn’t seem rational for a young man to give his girlfriend an expensive engagement ring when he proposes. My thought is that the most efficient use of that dollar is to invest it into something that a young couple would value most e.g. a down payment on a first house, etc. The diamond market is a monopoly and diamond prices are manipulated so that prices are always high. Can you construct a concise and logical argument that young men across the world can use to not buy diamond rings? After all, you already are offering the most valuable thing that you have (your heart) to your soon-to-be bride. In this age, why is a token like an overpriced rock still needed? — Hollins

A.

You have a point. Engagement rings took off in the U.S. when the courts refused to hear “breach of promise” lawsuits. These suits were brought by women who had slept with their fiancés and then been abandoned. These women were then less attractive marriage prospects for anyone else.

Naturally, such lawsuits were sensational fun for the newspapers, and eventually the courts put a stop to the whole thing. The problem then became: how could a young affianced couple have sex with each other when she had no recourse to the law if he changed his mind? Both of them might well want to, but for the lady the risks were pretty high. And so the institution of the engagement ring came about. Such rings are non-returnable, meaning that if the man breaks off the engagement he doesn’t get the ring back. The system discourages him from running off and provides automatic compensation if he does. Very clever.
Given all this history, I tend to agree with you. Tell your girlfriend that you doubt she is a virgin and don’t care much either way, and you will thus be spending the engagement ring money on something more useful. Be sure to let me know how it works out for you.

When should we tax consumption choices we don't like?

2009-09-22T10:16:00.002-04:00

Ed Glaeser offers his thoughts on soda taxes (note the clear application of economic theory to the issue leads to a clear set of empirical questions). Here's the beginning click the link to read the rest:

Over the past 30 years, Americans have gotten a lot heavier thanks primarily to technological progress in the food industry, which has provided an abundance of tasty, caloric treats. The champions of public health are now fighting fat with the same tools that helped turn the smoky city of the Mad Men-era into the clean-aired boroughs of Bloomberg.
New York City is running anti-soda ads where a brown liquid streaming out of a bottle turns into fat in a glass. The New York Times editorial page wants sterner stuff. They suggest that these ads are distinctly inferior to “the best move when it comes to soft drinks — a tax on sodas and other sugary beverages.”

Many public interventions can be readily dismissed because they are costly and ineffective. Yet the battle against cigarettes has taught us that taxes and advertising can together dramatically reduce an unhealthy habit. The public sector could indeed dramatically drive down the consumption of sugary sodas, but should it? Is public paternalism appropriate? If the state wants to champion health, should it use stomach-churning public service messages or sin taxes?

The economist’s perspective differs from the perspective of the public health advocate.
Public health advocates champion health. Economists don’t exactly champion illness, but they don’t usually think that health trumps all. For die-hard cola lovers, the pleasure of sugary soda may just be more important than the health consequences of a few extra calories. That perspective, combined with a respect for individual decision-making, leads many economists to question the merits of public paternalism.

From the archive: Upward sloping demand curves

2009-09-18T14:00:00.001-04:00

As noted previously, the presence of long lines for a variety of goods strikes economists as bizarre. Why don't firms raise prices to reduce the excess demand?

There are a number of explanations ranging from the sales of related products (discussed below in the world cup post) to dodging taxes (by having some off the book side payments) to concerns about consumer reaction to price increases (if consumers think that price increases are unfair they might punish producers) to the fact the individual demand is a function of aggregate demand.

This last explanation is outlined by Gary Becker in his brief "A Note on Restaurant Pricing and Other Examples of Social Influence on Price" in the Oct. 1991 Journal of Political Economy.

Becker argues that these phenomena frequently occur for products (like eating meals in restaurants, watching concerts or games, talking about books, movies, TV shows, or even actors, models, or musicians) which are, at least partially, social activities. If the pleasure of consuming a good increases if lots of others consume it (because people want to fit in or because confidence in the quality of the good increases), then demand increases with aggregate demand. And, with strong enough social interaction effects, demand may increase with price.

Becker goes on to describe a side-ways "S" shaped demand curve that falls, rises, and then falls again. This produces two profit-maximizing equilibria. One has a low price and excess capacity and the other a high price an excess demand. The trick for producers getting to the high price, excess demand equilibria. This involves coordinating demand and explains why firms in these types of industries spend alot of effort and money on advertising and publicity.

This approach also helps to explain why popular restaurants are very small (that is, why places which regularly draw crowds don't increase their supply). Because the market has multiple equilibria and because consumer coordination determines which equilibrium is reached, producers have to worry about consumers deciding that something else is "so hot right now" and disappearing. This fickleness in consumer tastes makes expansion a risky investment. (Suppliers may also not want to increase supply if the size of the line matters. That is, without the long line demand starts to fall.)

The Marshmallow Test

2009-09-17T17:30:00.002-04:00

Below is a cute video of a marshmallow test. Kids are offered a marshmallow and told if they wait to eat it they'll get a second one. It is an interesting examination of kids intertemporal decision making.

Oh, The Temptation from Steve V on Vimeo.

While the video is cute, it turns out that this experiment can reveal a great deal about who these kids become later in life. The original version was conducted in the 1960s and the researchers have continued follow the subjects over time and found some interesting stuff:

But occasionally Mischel would ask his three daughters, all of whom attended the Bing, about their friends from nursery school. “It was really just idle dinnertime conversation,” he says. “I’d ask them, ‘How’s Jane? How’s Eric? How are they doing in school?’ ” Mischel began to notice a link between the children’s academic performance as teen-agers and their ability to wait for the second marshmallow. He asked his daughters to assess their friends academically on a scale of zero to five. Comparing these ratings with the original data set, he saw a correlation. “That’s when I realized I had to do this seriously,” he says. Starting in 1981, Mischel sent out a questionnaire to all the reachable parents, teachers, and academic advisers of the six hundred and fifty-three subjects who had participated in the marshmallow task, who were by then in high school. He asked about every trait he could think of, from their capacity to plan and think ahead to their ability to “cope well with problems” and get along with their peers. He also requested their S.A.T. scores.
Once Mischel began analyzing the results, he noticed that low delayers, the children who rang the bell quickly, seemed more likely to have behavioral problems, both in school and at home. They got lower S.A.T. scores. They struggled in stressful situations, often had trouble paying attention, and found it difficult to maintain friendships. The child who could wait fifteen minutes had an S.A.T. score that was, on average, two hundred and ten points higher than that of the kid who could wait only thirty seconds.

ECON 292 (Micro) Quiz Postponed

2009-09-17T11:06:00.002-04:00

I forgot to mention and discuss the quiz scheduled for this Friday in class yesterday. As such, I'll discuss the quiz on Friday, and I'll administer it on Monday. Sorry.

For Jim

2009-09-16T21:58:00.002-04:00

Here's the paper I mentioned in my office today:

Game theory makes strong predictions about how individuals should behave in two player, zero sum games. When players follow a mixed strategy, equilibrium payoffs should be equalized across actions, and choices should be serially uncorrelated. Laboratory experiments have generated large and systematic deviations from the minimax predictions. Data gleaned from real-world settings have been more consistent with minimax, but these latter studies have often been based on small samples with low power to reject. In this paper, we explore minimax play in two high stakes, real world settings that are data rich: choice of pitch type in Major League Baseball and whether to run or pass in the National Football League. We observe more than three million pitches in baseball and 125,000 play choices for football. We find systematic deviations from minimax play in both data sets. Pitchers appear to throw too many fastballs; football teams pass less than they should. In both sports, there is negative serial correlation in play calling. Back of the envelope calculations suggest that correcting these decision making errors could be worth as many as two additional victories a year to a Major League Baseball franchise, and more than a half win per season for a professional football team.

From the Archive: Why Height Matters

2009-09-16T21:57:00.001-04:00

Height (which is frequently not captured in beauty variables) also produces returns in the labor market. An extra inch of height is estimated to be worth approximately $1000 a year in wages. While that's great (at least if you are me), one can't really invest in their height so who cares?

Well, it turns out one's current height doesn't appear to generate these returns. Economists Nicola Persico, Andy Postlewaite, and Dan Silverman show that it is not height today that generates higher incomes, but rather height at age 16. Boys who were tall at 16 earn more money, but boys who were short at 16 but tall at 33 don't. This suggests that height itself does not matter. Rather, adolescent experiences differ for those who are tall and these different experiences generate self-esteem, confidence, or some set of skills that are valuable in the labor market.

Steven Landsburg provides a one page summary of the paper here.

From the Archive -- Why Beauty Matters (the third time)

2009-09-16T14:02:00.003-04:00

Here's some additional material on the topic of discussed in Metrics today.

Why Beauty Matters

In class yesterday, we discussed that your appearance is an important part of your social capital. For many years, economists have known that more attractive people earn more money. Steven Landsburg summarizes several of the key findings in this slate column.

Here's the highlight:

In their published research, Professors Daniel Hamermesh and Jeff Biddle
estimate that if you're perceived as beautiful, you probably earn about 5
percent more than your ordinary-looking counterparts. As beauty is rewarded, so
ugliness is penalized. Ugly women earn about 5 percent less than other women,
and ugly men earn about 10 percent less than other men. That's right; the market
punishes men more than women for being unattractive. Moreover, men's looks haunt
them at every stage of their careers: Better-looking men get more job offers,
higher starting salaries, and better raises. For women, good looks will get you
better raises but usually not better job offers or starting salaries. (A note on
Hamermesh and Biddle's methodology: Beauty was assessed by panels of people who
judged photographs of the study's subjects.)

But why is beauty rewarded? Do employers "pay" because they just like to have pretty people around? Do employer's know that customers prefer to work with pretty people? Are pretty people more productive? Or do employers (and the pretty people themselves) just think that they are?

Spiffy research by Harvard's Markus Mobius and Wesleyen's Tonya Rosenblat addresses these questions using an experimental labor market. Berkeley professor Hal Varian conveniently summarized this paper in yesterday's NYTimes:

Armed with the data from these experiments and surveys, the economists found
several interesting results. It turned out that beautiful people were no better
than ordinary people in solving mazes. But despite having the same productivity
as others in this task, beautiful people were a lot more confident about their
own abilities. Being good looking seems to be strongly associated with
self-confidence, a trait that is apparently attractive to employers. When
employers evaluated employees only on the basis of resumes, physical appearance
had no impact on their estimates, as one would expect. But all of the other
treatments showed higher productivity estimates for beautiful people, with the
face-to-face interviews yielding the largest numbers. Interestingly, employers
thought beautiful people were more productive even when their only interaction
was via a telephone interview. It appears that the confidence that beautiful
people have in themselves comes across over the phone as well as in person. But
even when the experimenters controlled for self-confidence, they found that
employers overestimated the productivity of beautiful people. The economists
estimated that about 15 to 20 percent of the beauty premium is a result of the
self-confidence effect, while oral and visual communication each contribute
about 40 percent. It seems that good-looking people are good communicators as
well, and their oral communication skills contribute about as much to employers'
perceptions as their looks. As the researchers put it, "Employers (wrongly)
expect good-looking workers to perform better than their less-attractive
counterparts under both visual and oral interaction, even after controlling for
individual worker characteristics and worker confidence."

Poverty and Temptation

2009-09-16T03:24:00.002-04:00

This is a little premature for where we are in Micro, but I'll forget to post it later if I try and wait.

Chris Blattman points to an interesting new paper by Abhijit Banerjee and Sendhil Mullainathan on discount rates and temptations:

Some people are impulsive and impatient; they prefer a dollar or a donut today far more than a dollar or a donut tomorrow, so much so that they’re willing to give up shocking amounts of dollars and donuts tomorrow for just one today. This is one reason, some say, that we see such high interest rates for short-term borrowing, from New York to Calcutta.

Some people are not only impulsive and impatient, but inconsistently so. they care a lot about a dollar today versus tomorrow, but could care less between getting a dollar either 10 or 11 days from now. Economists call this ‘hyperbolic discounting’.

Both behaviors–impatience and time inconsistency–could be a source of persistent poverty.

Or not. Abhijit Banerjee presented a new paper here yesterday, written with MIT colleague Sendhil Mullainathan. They look at a number of seemingly unusual behaviors by the very poor–from exorbitant rates of short-term borrowing to the low take-up of small, high-return investments. Impatience cannot explain the patterns, they say. The impatience approach also requires the poor think differently than the rest of the population.

Another view: we’re all impulsive and impatient in the same way, but over a narrow range of goods that are quickly and cheaply satisfied. If you’re poor, these temptations are a big fraction of your income. If you’re even somewhat wealthy, they are not. Temptations are declining in income.

A question

2009-09-15T16:42:00.005-04:00

Over the past 30 years, Gallup has occasionally asked people the following questions, "of every dollar that goes to [the Federal government; state government, or local government] how many cents would you say are wasted?" How would you respond to these questions? Also, how would you respond to the questions, "of every dollar earned in revenue by private businesses what share do you think is wasted?" or "of every dollar raised by non-profit organizations what share do you think is wasted?" Finally, provide some context for your answers by discussing how you define waste?

Irrationality

2009-09-14T20:02:00.002-04:00

Jeff Atwood builds on the book Predictably Irrational in order to try and offers 9 ways to help prevent marketers from taking advantage of you, e.g.:

1. Encourage false comparisons

When Williams-Sonoma introduced bread machines, sales were slow. When they added a "deluxe" version that was 50% more expensive, they started flying off the shelves; the first bread machine now appeared to be a bargain
When contemplating the purchase of a $25 pen, the majority of subjects would drive to another store 15 minutes away to save $7. When contemplating the purchase of a $455 suit, the majority of subjects would not drive to another store 15 minutes away to save $7. The amount saved and time involved are the same, but people make very different choices. Watch out for relative thinking; it comes naturally to all of us.

Realize that some premium options exist as decoys -- that is, they are there only to make the less expensive options look more appealing, because they're easy to compare. Don't make binding decisions solely based on how easy it is to compare two side-by-side options from the same vendor. Try comparing all the alternatives, even those from other vendors.
Don't be swayed by relative percentages for small dollar amounts. Yes, you saved 25%, but how much effort and time did you expend on that seven bucks?

Give kids a chance (at independence)

2009-09-12T14:55:00.002-04:00

Awhile back, I posted about whether or not parents today are more worried:

Frequently, when I look at my young cousins and reflect back on my own childhood, I am shocked at how much independence I had growing up. As a young child (3-4 year old), I tagged along with the “older” (i.e., 6-9 year olds) in the neighborhood as we roamed the small area around my house. By the time I was 5, I was walking unaccompanied further away to meet up with friends from school, and most of my weekends and summers from age 7-11 were spent climbing the mountain behind my house for hours on end, again, only with other kids my age. When I look at my cousins or other kids at these ages growing up in the same town I did, I cannot imagine them being allowed the same amount of unsupervised activity.

Over the weekend, I was discussing this phenomenon with a friend who grew up half-a-world away in Portugal, and he felt the same way. Together we reminisced about the long list of activities that were common kid behaviors that are typically unacceptable today (many of which were clearly stupid); e.g., riding in the front seat of cars (without seatbelts) or in the back of pickup trucks, riding bicycles without helmets, playing (particularly swimming) far from the watchful eyes of trusted adults, playing with things like BB guns or wrist-rockets, and on and on.

Now, the NYTimes has an article describing the fact that parents basically don't let their children walk to school anymore:

Certain realities also shape these procedures, such as the schedules of working parents, unsafe neighborhoods and school transportation cuts.
But when these constraints are mixed with anxiety over transferring children from the private world of family to the public world of school, the new normal can look increasingly baroque. Now, in some suburbs, parents and children sit in their cars at the end of driveways, waiting for the bus. Some school buses now have been fitted with surveillance cameras, watching for beatings and bullying.
Children are driven to schools two blocks away. At some schools, parents drive up with their children’s names displayed on their dashboards, a school official radios to the building, and eachchild is escorted out.
When to detach the parental leash? The trip to and from school has become emblematic of the conflict parents feel between teaching children autonomy and keeping them safe. In parenting blogs and books, the school-bus stop itself is shorthand for the turmoil of contemporary parents over when to relinquish control.
...
The fear of abduction by strangers “has become a norm within middle-class parental circles,” said Paula S. Fass, a history professor at the University of California, Berkeley, and author of “Kidnapped: Child Abduction in America.” “We try to control our fears to the nth degree, so we drop our children off right at school. It’s a confirmation that ‘I’m a good parent.’ ”
In 1969, 41 percent of children either walked or biked to school; by 2001, only 13 percent still did, according to data from the National Household Travel Survey. In many low-income neighborhoods, children have no choice but to walk. During the same period, children either being driven or driving themselves to school rose to 55 percent from 20 percent. Experts say the transition has not only contributed to the rise in pollution, traffic congestion and childhood obesity, but has also hampered children’s ability to navigate the world.
In a study of San Francisco Bay Area parents who drove children ages 10 to 14 to school, published this summer in the Journal of the American Planning Association, half would not allow them to walk without supervision, and 30 percent said fear of strangers governed their decision.
In recent years, parents like Katie have begun to push back. They often encounter disapproval by other parents, scoldings by school administrators, even visits from local constabularies.

I really don't get this. Parents seem to believe that they are somehow "bad parents" if they allow their children some freedom and something bad happens. Yet, parents actively encourage their kids to do far more dangerous activities than walking to school (e.g., they put them in cars and drive them around):

Critics say fears that children will be abducted by strangers are at a level unjustified by reality. About 115 children are kidnapped by strangers each year, according to federal statistics; 250,000 are injured in auto accidents.

From the archive: Correlation is not Causation

2009-09-12T14:49:00.002-04:00

Mark Thoma posts about correlation not implying causation and points to this gem from the Simpsons:

Homer: Not a bear in sight. The "Bear Patrol" is working like a
charm!

Lisa: That's specious reasoning, Dad.

Homer: [uncomprehendingly] Thanks, honey.

Lisa: By your logic, I could claim that this rock keeps tigers away.

Homer: Hmm. How does it work?

Lisa: It doesn't work; it's just a stupid rock!

Homer: Uh-huh.

Lisa: But I don't see any tigers around, do you?

Homer: (pause) Lisa, I want to buy your rock.

From the Archive: Value of learning empirical skills

2009-09-12T14:29:00.003-04:00

I posted this a few months ago:

Conventional wisdom holds that breastfeeding is vastly superior to bottle feeding. The superiority of breast milk is supposedly supported by scientific evidence. Upon closer examination, though, the evidence does not appear that overwhelming. Why?

most of the claims about breast-feeding’s benefits lean on research conducted outside the lab: comparing one group of infants being breast-fed against another being breast-fed less, or not at all. Thousands of such studies have been published, linking breast-feeding with healthier, happier, smarter children. But they all share one glaring flaw.
An ideal study would randomly divide a group of mothers, tell one half to breast-feed and the other not to, and then measure the outcomes. But researchers cannot ethically tell mothers what to feed their babies. Instead they have to settle for “observational” studies. These simply look for differences in two populations, one breast-fed and one not. The problem is, breast-fed infants are typically brought up in very different families from those raised on the bottle. In the U.S., breast-feeding is on the rise—69 percent of mothers initiate the practice at the hospital, and 17 percent nurse exclusively for at least six months. But the numbers are much higher among women who are white, older, and educated; a woman who attended college, for instance, is roughly twice as likely to nurse for six months. Researchers try to factor out all these “confounding variables” that might affect the babies’ health and development. But they still can’t know if they’ve missed some critical factor. “Studies about the benefits of breast-feeding are extremely difficult and complex because of who breast-feeds and who doesn’t,” says Michael Kramer, a highly respected researcher at McGill University. “There have been claims that it prevents everything—cancer, diabetes. A reasonable person would be cautious about every new amazing discovery.”

The article continues to describe some very clever ways researchers have attempted to tease out the "true" effects of breastfeeding. Economists call these types of clever approaches "identification strategies", and a significant share of graduate training in labor economics consists of learning how to come up with these kinds of clever strategies.

Found textbook

2009-09-11T16:43:00.000-04:00

We found an metrics textbook in class. Let me know if you lost one. I have it.

Math and Movies

2009-09-11T14:49:00.002-04:00

Some times movies are actually about math, but lots of time movies incorporate math. This article explores some uses in movies like Dark Knight and Reservoir Dogs:

The math of zombies
You think you know what zombie flicks are about: the undead’s insatiable desire for human flesh. True, but they’re also about epidemiology. One zombie bite infects a healthy person, who infects others, and so on until the few healthy humans left are holed up in Wal-Mart with a shotgun, aiming for the head.
The problem of zombies intrigued Philip Munz of Carleton University and his colleagues at the University of Ottawa, who recently wrote a scientific paper quantifying various properties of zombie epidemics. Standard modeling techniques for disease outbreaks weren’t quite sufficient, the authors found. “The key difference between the models presented here and other models of infectious disease,” they wrote, “is that the dead can come back to life.”
After a thorough, if tongue-in-cheek, analysis, the authors found that the optimal method for halting such epidemics involves killing zombies early and often - the rare scientific paper that satisfies both the splatter-film aficionado and the Centers for Disease Control.

Important description of economic performance

2009-09-11T10:28:00.003-04:00

The Census Bureau released its latest description of income, poverty, and health insurance coverage. These data provide important description about what's going on in the economy. You should click this link and look at all the slides, or this link for a summary of a few. While there ask yourself, are these patterns acceptable? If not, what outcomes would you prefer? What is impeding us from reaching the better outcome (that is, what explains the deviation of actual economic performance from the ideal), and what policies might help bridge the gap between where we are and where we'd like to be?

Social Insurance

2009-09-11T10:03:00.002-04:00

One of the big roles for government in the economy is the provision of social insurance. Approximately 50% of spending by the federal government goes toward social insurance programs -- like Social Security and Medicare. Government provided social insurance is frequently controversial, in this post, Uwe Reinhardt uses last year's Lehman collapse in an attempt to get Americans to appreciate social insurance:

A year ago, century-old Lehman Brothers lapsed into bankruptcy, completely spooking the oligarchy that runs our nation’s financial sector.

The oligarchs had fully expected to see Lehman bailed out by the federal government that serves them, especially after the government had dutifully bailed out Bear Stearns earlier in the year. When Lehman was not so served, panic set in, unleashing global economic turmoil and pain.

Devastating as this calamity has been to many individuals and institutions, it should have served Americans also as a great teaching moment, reminding them of the important and highly productive role government risk management plays in their daily lives.
...

In the end, like teenagers who hate Mother’s strictures when all is well, but run to Mommy whenever they get in trouble, the swashbuckling oligarchs of the financial sector ran to government for cover, owning up once again to the time-honored mantra of this country’s legendary rugged individualists:

When the going gets tough, the tough run to the government.

Another term for “government risk management,” of course, is “social insurance.”

It is a social contract with government that Americans quietly love, but in the shouting matches that now pass for our “national conversation” on public policy so often profess to hate — as when they cry for government to stay out of Medicare, or when they sit on their beachfronts in the Hamptons waxing worried about government intrusion in the economy, all the while basking in the security of federal flood insurance.

In the rest of the post, Reinhardt reminds readers that social insurance does more than simply help those who find themselves poor or sick (which is apparently a very controversial idea). Social insurance extends to government supported flood insurance and the limited liability corporation (oddly, you seldom hear people complain about these -- although, some of the flood insurance stuff stupidly allows/encourages people to build big expensive houses that are fairly likely to be destroyed by floods or hurricanes).

Krugman on Math in Economics

2009-09-11T09:54:00.002-04:00

Paul Krugman (following up on the article I linked to a few days ago) discusses the role of mathematics in economic theory:

Math in economics can be extremely useful. I should know! Most of my own work over the years has relied on sometimes finicky math — I spent quite a few years of my life doing tricks with constant-elasticity-of-substitution utility functions. And the mathematical grinding served an essential function — that of clarifying thought. In the economic geography stuff, for example, I started with some vague ideas; it wasn’t until I’d managed to write down full models that the ideas came clear. After the math I was able to express most of those ideas in plain English, but it really took the math to get there, and you still can’t quite get it all without the equations.

What I objected to in the mag article was the tendency to identify good math with good work. CAPM is a beautiful model; that doesn’t mean it’s right. The math of real business cycle models is much more elegant than that of New Keynesian models, let alone the kind of models that make room for crises like the one we’re in; that makes RBC models seductive, but it doesn’t make them any less silly.

In intermediate micro, we won't get too sophisticated with our math, but Krugman's right, the part of the value of writing down and solving mathematical models for economic phenomena, is that such models occasionally yield results that were not intuitively obvious (but ultimately make lots of sense).

Getting the Description RIght

2009-09-09T20:11:00.002-04:00

Examining data in only useful if the data provide accurate reliable information. Many surveys and polls provide "bad" information. Polling on health care has been all over the place. In part, this reflects poor survey design. This article describes some of the problems with health care polling, e.g.,:

Indeed, questions that have asked about "Obama's plan" are particularly egregious violators of the tenets of good polling: As of yet, no such thing as an "Obama plan" exists. So when CNN asked respondents whether or not they "favor or oppose Obama's plan to reform health care" and the NBC/Wall Street Journal polling team asked whether "Barack Obama's health care plan" is a good idea, they were asking respondents to voice an opinion on an imaginary concept.

Read This!

2009-09-08T11:18:00.002-04:00

I am working on a longer series of posts about health reform, but in the meantime -- READ THIS.

This article (or a similar article) should be running every day on the front page of every newspaper in the country (modified only as the bills change). TV news should also regularly repeat a story which walks through the substance of the legistlation. The media is too focused on reporting news -- what happened today? As such, they fail to inform the public about the substance of the debate, and the public ends up completely clueless about what is actually going on and easily manipulated by those wishing to scare them (death panels anyone).

ECON 292 -- Assignments for this week

2009-09-08T10:02:00.003-04:00

This week we will be working through Varian chapters 2-4.

Please complete the following questions from Workouts to turn in by next Monday (9/14): 2.1, 2.7, 2.11, 3,1, 3.3, 3.12, 4.1, 4.6

Please complete the following questions on your own: 2.2, 2.9, 2.12, 2.13, 3.2, 3.4, 4.0, 4.2, 4.4

ECON 303 -- Assignments for this week

2009-09-08T09:49:00.003-04:00

This week we will be review probability and statistics in class. These are discussed in chapters 2 and 3 of Stock and Watson (SW).

Please complete the following exercises from SW to turn in next Wednesday (9/16): 2.6, 2.8, 2.14, 3.3, 3.4, 3.12.

Please complete the following exercises on your own (these will not be turned in, but solutions will be provided): 2.2, 2,5, 2,12, 2.17, 2,22, 3.1, 3.2, 3.11, 3.13, 3.17

Read This!

2009-09-03T17:28:00.003-04:00

It's mostly about macroeconomics and finance (so not really relevant for Micro and Metrics classes), but, in this article, Paul Krugman does a great job describing the the big debates about the macroeconomy and the implications of recent events for these debates.

I really wish someone would have handed me this at the start of my graduate macro class. I think things would have made a lot more sense.

Money and Happiness

2009-09-03T10:54:00.002-04:00

I alluded to this relationship in class yesterday, if you want to learn more. This post includes a number of links to the basic facts about the relationship between money and happiness.

This post offers up one of the main ways I think that money can buy happiness -- buy memories (although I think people frequently neglect these opportunities).

Correlation is not Causation

2009-09-03T10:38:00.002-04:00

Fact: students in the Midwest have higher SAT scores than students on the coasts.

Does this mean the students or schools in the Midwest are superior to the schools on the coasts?

Read here to find out more.

ECON 303 -- Assignment for 9/4

2009-09-02T21:06:00.003-04:00

Please read Stock and Watson Chp 1 and this document (which I wrote to help students in my sophomore tutorial at Harvard write their term papers) before class on Friday:

970_papermanual

ECON 303 -- Motivation

2009-09-02T14:52:00.003-04:00

The NYTimes recently ran an article on the growing demand for workers capable of using computers to analyze the growing mounds of electronic data. This class is an important step in acquiring such skills:

“I keep saying that the sexy job in the next 10 years will be statisticians,” said Hal Varian, chief economist at Google. “And I’m not kidding.”
The rising stature of statisticians, who can earn $125,000 at top companies in their first year after getting a doctorate, is a byproduct of the recent explosion of digital data. In field after field, computing and the Web are creating new realms of data to explore — sensor signals, surveillance tapes, social network chatter, public records and more. And the digital data surge only promises to accelerate, rising fivefold by 2012, according to a projection by IDC, a research firm.
...
Though at the fore, statisticians are only a small part of an army of experts using modern statistical techniques for data analysis. Computing and numerical skills, experts say, matter far more than degrees. So the new data sleuths come from backgrounds like economics, computer science and mathematics.

ECON 292 -- Assignment for 9/2

2009-09-01T15:01:00.002-04:00

Please think about the following questions and come to class prepared to discuss your responses to them.

How would you expect to respond if placed in the following situations:

A. Assume you have $100 in spending money. Further assume that you have a date on Friday night. On the date, you have the choice to spend money on food, entertainment, or gifts. Any money you don't spend on the date you can keep to buy whatever else you like.
(1) How much money would you allocate to the date and how much would you keep for other stuff?
(2) Of the money you allocated to your date, how much would you spend on food, entertainment, or gifts?
(3) If the price of entertainment increased, how would your choices change?
(4) If you had $200 instead of $100, how would your choices change?

B. Assume you have a part-time job that pays you $15/hour. If you were given a raise so you earned $17/hour, would you change the number of hours that you worked? If so, would you increase or decrease the number of hours you worked?

C. Assume I offered you the following bet:

I will flip a coin. If it comes up heads, I will give you an A for this class. If it comes up tails I will fail you? Would you take the bet? What if heads got you an A and tails got you a C? Heads A, tails B? What if I let you pick a card from a standard deck of playing cards and any heart got you an A, any diamond got you a B, any spade a C, and any club a D, would you take this bet?

D. Assume you have $6000, if I offered you the chance to invest the $6000 and get paid $10,000 in 10 years, would you make this investment?

ECON 303 Assignment for 9/2

2009-09-01T14:57:00.002-04:00

Please email me or post in the comments below a brief description of a debate/argument/discussion you find interesting. Any topic or subject is fine (that is, it needn't be something obviously economic -- economics, politics, public policy, sports, entertainment, social norms or customs, etc. are all fine).

OECD Health Care Expenditures as Share of GDP

2009-08-15T14:09:00.005-04:00

Summary since the second quiz

2009-06-06T13:32:00.004-04:00

I am still writing it, but, at the moment, the final looks like it will be approximately twice as long as one of our normal quizzes (so hopefully time will not be a significant issue).

Here's a list of major topics since the last quiz:

Market Failure (cont)

What is market failure?

How can each of the following generate market failure in labor markets: asymmetric information (adverse selection, moral hazard) and market power?

How do we try and solve (or minimize) the impacts of moral hazard (e.g., how might we solve the principal-agent problem)?

What are efficiency wages? Why might firms offer them?

Market Power

Key sources: Monopsony, Occupational Licensing, Unions

How do each of these key sources generate market power?

How (and why) does possession of market power affect the labor market (e.g., wages, compensation, employment levels)?

Do monoposonies, licenses, or unions generate benefits that offset the costs they may impose on the economy?

Distribution of labor market outcomes

What is the distribution of income in the US?

What explains individuals' positions in the distribution?

What choices affect individual labor market success?

What conditions are likely prompt individuals to invest in their human or social capital? E.g., what are the benefits and costs associated with such investments? [related: what is a discount rate and why is it relevant for this discussion?]

What exogenous factors (i.e., stuff outside of the individual's control) affect individual labor market success?

What is relatively more important for determining individual success, individual choices or exogenous factors? Why is this question important?

How has the distribution of income changed over time?

Why has it changed?

Do we care about the changes?

Labor market policies

Is the distribution of income important?

Does income affect happiness? If so, why; if not, why not?

If it wants to, how can society change the distribution of income? What are the benefits and costs associated with such policies?

HW1 Solutions

2009-06-06T13:31:00.001-04:00

Apparently, I never posted these.

hw1sols

Publish at Scribd or explore others:

Quiz 2 and HW 2 Solutions

2009-06-04T22:51:00.002-04:00

Quiz 2 solutions and HW 2 solutions

HW 2 Solutions

Publish at Scribd or explore others:

Some New Evidence on the Source of Discrimination

2009-06-04T13:53:00.002-04:00

Yesterday we discussed some potential hypotheses for wage gaps (and discrimination). Customer discrimination is one potential source. This study argues that customers prefer white men.

The study will be published in the Academy of Management Journal. "Customers, from students buying textbooks to patients in an examining room, are consistently biased in favor of white men," says Hekman. "Because customer satisfaction is critical for organizational survival, business owners and managers will hire white men when possible and will pay lower salaries to the women and minorities they do hire."

Today's class

2009-06-03T13:13:00.002-04:00

Given the speed at which we covered this stuff, I will try and find some additional reading for this stuff, but here are today's slides.

Happiness Facts

2009-06-02T13:18:00.002-04:00

Justin Wolfers does a nice job summarizing his happiness papers with Betsy Stevenson in these posts: 1, 2, 3, 4, 5, 6.

They also have a paper on the trends in happiness inequality in the US which he summarizes here: 1, 2, 3

Today's Class

2009-06-01T13:06:00.002-04:00

Today's lecture slides are available here.

Here's the related video:

Here's another talk by Dan Gilbert:

A look at fundamental economic assumptions

2009-05-29T16:39:00.002-04:00

For the most part, economic education teaches students to understand society by assuming that agents rationally pursue their self-interest. For economists, identifying the the benefits and costs associated with particular decisions is all that's really required to understand why people make decisions (and to figure out how to change them). For along time, most economists believed that individual material interest dominated benefit-cost calculation, increasingly, though, economists have been forced to recognize that social concerns also affect individual calculations (e.g., people will frequently not pursue their own material self-interest if they must take unfairly from others -- particularly others they know).

This article provides a nice summary of some of the experiments in behavioral economics that have helped move social considerations closer to the forefront. The first several paragraphs even directly deal with something we discussed recently -- a union deciding between wages and employment:

The City of Yonkers, New York, wound up in a distressing predicament early this year. The municipal budget was running a deficit and the economic crisis was sorely aggravating the problem. Layoffs were needed and among the casualties were six firefighters, including, most regrettably, a young man who’d recently rescued several children from a burning apartment building. The job cuts were due to go into effect the first week of January.

But then something remarkable happened. The men and women of the Yonkers Fire Department offered to work days free for six months so the city could save money and their colleagues could save their jobs. The deal was approved by 75 percent of firefighters and the layoffs were avoided. “Everyone is aware of what is going on with the economy,” explains Patrick Brady, president of the local firefighter’s union. “We banded together and voted to save our brethren.”

This link includes several other bits on behavioral economics that you may want to check out.

Today's Class

2009-05-28T00:16:00.003-04:00

Slides from today's lecture are available here.

Here are some additional links on inequality:

Berkley professor Emmanuel Saez has written many of the most detailed descriptions of these issue. Links to his papers (and the tables I used in class) are available here.

Here's something I posted earlier on how much the gov't spends promoting economic mobility.

Here's an overview of the issue I wrote awhile back -- in particular, here's a document I wrote that explains the basic elements of inequality, mobility, and income growth.

Here are some of my opinion pieces on this topic. One and another.

Go to class

2009-05-27T17:27:00.001-04:00

Your grade will improve. Jennjou Chen and Tsui-Fang Lin estimate the effect of class attendance using a randomized experiment:

The study of determinants of a college student’s academic performance is an important issue in higher education. Among all factors, whether or not attending lectures affects a student’s exam performance has received considerable attention. In this paper, we conduct a randomized experiment to study the average attendance effect for students who have chosen to attend lectures, which is the so-called the average treatment effect on the treated in program evaluation literature. This effect has long been neglected by researchers when estimating the impact of lecture attendance on students’ academic performance. Under the randomized experiment approach, least squares, fixed effects, and random effects models all yield similar estimates for the average treatment effect on the treated. We find that, class attendance has produced a positive and significant impact on students’ exam performance. On average, attending lecture corresponds to a 7.66% improvement in exam performance.

More Occupational Licensing

2009-05-27T01:40:00.002-04:00

We talked a few weeks ago about occupational licensing. Here's some additional summary:

10. Analyzing the Extent and Influence of Occupational Licensing on
the Labor Market
by Morris M. Kleiner, Alan B. Krueger - #14979 (LS)

Abstract:

This study examines the extent and influence of occupational
licensing in the U.S. using a specially designed national labor force
survey. Specifically, we provide new ways of measuring occupational
licensing and consider what types of regulatory requirements and what
level of government oversight contribute to wage gains and
variability. Estimates from the survey indicated that 35 percent of
employees were either licensed or certified by the government, and
that 29 percent were fully licensed. Another 3 percent stated that
all who worked in their job would eventually be required to be
certified or licensed, bringing the total that are or eventually must
be licensed or certified by government to 38 percent. We find that
licensing is associated with about 14 percent higher wages, but the
effect of governmental certification on pay is much smaller.
Licensing by multiple political jurisdictions is associated with the
highest wage gains relative to only local licensing. Specific
requirements by the government for a worker to enter an occupation,
such as education level and long internships, are positively
associated with wages. We find little association between licensing
and the variance of wages, in contrast to unions. Overall, our
results show that occupational licensing is an important labor market
phenomenon that can be measured in labor force surveys.

http://papers.nber.org/papers/W14979

In case you're wondering ...

2009-05-27T01:38:00.001-04:00

5. Why do Institutions of Higher Education Reward Research While
Selling Education?
by Dahlia K. Remler, Elda Pema - #14974 (ED)

Abstract:

Higher education institutions and disciplines that traditionally did
little research now reward faculty largely based on research, both
funded and unfunded. Some worry that faculty devoting more time to
research harms teaching and thus harms students' human capital
accumulation. The economics literature has largely ignored the
reasons for and desirability of this trend. We summarize, review,
and extend existing economic theories of higher education to explain
why incentives for unfunded research have increased. One theory is
that researchers more effectively teach higher order skills and
therefore increase student human capital more than non-researchers.
In contrast, according to signaling theory, education is not
intrinsically productive but only a signal that separates high- and
low-ability workers. We extend this theory by hypothesizing that
researchers make higher education more costly for low-ability
students than do non-research faculty, achieving the separation more
efficiently. We describe other theories, including research quality
as a proxy for hard-to-measure teaching quality and barriers to
entry. Virtually no evidence exists to test these theories or
establish their relative magnitudes. Research is needed,
particularly to address what employers seek from higher education
graduates and to assess the validity of current measures of teaching
quality.

http://papers.nber.org/papers/W14974