Mother's day special: money creation

This is a TV ad for a German bank. Somewhat racy, depending on your local culture.

The value of virginity

On the marriage markets, virgins have been valuable throughout human history. One can conjecture that this is due to the sexual exclusivity that the husband enjoys. Why? Some claim that rich people care, and thus daughters of rich people will try to remain virgin in order to be eligible for marriage within their class. Poor people cannot afford virgins, and thus do not care, and sexual promiscuity before marriage is common.

All these arguments sound crude, but they reflect the fact that virginity is indeed a trait more common, historically, in the upper class. One consequence is that virginity should be more valued in societies that are more stratified. This is what Fabio Mariani studies using a model with a marriage market where poor girls can move up through love and virginity. This model is capable of explaining the recent decrease of the value of virginity as a consequence of the stronger social stratification (which makes matching across classes more difficult), the increase of female labor market participation (which gives new opportunities for women to strike it rich) and the reduced inequality. Interesting ideas, and I would love to see all this put to data more systematically than through anecdotal evidence.

Who benefits from agricultural subsidies?

Plenty of governments are dishing out large subsidies to their farmers. But are they really benefiting from them? If they rent the land, classic theory would indicate the land owner who be able to extract the whole subsidy from the renting farmer, simply because of the inelastic supply of land, assuming perfect competition for land.

Barrett Kirwan answers this question using US data and exploiting changes in farm subsidies. Kirwan finds that tenants actually manage to keep 75% of the subsidy. Why? Because the rental market is not perfect competition after all, something that is confirmed by the fact that tenants manage to extract more where there is less competition.

While I find it hard to justify agricultural subsidies, they are targeted towards those who farm the land, not those who own it. And it appears that this is working.

The proper way to create education vouchers

Education vouchers are supposed to create competition among schools to improve the level of education within a school district. In particular, it is supposed to help students get out of particularly bad schools and into better ones. The reality is, however, quite different. The best schools get even better because they can afford to become more choosy, and the differences across schools become even larger. So how could this be fixed?

Dennis Epple and Richard Romano suggest that school voucher should not be just blank checks. You need to be subtle. If you want to achieve high and equal quality education, the amount of the voucher needs to decrease with student ability, and the school need to accept them as full tuition. This requires large vouchers, and thus high taxes to finance them. Epple and Romano show that a less expensive system is possible, all you need is attach various constraints to the use and amount of the voucher. And this still works if students or schools can choose to opt out.

The key to all this is to prevent schools from making too much profit from vouchers. Essentially, vouchers increase the paying capacity of schooling demand, and schools exploit this. To counteract this, they need to be constrained, either by disallowing them to accept payments in addition to the voucher (or they would just charge the usual tuition plus voucher and laugh all the way to the bank), or allow side payments with more strings attached. The former seems much easier to implement and monitor, though. Also critical is that voucher amounts should not depend on the income or wealth of parents. Then, one can prevent richer schools from getting even richer with more rich kids.

Mom should stay at home

New working mothers always face the question of when to return to work. While their concern is the immediate well-being of the newborn, what about its long term prospects? It is now well establish that adult outcomes (education, wages) are largely set in the first years of life, especially in pre-school years. The empirical literature on the subject is largely inconclusive, but suffers of several issues: 1) mothers who work and use child care may be different from the others; 2) the child's cognitive abilities may influence the mother's choices.

Raquel Bernal corrects for these issues by avoiding the ominous reduced-form regression. She estimates a full-blown dynamic employment and child care choice model using data from the National Longitudinal Survey of Youth, the same dataset others used without clear results. Bernal obtains clear and significant results, though, showing that using child care during one of the first five years reduces the test score for cognitive ability at the start of schooling by 1.8%. While this does not seem much, this amounts to one eighth of the standard deviation of this score. For high ability kids, the impact is even stronger.

The nice thing with a structural model is that one can perform meaningful policy experiment. For example, introducing a 35% child care subsidy encourages the use of child care, but also reduces test scores by about 1% (it ranges for 0.23% to 1.87% depending on the test). Not particularly encouraging. A maternal leave policy is detrimental as well: as the mother can then rejoin the workforce under the same conditions as when she left it, it increases the opportunity cost of staying at home and she rejoins the labor market even earlier. Cognitive skills of the child are reduced by 0.1% to 1%. However, giving a baby bonus (a quarterly $250 lump sum) increases significantly the number of stay-at-home moms and test scores.

So much for all these policies encouraging women to work. They have perverse effect to slow the development of the youngest. One needs thus to complement these policies with incentives to stay at home during the pre-school years.

Safe haven currencies

Whenever trouble brews in the global economy, some currencies tends to becaome the refuge of worried investors. There is plenty of opportunities to panic right now (rightly or wrongly), and these safe haven currencies are again being sought. So, which are they?

Angelo Ranaldo and Paul Söderlind document that these currencies vary little by circumstances. Whenever US stock markets tank, US bond prices increases or currency markets become more volatile, the euro, the British pound and especially the Swiss franc appreciate. Interestingly, such movements are visible in the data at all sorts of frequencies, including hourly data.

While I can understand why non-US currencies appreciate when there are sign of trouble in the United States, I am somewhat mystified why the Swiss franc would appreciate more that the others. While Switzerland has indeed the reputation of being a very stable country, its monetary policy follows very closely that of the Europen Central Bank (and the German Bundesbank before that). In fact, the Swiss National Bank does not like at all such appreciations, which are bad for trade in a country relying very much on its export sector. Does anybody have insights?

Welfare-to-work programs work, sort of

Labor market reform seems to be an eternal buzzword among policy makers in Europe as they try to deal with chronically high unemployment rates. They continually come up with new ideas on how to undo what labor laws, labor practices and poor labor mobility have done. On favorite are active labor market policies, which try to prepare unemployed workers for new jobs through various channels such as reschooling, phantom businesses or job searching skill classes.

Looking at the recent reform in Germany, where substantial welfare-to-work programs were introduced, Martin Huber, Michael Lechner, Conny Wunsch and Thomas Walter find that these initiatives work in the short term, sort of. They highlight that results differ a lot across people, and that this count be exploited to better target the programs. Implicit in this statement is that active labor market policies are wasted on some people, while quite efficient for others, and one should truly discriminate. Indeed, while thses policies seem to improve overall job market prospects, they also cost, something that is typically ignored in this type of study.

Taxing drunk drivers

Policies to reduce drunk driving do not appear to work. There are still many accidents caused by them, and threats of imprisonment (rarely credible) or loss of driving privileges (recanted when the offender needs to drive for a living) do not have the necessary bite. Indeed, drunk driving has only real consequences when an accident occurs. Are there better solutions?

An economist always looks whether there are market based solutions that would properly drive incentives. In particular, one would want (potential) drunk drivers to internalize the cost they exert on others with their behavior. That is, one would want to impose the appropriate tax. Steven Levitt and Jack Porter looked at this in their 2001 JPE piece. Considering only fatal crashes, they estimate that drivers with alcohol in their blood multiply the probability of a crash by 7, legally drunk (above (0.10%) ones even by 13. Now, using fatalities and traffic statistics, as well as measures of the statistical value of life, they then are argue that driving with alcohol should be taxed at US$0.15 a mile, the double for legally drunk, for the costs of fatalities to be covered. Of course, such a tax would be impossible to enforce. But one could fine people when caught, even when no accident is involved. That fine would amount to US$8000,given typical arrest rates. Now enforce that.

Minimum wages and the stickiness of restaurant prices

While the restaurant industry is exempt from minimum wages in the United States (at least for jobs where tipping is prevalent), other countries have binding minimum wage laws for all industries. One common complaint from restaurant owners then is that minimum wages unduly increase their costs and that they have to increase prices accordingly. Well do they?

Denis Fougère, Erwan Gautier and Hervé Le Bihan look at restaurant prices collected for the computation of the consumer price index in France and find that it takes a full year for minimum wage increases to be reflected in menu prices. From this we can learn many things: 1) menu costs are important; 2) restaurant owners have sufficient margins to absorb such cost increases, despite their claims. The second point is more of anecdotal nature, while the first merits discussion.

There is a long standing debate whether prices are sticky or not. One of the main justification for stickiness, menu costs, takes its name from the cost of determining new prices and printing new menus in a restaurant. So there is no reason to act surprised that one finds some price stickiness in the prime case for price stickiness. It is like finding that water is wet. Find me price stickiness in a market known for flexibility, and then I would be convinced.

Cheaper daycare, more kids

Most industrialized countries have very low birth rates, jeopardizing the health of their retirement systems. Many governments try policies to increase fertility. However, in the name of gender equality and of improving female labor force participation, it is difficult to increase fertility while keeping females working.

The most extreme case is Sweden. Female labor force participation is at an international high, and fertility is very low, despite near universal use of subsidizing day cares. How could it be possible to increase fertility without discouraging work? Eva Mörk, Anna Sjögren and Helena Svaleryd show that increasing the day care subsidy works wonders. A lifetime equivalent of US$17,800 in subsidy led to a 4-6% increase in the birth rate. Not bad for a country that was thought to already have maximized all benefits.

Development economics needs to refocus on theory

The most important questions economists can address relate to economic development. How can we explain the immense differences in income across the world? Why is human capital so low in developping countries? What can policy do about it? Should policymakers care? But answering all these questions is severely hampered by the abysmal quality of the data. Macroeconomic data is spotty and unreliable, and microeconomic data is largely inexistent. The answer to this problem was for researchers to generate their own data.

Thus were born randomization studies, whereby some region was region was subject to an economic experiment. Randomly seleced people or villages are given some sort of incentive, and others not, and the impact of the intervention is studied. This procedure has now become extremely fashionable in the development economics community, where it is now a must to be working "in the field" gathering data. This approach has, however, become increasingly questioned, for several reasons.

First, randomization studies are terribly expensive. There is an increasing sentiment that these resources could be better used, both in terms of research and development aid. In some cases, such experiments have even been shown to be detrimental. I related earlier about one where the distribution of free anti-malarial bed nets killed a local industry.

Second, as Angus Deaton discusses, the data that is obtained in these randomization studies is not informative. The critical issue here is that these experiments are not designed with any theory in mind, thus they do not help us in understanding the underlying mechanisms. They are case studies, applicable only to the very situation they have been used in. This criticism is very similar to the Lucas critique. Unless you put structure in your data, there is nothing useful you can learn from an elasticity in a linear regression with a set of variables which happen to be those available. Add to this that randomization, if poorly performed, gives statistically very poor results.

Third, I have yet to see a study that would indicate anything about the cost effectiveness of a policy or treatment. Studies are all focused on dtermining whether there is a significant impact in a statistical sense, sometimes in an economic sense, but never discusses the cost of the policy. In fact, given the huge cost of these studies, one starts to wonder whether those researchers ever think about scarcity and budget constraints.

What you really want to learn from an experiment is what is generalizable, what can be applied to other situations that differ from the studied one. For this, development economics needs to refocus on theory and the use of theory in its empirical work. Theory can help us understand a surprising amount without needing much data. In fact, in an evironment that is data poor, theory should be the priority, and any quantification should be performed with data-economizing techniques, such as calibration.

A few examples:

• Matthias Doepke and Fabrizio Zilibotti
  
• Douglas Gollin, Stephen Parente and Richard Rogerson
  
• Douglas Gollin and Christian Zimmermann
  
• Jeremy Greenwood, Juan Sanchez and Cheng Wang
  

The best young economists

RePEc recently released a ranking of the best young economists. While it is obvious that results are going to be somewhat spurious when based on a short career (and for other reasons explained on the RePEc blog, there are still some interesting aspects to them. First, looking at those that have a publication record for 10 years or less, to things stand out: 1) there is substantial female presence; 2) the US dominance is less pronounced.

First about the women. While in the general ranking, there is only one woman in the top 100 (Carmen Reinhard), there are much more numerous among the young: Monika Piazzesi at 7, Paola Sapienzi at 10, Eliana La Ferrara at 21, and more. While women are still a small minority, this is a remarkable change.

Them the Europeans. In the general ranking, I count only five economists based in Europe among the top 50 (one of them deceased), there are 11, plus two in Australia, among the top young. This shows how much progress Europe has made in graduate education and in its capacity in retaining talent compared to recent decades.

Tax political contributions

It is now pretty obvious that the US political system where political candidates have to raise their campaign funds from influence peddlers (aka political action committees) is at least not optimal if not disastrous. But solutions to get out of this mess are difficult to find, none the least because those that can make change happen are those that are the most interested in the status quo. Yet, this not lower the interest in studying this problem, the incentives at play and various policy proposals.

Christopher Cotton looks at an interesting aspect: should we cap contributions or tax them? Like in many situations where it is optimal to have less of some quantity, it should not be a surprise that taxing is the optimal strategy, at least compared to rationing. What is more interesting is that Cotton shows that the contribution cap is optimal from the point of view of the politician. In other words, even if a consensus could be obtained that political contributions need to be reigned in, the policy outcome would still be one that is suboptimal and favoring politicians. We are screwed.

Credit rating inflation and naive investors

Imagine that employers determine the quality of job applicants by looking at their GPA (grade point average). Then obviously, colleges would want to give good grades to their students to give them better chances on the job market. To attract tuition paying students, colleges promise good grades. This scheme will work as look as there are some naive employers that do not see that they are getting fooled by grade inflation.

Patrick Bolton, Xavier Freixas and Joel Shapiro argue that this is exactly what happened with the credit rating agencies, which are financed by the very institutions they are rating. And the latter shop around for the better ratings. As long as there are naive investors willing to believe whatever the credit rating agencies say, the rating inflation will continue. The authors show with a model that the optimal policy response is to force disclosure of all ratings. One would not have needed a formal model to realize that. More interesting is that they show that a monopoly can in fact lead to better outcomes, for once, because it does not lead to rating inflation. Monopolies bring other inefficiencies, however, and we are already advocating the public provision of ratings...

A little money gets people to exercice in the long term

Sometimes, small incentives can bring great rewards. Think for example about the 10 cent toys some fast food outlets give to children in return of the loyalty of a whole family (and a lifetime of business thereafter). One could equate this to the little tryout that tips you into an addiction, providing great returns to the provider of the initial investment. But can we obtain such behavior on a more positive side?

Gary Charness and Uri Gneezy show that giving people a monetary incentive to attend a gym for a month will make them more likely to attend thereafter. They claim that a non-trivial incentive managed to create a good habit, but one can also view this incentive to be relatively small compared to the present value of future benefits from going to the gym.

It looks like context matters. People already were aware of the benefits, they just needed to overcome some fix costs to try and the incentive was sufficient. But the more interesting aspect of the study is that compared to a control group, those who received incentives for a sufficiently long time then kept going to the gym thereafter, thus a habit was created. But it looks like this habit was already underlying, waiting to awakened. Why would this habit be stronger with the monetary incentive?

The experiments were carried out in Chicago and San Diego. In particular in the second location, there is a culture centered around the gym: it is the place to be, the meeting place. There is something of an expectation in California that everybody respectable goes to the gym. What does this mean for this study? The peer pressure to go to the gym should not be different according to the receipt of an incentive or not. But does the feeling of guilt about not going to the gym become stronger if you used to be paid to go?