Family environment and IQ

There has been a long discussion in the literature on whether intelligence is inherited or acquired, the nature versus nurture debate. The traditional empirical strategy has been to look at twins separated at birth and raised in different families. While this seems to be a perfect data set for this kind of study, it suffers from at least two drawbacks: samples are very small, and there could be a selection bias, as twins given for adoption may not be representative of twins, and furthermore, twins may not be representative of the general population.

Anders Björklund, karin Hederos Eriksson and Markus Jäntti focus on the correlation of IQ across siblings as it compares with father-to-son IQ correlation. For Sweden they find that they are 0.473 respectively 0.347 from a data set of military conscripts (all male). As siblings share genes and environment, whereas father and son only share genes, they argue that this is evidence that the environment is important. An environment that may include the mother and her genes, by the way.

These results look interesting, but I do not quite know where to go from there. Does this mean that we have less to worry about the intergenerational persistence of skills? Or that the high correlation of earnings within a family is OK and not a sign of mis-allocated opportunities in society?

How to select presidential candidates based on their biography

Every party would like to find a way to find the perfect candidate to run for office. In some way, this is the goal of primaries in the United States. But in most states, this only determines the preferred candidate among sympathizers, but the most electable in the general population may be different. Any other criteria we could use?

Scott Armstrong and Andreas Graefe looked at detailed biographies of US presidential candidates and claim to have found the formula that works 25 times out of 28. You can start now looking for the perfect candidate: coming from a political family, first-born, single-child, lost a parent in childhood, is still married with children, some adopted, went to a military academy, then received a graduate degree from an Ivy League school, is a member of Phi Beta Kappa, held political office (the more the better) and was never defeated in an election, has written books, was a movie or sports celebrity, has military experience, survived a major disease, is tall and heavy, has common first and last names, is attractive and looks competent, comes from a large state and is affiliated with a large region. All in all, the paper mentions 34 criteria. My score is 15, so I am afraid politics is not for me.

The unpredictable ones? Truman, Carter and Clinton (first term).

Cattle as self-insurance in modern economies

We have all used this example in class: in economies with no credit markets or serious banking, people may use cattle as a means of storage of value and to self-insure against future eventualities. But could such a thing happen in a modern economy with well-functioning financial markets?

Anne Borge Johannesen and Anders Skonhoft study Saami reindeer herding in northern Norway. The idea is to look at reactions to price fluctuations. For example, if meat prices increases and herders slaughter only few animals, it means that they keep them for other reasons than simply revenue: self-insurance or status. But one has to be careful. Price increases that are perceived to be permanent should lead in fewer slaughters in the short term, as herders beef up their animals. One needs to looks at temporary price changes.

Borge Johannesen and Skonhoft come to the conclusion that the price response is indeed weak for Saami herders. They also find that herd size is relevant for status, but that it does not appear to matter for slaughter decisions. Thus, there is a strong self-insurance component.

About estate subsidies and capital income taxation

There is an endless debate about estate taxation, especially in the United States. One side wants to repeal it because it discourages entrepreneurship, the other side wants to expand it, for fairness' sake. Here comes a paper that claims that both sides are wrong. Estates should be subsidized.

Carlos Garriga and Fernando Sánchez-Losada are the ones making this surprising claim. The logic is the following. Imagine that there are three potential sources of taxation: estates, capital income and labor income. You want to optimize the tax mix in order to minimize the distortions from raising taxes and maximize equity as measured by the distribution of wealth across agents. Factor also in that there is some cross-generational altruism and that one cannot bequest more than one has. One also has to realize that bequest have an important positive externality that the donor only partially takes into account: its effect on the recipient. Logically, the donor needs to be encouraged, hence the estate subsidy. But this needs to be financed somehow, hence the capital income tax. It is usually found that capital income should not be taxed, but here the pressure to raise taxes is too strong. In fact, capital income tax is significantly higher than labor income tax.

All this is done with a model that gets reasonably close to mimicking the existing distribution of skill, income and wealth in the population. Garriga and Sánchez-Losada even look into tax progression in their analysis, but qualitative results remain with constant tax rates. What I learned from this is that despite equity concerns, one has to factor in that people leave too little bequests. And that the combination of estate subsidy with capital income taxation essentially alters the intertemporal profile of wealth holding to a more egalitarian one.

Religiosity and risky behavior

Teenagers tend to engage in risky behavior, and many reasons have been identified for this. Still, there are large differences across teenagers, and some literature seems to have identified religiosity as a powerful explanatory variable for less risk taking. But as so often, correlation is not causation. "Nice" kids who follow their parents' advice and behave may also be more likely to follow their parents to church, for example. Perhaps more importantly, individual religiosity may be influence by religious fervor in the social circle beyond the family.

Jennifer Mellor and Beth Freeborn try to disentangle this by using data from the National Longitudinal
Study of Adolescent Health and consider binge drinking, smoking and marijuana use. One may discuss whether the latter is truly risky, but this is not the topic here. Mellor and Freeborn use county-level religious density, a measure that takes into account the proportion of people of a same religious group in the same area, as an instrument to control for the social environment. For religiosity, they use the frequency of church attendance.

Measuring religiosity is tricky business. Density measures depend on the size of the area and how one fragments religious groups (split protestants apart or not, for example). And church attendance may be more a social event than anything else in some areas. I prefer measures like "Do you believe in hell?" to measure this. But let us assume the authors do the right thing (I wished they would supply some robustness exercises).

The results? Marijuana use is robust to taking into account the endogeneity in religiosity. So religious teenager indeed smoke less pot. But smoking cigarettes and binge drinking is a frequent as for less religious teenagers.

Placement officers can lower unemployment

From my casual observation, it appears that in countries where the unemployment rate is rather high, unemployed workers tend to rely more on government run employment offices to find jobs. I do not think there is causation in this correlation though. But this makes it more important to understand whether employment office are good at anything.

Jens Hainmueller, Barbara Hoffmann, Gerhard Krug and Katja Wolf discuss an experiment in Germany where the case load of some employment officers was halved, which would be equivalent to doubling the number of employment officers. Does this help in increasing the placement of the unemployed? The above four claim that yes: the unemployment rate is reduced and so is the number of people registered in employment offices. But these results are obvious, except maybe that they are statistically very significant. What matters more is that they are economically significant.

Is a 0.5%-point reduction in the unemployment rate economically significant? Probably yes. Is it worth the cost? Remember, you double the number of case workers and you increase taxes to pay them. In fact, some of the unemployed may have been hired as case workers. It is much less obvious that the experiment is positive look at it this way.

This is what should have been studied. I am too often frustrated by studied that just look at the statistical significance of an effect, ignoring the economic significance and especially how this fits in the rest of the economy. And this happens too often with labor economics papers. If there is one thing that distinguishes economists from other social scientists is that we tend to think more in a general equilibrium way, and this papers for sure does not do justice to economics.

Optimal deposit insurance

With the current financial crisis, the question of the optimality of bank deposit insurance has flared up again. Figuring out how much deposit insurance should cover is not an obvious exercise. Indeed, one has to think this as a game between bank managers, who want to take advantage of moral hazard through excessive risk taking, bank owners, looking maximize bank value, depositors, who decide whether to run and withdraw funds, and regulators, who want to prevents crises, but also want to liquidate banks that should be liquidated.

Michael Manz develops a nice and rich model that attack the problem from the perspective of global games. This has the advantage of resolving the issue of multiple equilibria in the standard bank run models. Among the many results, several stand out. If the bank risk is exogenous, coverage should not be high as it prevents necessary and efficient runs. Also, liquidity requirements are a good substitute to deposit insurance. Finally, coverage should not increase in the event a financial crisis hits. The reason is that the financial risk increases with the scope of deposit insurance because, if I understand right, while higher coverage protects better deposits in banks of systemic importance, it leads to more moral hazard in others and then increases the likelihood of a run on all banks. The only way out is to discriminate coverage by bank, which is a completely different regulatory game.

Rational procrastination

So you have a deadline to submit a project. Your cost, in terms of utility for example, for working on the project is stochastic with a known distribution. When should you start working on it? The solution to this problem is a stopping rule, which will of course depend on the way you discount future disutility.

Alberto Bisin and Kyle Hyndman look at this with three different types of discounters and come up with interesting solutions. Agents with a standard exponentially discounted utility will choose to work on their project when it is most convenient, which may be before the deadline. Agents with hyperbolic discounting will delay until the last moment. But hyperbolic discounter may not be that naïve. Sophisticated ones realize they have a procrastination problem and will end up completing their project before the deadline.

This last result is important because sophisticated hyperbolic discounters and exponential discounter end up being, potentially, observationally identical. However, looking at me and around me, there are many hyperbolic discounters who are aware of their problem, but still cannot do anything about it except complaining. I am thus not quite convinced of the empirical relevance of this result. Of course, my empirics are anecdotal, but I saw no empirical evidence at all in the paper.

People are nasty

We all know that doing better then others is an integral part of our satisfactions. Thus when we think about utility functions, at least in some contexts, it is important to consider not just absolute outcomes but also relative ones. Indeed, there is for example evidence that people are willing to lose something only to hurt (more) others. Presumable this raises their utility.

Klaus Abbink and Benedikt Herrmann push this further with an interesting experiment. They let people chose to pay in order to probabilistically hurt someone else in a game where Nature may hurt the other anyway. And when Nature is in play, people hurt much more each other, and also expect this to happen more. The moral cost is clearly lower, as one can always defend oneself by pretending Nature did it. Strangely, this is even prevalent when there is complete anonymity.

Optimal irrationality

One can safely say that the assumption of rationality is central to economics. One idea behind it that economic agents must be trying there best. But what if it were optimal to behave in an irrational way? Surely, one could build some twisted example where irrationality would be preferable, same some game theoretic environment where being unpredictable is superior. But this is still a rational choice, called mixing strategy. Would there be some truly irrational behavior that could at least weakly improve outcomes?

James Feigenbaum, Frank Caliendo and Emin Gahramanov come up with such an example. They use an overlapping generation economy where one can improve on the permanent income rule. Now, we know OLG models can quirky and lead to strange results, but this is still an interesting example. They key here is that there is a publicly shared rule of thumb, say, "save more now" that can alter aggregate outcome, in this example increase labor income and thus wealth. Households are not just price takers, but they consider that if everybody deviates, it will have consequences. All you need it to have some trigger that lets everyone converge on this new focal point. In short, animal spirits at work.

Why all the fuss about business cycles?

There is a surprising amount of research on business cycles, and also public concern about recessions, if your consider the most influential work on the topic. In his 1987 book, Robert Lucas claimed that the welfare cost of business cycle was minimal. The model he used was utterly simple, in particular with a represntative household and has been attacked many times since. But in his 2003 AEA presidential address, Lucas claims that all modifications to his model from the literature taken together are not able to give a significant welfare improvement from the elimination of business cycles.

In recent years, there has been much progress in working with heterogeneous agent models with business cycles. And these models can highlight costs from business cycle fluctuations in the order of 1% of consumption. Their more important result is that this cost is very unequally distributed, which makes it very significant to some. Take two examples. Tom Krebs argues that the real cost of business cycles is in the long-term job displacement of workers. The reason is that short-term fluctuations can have long-term consequences. Or Per Krusell, Toshihiko Mukoyama, Ayşegül Şahin and Anthony Smith show that the elimination of business cycles not only smooths variables, but also changes their average level. The latter happens because of changes in precautionary savings and through the resulting changes in prices. Both papers also show that there are strong redistribute forces at work, and the welfare impact of aggregate fluctuations is worth several percents of consumption in some worker categories, something worth caring about.

Competition is key to getting good politicians

Wouldn't we all love to have competent politicians? Vincenzo Galasso and Tommaso Nannicini show you how to get them. First the theory: suppose you care about having people in power who are experts and hard-workers and favor your policy choices. Parties allocate candidates to districts, knowing that some districts will be more contested than others. For district that are safe bets, they will allocate relatively incompetent candidates. In toss-ups, the best candidates will compete.

Does this really happen? Galasso and Nannicini also look at data. They used parliament elections in Italy, where they know a fair bit about each elected candidate, including education, past appointments, pre-election income and absenteeism. And these variable vary in expected ways with the safeness of the districts, as measure by previous election margins. Also, they find that left-wing and right-wing candidates look very similar to each other in close elections, whereas they differ much in safe elections, following predictable patterns: right-wing candidates have private sector experience, are late starters in politics and are more educated, left-wing ones are have more local political experience, are more female and are older.

In conclusion, as a voter you should vote against sure winners in order to attract better candidates. And these candidates will more likely be centrists.

The long-term impact of hurricanes

Hurricanes create havoc and large costs, as nobody doubts. Some of those costs are easy to measure: life are lost, property is damaged, insurance companies pay out claims. But there can be a more subtle, long-term cost that goes beyond the physical replacement of destruction. Hurricane Katrina still has a profound impact on New Orleans, four years after landfall and will have for many years to come, as the city is still much less populated than before and its labor market is profoundly changed. Four years is still short, though, to analyze the long term.

Makena Coffman and Ilan Noy study the case of the Hawaiian island of Kauai that was affected by hurricane Iniki in 1992, while neighboring Maui was not. Comparing the two islands, it appears clearly that while externally there are few signs of the hurricane seventeen years ago, Kauai is still suffering, mostly because its labor market still has not recovered, despite massive transfers right after the storm. Population took a permanent hit, at least partly as a consequence of a sudden drop in the housing stock and a spike in unemployment, and never recovered compared to the neighboring island.

New Orleans shows similar signs, if not stronger, given that many are saying this city is poorly located and its partial destruction should be taken as an opportunity to relocate. It appears the same happened on Kauai, although one has to wonder, because the other islands of Hawaii face very similar risks.

Unemployment: Culture matters more than policy

Why do some areas have higher unemployment? There are some obvious explanations, but could cultural aspects matter? For example, the social stigma attached to being unemployed could vary from a region to the other. This is very difficult to measure and typically ends up in the error term or the regional fixed effect of a regression.

Beatrix Brügger, Rafael lalive and Josef Zweimüller use data from Switzerland. There are two mains cultural groups in this country, the French and Italians speaking, called them the Latins, who have more of a Latin nonchalance and express it by not working more than necessary, and the German speaking, with a strong work ethic. (As a side-note, it is remarkable that Calvinism started in French-speaking Geneva). Of particular interest here is that the boundary between Latin and German speaking regions is well-defined, but does not overlap with political or labor market boundaries. A perfect setting to study difference in border regions using a micro dataset.

And the differences are important. For example, the duration of unemployment is 7 weeks longer in the Latin regions. This has nothing to do with discrimination, as the German speaking workers are much more likely to find a job on their ones, instead of through an employment office. And looking at those who moved from one community to the other, it appears these values are rather shared with those you live with rather than those you grew up with. Finally, the impact of these values is stronger than what policy changes would typically yield.

Strategic tax auditing

There is a well published on tax competition between authorities, where the object of competition are tax rates and occasionally public services. But there is another neglected aspect: competition on the thoroughness of tax auditing. This is relevant in countries where local authorities are also in charge of collecting the taxes of the central government.

Alexander Libman and Lars Feld consider the case of modern Russia and find that indeed the willingness to audit depends on the strength of the Moscow. This has two channels: the first is about where audit revenues are directed and whether audit happen in the first place. If there were no audit variations, the share of revenue going to the local government should not vary across regions. Yet, Libman and Feld find that there are systematic variations that can be explained by the power structure, in particular during the loose administration of Boris Yeltsin.