Low labor market attachment and disability insurance, some expected relationships

Insurance fraud is a constant problem, and we have addressed this in the case of employment insurance before. Now it is the turn of invalidity insurance. We occasionally read stories in the press about gross fraud by healthy people, but what about those at the margin? Of course, they are impossible to measure individually, but maybe something can be measure collectively.

Joshua Angrist, Stacey Chen and Brigham Frandsen look at Vietnam Veterans. The latter benefit from dedicated disability insurance, if they use such a facility more frequently then non-veterans, it must be because of war-related conseuqnces, right? Angrist, Chen and Frandsen use the 2000 census, which has birth date information, to identify who likely went to Vietnam, as birth dates were linked to draft status. It turns out that invalidity declared in the census is no more likely for Vietnam vetarans. Well, allmost all, because those with low skills, who typically have lower employment prospects, report higher invalidity incidence than comparable men who did not go to Vietnam. The authors argue that this cannot be due to a higher incidence of war injuries for low skilled soldiers. So it can only be that they view disability insurance as a good alternative to employment.

Traffic safety, obesity, and ... organ donations

There are times where you really wonder why authors would even think that some variables could be correlated and how they then come up with a story that can explain this statistical relationship coming from seemingly nowhere. The paper by Jose Fernandez and Lisa Stohr is one of these.

To quote their abstract, "this paper uses variation in traffic safety laws and obesity rates to identify substitution patterns between living and cadaveric kidney donors." Despite reading this sentence ten times, I could not make any theoretical sense of it. But reading through the paper, a good story can be made. Tightening traffic safety laws reduces the number of fatalities, and thus the number of cadaveric organ donors. An increase in obesity increases the demand for organs, in particular kidneys. Thus one can instrument for supply and demand using these measures. With this in mind, one can then study how variations in the supply of supply of cadaveric organs (which are of poor value) and demand can motivate living donors to come forward, as they trade off the usefulness of their donation with the personal harm it will inflict upon them. Fernandez and Stohr find that donors respond indeed to cadaveric supply and to the increase in demand due to obesity.

But finding such ways to interpret data is difficult, you need the talents like those of John Donohue and Steven Levitt.

Update: I just came across another paper making essentially the same points, by Randolph Beard, John Jackson, David Kaserman and Hyeongwoo Kim.

Climate change and non-committal governments

As I reported yesterday, gas taxes are the best way to reduce carbon pollution. However, that will only be effective if governments can commit to future gas taxes as well. If they can, investment in energy efficiency will happen in an ... efficient way. If they cannot, energy efficiency is out of the window.

In that case, Alistair and David Ulph study how the policy should be altered. The major consequence is that current governments need to overdo in some way current policy in order to make sure future outcomes are coherent with current wishes. In other words, the potential time inconsistency of public policies makes that current government want to lock in future governments. One way to do this is to invest in green technologies, as obviously the private sector would not do it. This can also be attained with investment credits.

I think this opens a ethical question about current governments deciding for future generations. While it is obvious that you do not want to put future generations in a disadvantage due to current choices, it is less clear that it would be advisable to force the choices of future generations to conform with the preferences of current ones. There is a distinction between solving a commitment problem and forcing the hand of future governments.

Rents differ markedly from user costs in the US

Economic theory tells us that at least in the long run and under perfect competition, marginal revenue should equal marginal cost. With free entry, one should even observe that price equals costs, as profits are driven to zero. So it is puzzling when when one observes persistent deviations from this equality.

Randal Verbrugge notes that this is the case for housing rents in the United States. Now housing is a capital good with fluid markets in the US, so one should see even less deviations. Yet they exist, in part due to large fluctuations in costs. There do not appear to be opportunities for additional profits: transaction costs are high, and fluctuations are impossible to predict. So there are no arbitrage opportunities, even if arbitrage appears to be rather slow.

Gas taxes are still the best option to reduce CO2 emissions

I have advocated numerous times on this blog that high gas taxes are required in order to take into account the various negative externalities of gas consumption. Yet, in the real world, not only are gas taxes low, other means to reducing gas consumption are applied, such as fuel-efficiency standards and special taxes on gas-guzzlers. How do they really compare.

Rüdiger Pethig looks at combinations of the three and finds that gas taxes dominates them all. The reason is that a gas tax is the closest you can get to a CO2 emissions tax. And to reduce the emissions of CO2, nothing beats the price mechanism. The other two means just increase the price of cars, but do not impact the price of gas, and thus the marginal effect of gas consumption: you just end up driving more and consuming only slightly less gas.

And this without even considering that gas taxes can replace labor distorting labor income taxes, while standards provide no revenue.

Are women really more generous?

They is a widespread belief that women are more generous, and this is due to their maternal instincts. Experimental evidence confirms that women are indeed more generous, but has not been able to explain why. An interesting question here is whether by more generous in innate or whether it cost with the social context. This seems difficult to measure, but one could try to devise experiments that can get a hint of an answer.

Anne Boschini, Astri Muren and Mats Persson do the usual dictator games used to study generosity but with a few interesting twists. Instead of asking for demographic information at the start of the experiment, they ask about it after for some people. Or they do not mix genders in the experimental lab. The results are intriguing: women are only more generous when gender is asked before the experiment, or when the participants are of mixed gender. In fact, women are consistently generous, it is the men who change behavior. When they are reminded of their gender, or when women are present, they act tough, even though experiments are conducted anonymously. Pure machism.

More Economics research blogging

There few of us blogging on research in Economics, as most economist bloggers prefer to concentrate on current events, data releases and arguing with each other who started personal attacks. So when some newcomer decides to start with a blog really dedicated to research, this is a welcome addition.

Some NEP editors are starting an experiment with blogging about new papers in their respective fields. According to the post on the RePEc blog, each participating editors will select one paper a week for discussion. Two blogs are already up, Open Macroeconomics and Dynamic General Equilibrium, with hopefully more to come. There are only few comments so far, but they just started. As I hope Economic Logic demonstrates, a blog can be good even without big discussions (although I would obviously prefer it).

At this point, the blogs cater to a niche market, but I can see them develop into a meeting place for people working in those areas, in particular with the proposed weekly posts, which is a pace more appropriate for academics. That may be more successful than my blog, which is more dispersed and has so far five posts a week (I just have so much to say and share...).

If you are curious about other research blogs in Economics, there is a compilation over at Econ Academics. And by the way, NEP is a terrific source of new research in Economics, which I draw heavily on.

Measuring the peace dividend

How costly can a conflict be? While one can measure the expenses poured into a conflict and the physical destruction that ensued, there are important indirect costs that are much harder to get to. Think about the fear, the uncertainty, and the costs of migration. Taking the example of Northern Ireland, Timothy Besley and Hannes Mueller measure violency by conflict related death in eleven regions and look at their impact on house prices, which are supposed to capitalize all costs, and in particular incorporate both immediate suffering and risk as well as the likelihood of future violence. Indeed, a casualty is often a signal about future violence to come, and thus house prices capture also the learning process about conflict violence.

Besley and Mueller model this with a Hamilton regime switching process. Whenever an event occurs, it changes the likelihood that a region is in a violent regime. And this likelihood impacts hose prices. They find that the peace dividend corresponds to about 4-12% in Belfast and 0.8-2.5% over all regions. They also find a migration effect: when violence increases in Belfast, surrounding areas gain, and this effect is even stronger than the learning effect about the region's own violence process. Thus, it looks like every region reacts differently.

Are these effects big? I would say so given that the violence has directly impacted a very small fraction of the population. In fact, the cost of conflict can be even much larger. Indeed, the study only looked at differences across regions in Northern Ireland. There can be substantial costs for the region as a whole, costs that are washed out by trends and fixed effects. For example, the recent housing price boom in the area may have reflected the new peace (along with reduced conflict related expenses by authorities).

The efficient allocation of slaves in Korea

As the subtitle of this blog indicates, there is economics in everything. Even in activities that are illegal, immoral or banned. Slavery is one such activity, but at some time it was considered legal and moral in many parts of the world. The slavery market is in fact akin to a financial market, as a slave is an investment good that yields dividends in the form of labor, and depending on the country, also in the form of offspring. Now what is the first thing a financial economist would check when he encounters a new market? Verify whether this market is efficient.

This is what Elise Brezis and Heeho Kim do for the slave market in Korea in the 18th and 19th century, the period during which the existence of money and slavery overlapped. They compile data from several markets and deflate nominal prices using the price of rice, a proxy for the general level of prices. Given that slaves were typically farm workers, and thus their yield is probably correlated with the price of rice, this may not be the best choice for a deflator. But there may be no other price data to draw on consistently.

Brezis and Kim then use the arbitrage asset equation and find that the market is efficient most of the time, the exception being towards the end. The authors claim this is because monitoring costs became too high and hiring free workers became more economical. I wonder though whether the looming repeal of slavery may have something to do with this.

Fair labor income tax and human capital accumulation

The big problem with labor income taxation is that it discourages effort. What you would really want to do it tax luck (being born intelligent and rich) and encourage effort no matter your abilities (or even encourage it more if you are abler). There is a tax scheme that does the latter, the so-called ELIE taxes suggested by Serge-Christophe Kolm: taxing people on, say, IQ, is not distorting and brings more equality.

But removing the distortions on the labor supply may not be the only impact of ELIE taxes. There may also be an impact on the accumulation of physical and human capital. David de la Croix and Michel Lubrano build an overlapping generation model with people of heterogeneous skills and show that if markets are complete, ELIE taxes indeed reduce inequalities but reduce growth because less human capital is accumulated. The reason is that the taxes cannot solely be based on exogenous elements, and the endogenous parts is ties to education, which is then discouraged. Now prevent people from borrowing for education, and the growth penalty becomes less severe because the taxes redistribute resources towards those that are borrowing constrained. Of course, one can get education (and growth) back to the desired level by subsidizing education. Thus, tax the intelligent, but make education free, which is mostly used by the intelligent anyway.

Terrorism reduces crime

One could consider terrorism to be the ultimate crime, yet an argument can be made that terrorism is the best thing that could happen to reduce crime. Why? Eric Gould and Guy Stecklov argue that terrorism increases police presence and keeps people at home. They use data from Israel and analyze various types of crime and show that property crimes and assaults, even domestic assaults, are down after a terrorist event. But would this be the same in Europe or even the United States.

The type of terrorism Israel faces is a different threat than the one Western countries face. It is what I would call "petty terrorism", the bomb carried by a single person to areas otherwise of no particular interest. It appears Western Europe and especially the United States faces a more organized terrorism towards high-profile targets. A threat in the latter case would thus draw police away from the neighborhoods to the airports and landmarks, thus leading to higher crime.

Imagine if all those airport security personnel were cruising the bad neighborhoods in the US. Far fewer people would die violently.

Hurricane insurance needs to be government run

Insurance is a difficult business in the presence of moral hazard. While an insurance company can make a profit by exploiting the risk aversion of its policy holders, this profit may be annihilated if moral hazard drives the insured to increase the risk. And if policies cannot discriminate by risk category, then only bad risks can be insured, at a loss. But I do not see where there could be moral hazard in the case of hurricane insurance, as policy holders cannot influence the path of a hurricane. If they fail to strengthen their house, this is something that is easy to inspect and price into a policy. So why did private insurance companies leave the hurricane insurance market in Florida?

Mario Jametti and Thomas von Ungern-Sternberg describe how the state of Florida had to step in and provide coverage to all homeowners at a cost ultimately much lower than what private companies offered. While the state may be able to better diversify over the area of the whole state, it is not like it does not face substantial risk. A hurricane can have severe consequences for a significant part of the state. Private companies can diversify with other geographic areas or coverage types, they can even re-insure, two means that are not available to the state. But the latter can make up any loss with federal help or, gulp, taxes. And it cannot simply declare bankruptcy if it takes a big hit, like a poorly covered insurance company would.

On the advantage of marriage over cohabitation

Why marry when cohabitation can provide the same benefits of economies of scale and companionship? One may even think that cohabitation is superior because it allows a break up with less consequences. That is exactly wrong. The fact that divorce is costly makes that one is more careful in committing to marriage and, once married, one puts more effort into the marriage. The key here is that marriage is a commitment device that gives strong incentives to make a marriage work.

Murat Iyigun shows that this logic gives marriage a large surplus than cohabitation through spousal commitment, as long as men and women are available in roughly equal numbers and commitment costs are symmetric across genders. Otherwise, marriage surpluses collapse and cohabitation dominates.

The fact is that commitment costs are not equal, mostly because of children and traditional roles in the household and the labor market. In fact, the countries where women are the most equal to men (say, Scandinavia) are those where cohabitation is the most prevalent. That evidence goes exactly counter to the predictions of the Iyigun model. Unfortunately, the paper provides absolutely no empirical support for its results. In fact, it is not even motivated by any empirical fact that would need to be explained. What is it then good for?

Entry on the labor market and social beliefs: the impact of recessions

Do the economic conditions in which you grew up have an impact on beliefs and opinions about the economy? We all have notice how our grand-parents, having lived through the restrictions of the Great Depression or the Second World War, lived in a more thrifty way than us, never throwing away something. But could this experience also have an impact of beliefs about markets and social issues?

Paola Giuliano and Antonio Spilimbergo use the General Social Survey and exploit regional and chronological differences in economic conditions where respondents grew up to look at this question. They find that growing up in a recession makes you believe more that personal success is due to luck rather than effort, you support redistribution more but without believing government is there to help you. While should not be too surprising, how persistent such beliefs are is astonishing.

Now imagine that the current recession last longer than usual (some say there could be a double-dip) and this could plant the seeds of a profound change in the US. This country is the most capitalistic and the least relying on government at the moment. But attitudes could change over the next generation and indeed bring major reforms like public health care, more redistribution and more regulation of business as those in their formative years now experience (relative) hardship.

Sweatshop equilibrium

Westerners complain about sweatshops in Asia for two reasons: they produce at much lower labor costs, thus undercutting the Western labor force; and the labor conditions are inhumane due to long hours and poor environment. One answer to these critics is that without those sweatshops, the local labor force would not have jobs and that eventually conditions and wages will improve, as it has happened during the Industrial Revolution in the West.

Nancy Chau does not seem to share this vision as she shows sweatshop conditions could be permanent due to an unfortunate outcome in a multiple equilibrium. Think of the search and matching framework used nowadays to study the labor market. People need time to explore and find new jobs. But this time is not available in a sweatshop. In other words, on-the-job search is impossible and workers end up in a situation akin to slavery. The way out? Enforce shorter hours, even if this means temporarily reducing the workers welfare. The latter may oppose it, but it is only because they do not know what their outside options are.

The scenario I describe above is only one of several possible ones, but it is somehow reminiscent of European labor history. But Chau shows that there are also equilibria where an economy can grow out of sweatshop conditions without intervention. The big question is then: in which equilibrium are Asian sweatshops currently?