Minority protection and mass killings

Genocides and mass killings are still part of modern history, and when they happen it is most of the time too late to intervene. Thus prevention is more effective, but one needs to identify where there are risks.

By looking at past history with some good use of theory, Joan Esteban, Massimo Morelli and Dominic Rohner identify the following criteria: 1) large natural resources, 2) rents distributed proportionally, 3) low productivity, and 4) weak state. And a civil war can help, too.

Of particular interest here is the impact of constitutional constraints that force a government to provide resources to some groups according to their number. While such constraints may be well meant, to reduce disparities, they have the adverse effect of providing incentives to reduce the group size, by mass killing or displacement. In other words, provisions that are supposed to protect minorities may end up eradicating them.

Expectations and the employment effect of minimum wages

On financial markets, it is well known that anticipated changes in policy interest rates have little impact because they have already been priced in. The role of anticipations is very important in the price of any forward-looking goods, a phenomenon that can go beyond financial markets.

Sara Polini applies this idea to labor markets and specifically to the anticipation of movements in the minimum wage. She builds a search and matching model and applies it to Spain where minimum wage changes are usually anticipated, but occasionally not, like after the 2004 terrorist attack that lead to a surprise Socialist government. Anticipated changes lead to a reduction in employment, while unanticipated ones do not. This reconciles the ambiguous and inconclusive results in the literature, which ignored whether changes were anticipated or not.

About the impact of anticipated tax changes

Do anticipated tax changes have an impact? Theory tells us they should: as households anticipate future tax liabilities, which reduce their permanent income. Thus one should see changes in consumption. Yet, there are plenty of microeconomic studies that find no significant effect of anticipated tax changes on consumption. What about output?

Karel Mertens and Morten Ravn avoid the usual VAR approach for the identification of anticipated and unanticipated tax changes. For the US, they use the Romer and Romer narratives to identify exogenous federal tax changes, and then measure the time between the signature of the tax bill and its implementation date, and if it is more than 90 days deem the tax change to be anticipated. While unanticipated tax cuts increase output and consumption, with some delay, anticipated and not yet implemented ones decrease output and have no impact of consumption. And the longer the implementation lag is, the deeper the drop in output is. And when was this particular important? When Reagan announced tax cuts and sent the US economy into recession.

Tax here is a broad word, as it encompasses all types in taxation. Of course, a tax cut on labor income is going to have a different impact than a tax cut on dividend income. Of particular interest here is that the equation they estimate is derived from a DSGE model, and they tested that it correctly measures the coefficients even in short samples. That exercise assumes that tax changes are measured by changes in tax liabilities, wherever they may be (social security, income tax or gasoline excise tax, for example). They can have very different effects depending on their nature. So it is not clear how this translates back into a model. It would be interesting to repeat the exercise by differentiating by type of tax.

Overconfident CEOs are better

To be an entrepreneur, you should be confident and not risk-averse, given the high default rates. In a sense, you need to be out of the ordinary to take this kind of risk, and this is why there are so few entrepreneurs. Does this also translate to CEOs? In a sense they are entrepreneurs, but they are also employees. One can expect some of them to share the characteristics of entrepreneurs. How do their firms perform?

David Hirshleifer, Angie Low and Siew Hong Teoh take measures of over-confidence of CEOs and relate them to firm performance, in particular regarding to innovation. They measure over-confidence by looking at whether CEOs retain options beyond their vesting period and by analyzing press coverage about them, counting occurrences of particular words. They find that over-confident CEOs indeed do invest more in innovation and have more success as measured by patents. However, returns to R&D are much more volatile, and returns on assets are comparable to other firms.

One could then understand that firms that focus on growth and innovation would want to hire over-confident CEOs. Which leads us to the endogeneity issue. Removing recently hired CEOs, who would be best matches before the firm evolves, does not change results. The longer tenured CEOs have fashioned their forms to their image, giving us these results.

How to price museum visits

So you come across a museum and wonder whether it is worth visiting. The entrance price is rather steep, and given the uncertainty of your future enjoyment, you decide to pass on the opportunity and walk on. Could the museum have found a way to still attract you? One way would be to give you free entry, but this would oviously lead to loss of revenue and overuse of the museum.

Bruno Frey and Lasse Steiner claim it can attract casual visitors by asking for an entrance fee that depends on the time spent in the museum. This would allow for a cheap "sneak peek," and true lovers would pay much closer to their marginal utility. This is more efficient than exit donations, as those are voluntary and thus lead to loss of revenue and overuse of the museum. Keeping in mind that a museum's mission is often to spread knowledge and enjoyment, this scheme is much more likely to attract visitors with lower marginal utility and possibly expose them to arts or sciences they may learn to appreciate. Instead, museums typically emphasize club memberships, who cater to visitors who would have come anyway and offer them deep discounts that bring revenue loss.

How to tax covert child labor

Everybody agrees that child labor should be eradicated, even if some child labor maybe efficient. There is also wide agreement (except among politicians and officials) that simply banning child labor is not the solution, as parents are usually forced to send their kids to work due to poverty, borrowing constraints, or uncertain educational outcomes. In addition, it is difficult to ban something that is covert, as most child work is performed within the home or farm.

Alessandro Cigno proposes a scheme that would take care of all these issues together. While complex it addresses them one by one: To take care of the borrowing constraint, the government provides education grant. To make sure not only attend school but also spend sufficient time on homework, grants based on final results are given. And finally, to reduce the uncertainty about education outcomes, it redistributes from rich to poor. The result is not a first best for two reasons: first because of the distortions introduced, second because of the moral hazard with covert child labor. But it reduces in most cases child labor. Whether governments in developing countries are capable of implementing such a complex system remains to be seen. One can imagine improving on the PROGRESA system in Mexico, whether attendance at school is sufficient to obtain a subsidy, but assiduity at school is not rewarded.

Fight AIDS with life insurance

In the face of the AIDS epidemic, African governments have a very hard time convincing their constituents to refrain from risky sexual practices, in particular using condoms, despite wall-to-wall information campaigns. The problem is that life expectancy is very low without AIDS, thus their is little incentive to preserve life. And future potential earnings are dismal as well.

Pedro de Araujo and James Murray come up with a neat idea to overcome this problem: government supplied life insurance policies, which make anticipated income more valuable and thus prolongation of life more interesting. Making life insurance payout conditional on death not being the result of AIDS, people should be making sure not to catch. Only drawback: AIDS carriers would be even more marginalized. But you cannot make an omelette without breaking some eggs.

US households under-estimate gains from fuel efficiency

If you compare the cars sold in Europe and the United States, the US ones are woefully fuel inefficient. And it is striking that even American automakers provide better cars in this respect abroad than at home. Of course, fuel is much more expensive in Europe, so this should not be surprising. But does this difference in fuel efficiency reflect only the price difference?

One clue about this question is given by Hunt Allcott and Jean-Nathan Wozny who use variations in gas prices in the US and look at how this translated in car sales by fuel efficiency. It turns out Americans are only willing to pay $0.61 to reduce gas consumption by $1.00, after controlling for other car characteristics, the expected usage of cars and even how new cars filter through the used car market over time. Are consumers really that dumb? I suspect rather that it is 'uncool' to have an efficient car, something that the data cannot identify. And how do you take care of such an attitude? One way is a paternalistic way, by setting fuel efficiency standards for all cars. Another way would be to tax cars by fuel efficiency, or equivalently tax gas more, in order to get households to increase fuel efficiency to the dollar.

The impact of annual report language on firms

If you want to make a name for yourself in Economics, you have to publish in English, as it has become the lingua franca of the profession. But in which language a firm's annual report is issued, would not matter, right?

Wrong. Thomas Jeanjean, Hervé Stolowy and Michael Erkens show that publishing an annual report in English, in addition to the local language, increases the pool of potential investors and thus reduces information assymetry. They are careful to address the endogeneity issue here, of course, as a firm may issue an English report because the investor base has broadened. This language effect is similar to the adoption of particular accounting standards, as this allows investors to better understand the firm. Empirically, this improved information translates into lower bid-ask spreads on the stock market, larger following by analysts, and a larger share of foreign ownership. Whether this impacts also firm value is not addressed, though.

An economic model of God

To publish in Economics, marketing your paper is unfortunately very important. And it all starts with a catchy title. Some subjects can inspire you to absolutely great titles, like this one: "An Economist's Guide to Heaven." Dan Hamermesh could have penned that, but it is a paper by Nick Muller, Jo Anna Gray and Joe Stone.

The paper is not about how you can make sure the Pearly Gates are open to you, but rather it "offers an economic model of God and humanity as optimizing agents in the context of concrete belief archetypes (religious ‘contracts’) in Judeo-Christian theology." In plainer words, they study how belief about God influences the behavior of optimizing agents. In this paper, God optimizes, too, and believers know that. People care about private consumption, public goods and what God does to them, if they are believers. God benevolent, as He cares about public goods and likes to reward people instead of punishing them. Believers have a contract with God that entices them to provide public goods in exchange of godly rewards or punishments. Contracts can take four different forms, depending on the archetype within the Judeo-Christian belief system, which lead to different outcomes that can be tested using the General Social Science Survey.

Results are consistent with the model: strength of faith is irrelevant if there is no penalty in the contract, believers renege if there is no penalty, and contracts with penalty work, even if penalties are never exercised. What remains to be understood, though, is why there are believers in the first place.

Today's students are lazy

I find it quite frustrating to teach undergraduates, as they seem to have difficulties grasping simple concepts and often exhibit a disturbing lack of drive to learn. I may say this is due to my teaching, but my sentiment has been echoed by many colleagues, at my place and elsewhere. In addition, this frustration is fueled by the difference I see between undergraduates today and those from my times as a student. That view may very well be biased, as I was a rather good student, thus I am looking forward to some objective measures of student effort and performance.

Philip S. Babcock and Mindy Marks use time use surveys of students in 1961 and 2003. They notice that the time spent studying has been reduced from 40 hours a week to 27. This is not a small change. And this cannot be explained by any composition effect, as it appears no matter how you slice the data. There is some non-measurable way in which students are different.

One thing is that they rely much more on textbooks, thus they need to do much less note-taking and transcription, or trying to understand what they wrote. This would be positive for outcomes, probably. But universities pamper students much more with social activities that distract them from studying, on top of all the dispersions TV and the internet now offer. And finally, students find much less of an urge to do well, as they have the impression, which is not wrong, that they will be doing fine anyway. They do not need a work ethic to succeed any more.

Religious sacrifices in the lab

We all had chuckle when learning about some tribe or civilization making sacrifices to some spirit or deity, sacrifices that seem to be completely ineffective and the result of some superstitions. Before doing some navel gazing whether the sacrifices we do ourselves to our churches fit the same bill, let us think whether there is something innate that makes us surrender to such superstitions with useless sacrifices.

Paul Frijters and Juan Barón perform an experiment whereby participants experience outcome uncertainty due to "Theoi," and participants can make a sacrifice to "Theoi." Despite the fact that these sacrifices have no impact on outcomes, they amount to a staggering 30% of takings. Even labeling the source of the uncertainty later in the experiment as "the weather," which is clearly exogenous, does not change things. Participants facing no uncertainty still sacrificed 7%.

What does it tell us about human nature? Faced with the unknown, we believe we can still influence it with some sacrifice, no matter who irrational that may seem. And this seems to be deeply ingrained in us, as animals do the same, such as pigeons.

Are ignorant managers better?

It is commonly assumed that managers should be making well-informed decisions. That is just common sense and should apply at all levels. In fact, one of the reasons why it is believed a centrally managed economy like in the Soviet Union failed is that central managers could not have all the relevant informations. Interestingly two Russians claim there are situations where it is better that managers should be to some extend ignorant.

Sergei Guriev and Anton Suvorov bring the following idea. Suppose employees need to make some sort of investment in a project. If managers subsequently get little information, they will not change decisions, stick to the course and this gives good incentives for the employees to make that investment. On the other hand, if managers get a steady flow of information, they may change the course of the project, and employees facing this uncertainty will be more reluctant to invest effort in it. It is thus in the interest of managers to avoid getting information.

On the cost of financial crises

Are financial crises costly? To answer this question, one should not look at the cost of a bailout, a drop in GDP or missing tax revenue, but at what people care about: consumption. In this regard, the current crisis is too young to be analyzed, but other ones are available. Two recent papers look at this for Japan and Norway.

Yasuyuki Sawada, Kazumitsu Nawata, Masako Ii and Mark Lee use panel data from Japan that spans over the 1997 banking crisis and estimate Euler equation that allow for credit constraints. While in normal times, 7.82% of households are credit constraint, this increases only to 8.44% during the credit crunch. In other words, the ability for households to smooth out consumption was only negligibly affected.

Eilev Jansen studies Norway, but prefers a VAR approach linking current wealth and income to consumption, which appears to work better than Euler equation approaches for the recent years. But again, the impact of the crisis on consumption is negligible: the elasticity of equity income on consumption is 2%.

Thus, the impact on consumption seems to be minimal. So why again are we seeing these huge interventions?

Are bubbles observable?

The study of bubbles has come into fashion lately, and of course identifying them is high on the priority list. The thing is that they are very difficult to find, by definition. A bubble appears when the value of an asset deviates significantly from its fundamentals. But the latter are not directly observable, as they are mostly formulated in terms of expectations, and most of the time they are actually measured using the asset price. You see how this is circular and makes the exercise impossible.

Friedrich Geiecke and Mark Trede claim to have solved this. The use the prices of futures to determine dividend expectations, specifically future contracts on the Dow Jones Euro Stoxx 50 DVP Index, which is a traded index that measures all cumulated dividends paid on stock listed in the Dow Jones Euro Stoxx 50 Price Index. From this, Geiecke and Trede back out the fundamentals, then compare them to the last Price Index and find indeed that there are rational bubbles.

This is an interesting approach. I am worried though that the market for those futures may not be that liquid so as to tease out market fundamentals. We will see with time whether this approach holds water