Greening production through information

People in general prefer green products, although they are not always ready to pay a significant markup for a greener product. If they know that a product has been manufactured using green procedures, there will attach more value to it if the claim is credible. Several green labels, supposed to certify such claims, have emerged, but none have much recognition, in fact one sometimes wonders whether some of them are really weak.

Another approach is voluntary disclose of pollution emissions and other environmental disclosures by the industry. This is reviewed by, take a deep breath, Venkatachalam Anbumozhi, Qwanruedee Chotichanathawewong and Thirumalainambi Murugesh with a focus on Asia. They highlight that the final consumer is not necessarily the one targeted by this information. For example, some investment funds, in particular sovereign wealth funds, are under pressure to invest in ethical firms. Or potential employees may avoid polluters, and local planning may benefit form the available information, thus encouraging local investment.

The authors argue that there is little environmental regulation in most of Asian, with makes the price of environmental benefits close to zero. If you want firms to start abating, you need regulation, and then they also be willing to should how well they abate, leading to more abatement. In some larger Asian countries, a few modest disclosure programs have started, and they have shown excellent prospect in increasing environmental compliance.

Economic freedom and prisons

Americans are proud of their freedoms, political or economic ones. Yet, they are very trigger happy when it comes to takes one's freedoms, say by taking voting rights from felons, throwing people into prison or even executing them. How could such an apparent disconnect be explained? Why is the US different from Europe, where there is less economic freedom, but also much less punishment?

Rafael di Tella and Juan Dubra note that this apparent paradox does not only appear across countries, but also over time within the United States. For example, over the 30 years including the "Reagan Revolution" that considerably deregulated the economy, incarceration rates were multiplied by seven. They explain this with a theory that states the following. People view that when there are ample opportunities for legal activities in a system where there are many economic freedoms, people who still commit illegal acts must be "meaner" than the average criminal in a world with fewer economic freedoms. This can be supported with some limited empirics, but this is quite an appealing explanation. Indeed, Americans strongly believe that effort, not luck, is the root of success, and thus offer few excuses to those who become criminals out of necessity, an opinion that interestingly more and more African-Americans share.

More on institutions and growth

There a large belief in the development community that institutions matter. This has emerging from a large number of cross-country regressions, regressions that one should always take with a grain of salt because of methodological issues and data quality. However, this result has emerged so frequently that it must indeed matter. But the precise mechanism through which institutions matter of the course of development is still rather unexplored.

Ines Lindner and Holger Strulik come up with an interesting theory. When the economy is fragmented into small regions, entrepreneurial behavior is governed by local and informal enforcement. But as economies become more integrated, through specialization and/or the reduction in transportation costs, "connectivities" go from local to global, and informal enforcement is not sufficient. Formal institutions need to arise, and if they are weak, entrepreneurship will be weak. I wonder, though, how such a theory of networks could be tested in the data.

Who spent the 2001 Bush tax rebate?

Do tax rebate such as those implemented at various times by the Bush II administration work? Measuring this is not obvious. Previous studies have typically exploited the timing of the receipt of the rebate checks to see how expenses have changed. But most people have anticipated these payments, thus the marginal propensity to consume is mismeasured: it measures the propensity to consume due to short-term liquidity considerations beyond the consumption response from the announcement of the program.

Greg Kaplan and Giovanni Violante go a step further in this analysis and build a model that replicates the measurements found in the literature and the large share of hand-to-mouth households using an economy of liquid and illiquid assets with transaction costs. They define hand-to-mouth households as those who hold less that half their periodic pay in liquid assets. That seems very shaky to measure, as the timing of the relevant survey matters a lot here. But assuming there is no systematic error, they then extrapolate through the model what the response from the announcement of the rebate should have been. This adds 7-8% to the marginal propensity to consume. Interestingly, this come in large part form rich household who have only little liquid wealth because their assets are mostly in real estate and retirements funds. An important consequence of this is that larger tax rebates would have little impact, as they would make it more interesting to bear the costs of putting them into illiquid wealth. In fact, the marginal propensity to consume could even turn negative.

Why is blackmail costly?

Blackmail is a strange concept. Threatening to reveal information is legal. Asking money for a service is legal. But doing both at the same time is illegal. Even stranger, when the transaction is initiated by the one who could be harmed by the revelation, this is technically a bribery, it is legal. So why this difference? The conventional answer is that blackmail is about rent-seeking. But if the damaging information is freely available, there is no welfare loss justifying the criminalization of blackmail.

Oleg Yerokhin claims the justification can lie within the bargaining power structure between the two parties. Indeed, when the information holder is a monopolist, he will have more power than socially optimal, and should thus be punished to internalize this cost. But when the target is a monopolist, then the outcome reverses, and the blackmailer should be subsidized rather than punished. Yet, I hardly find this argument convincing on the grounds that blackmailers are certainly less likely to be monopolists than victims. Indeed, information is duplication at zero or close to zero cost, making it difficult for a monopoly to arise in such a situation. But this information can easily be about one particular person only.

Near rational agents and house price booms

House price run-ups, especially when they appear excessive, are difficult to explain. It is it even more difficult to explain how they are not coordinated across countries in a globalized world. Indeed, right now house prices are severely depressed in the United States, while you can have strong suspicions of bubbles in China, Norway and Switzerland. Bubbles are substantial deviations from fundamentals that could be due to some deviations from rationality or herd behavior, or both. But "rationalizing" this is a major challenge because of the apparent randomness of the occurrence of such house price booms.

Klaus Adam, Pei Kuang and Albert Marcet think they have a way to explain this using the concept of internally rationally agent. Such a agent, like the economist, does not know the true process of prices but tries to infer it from past observation using Bayes' rule. The belief about prices then becomes part of the state space and leads to some sort of path dependence. With shocks that are not perfectly correlated, it is then possible for different countries to experience different paths for house prices.

Why September 11 is remarkable

Amid the commemoration of the 10th anniversary of the terrorist attacks of September 11, 2001, I cannot help thinking how successful theses attacks have been. For an organization that wanted the United States to pay for sending troops to Saudi Arabia during the first Gulf war, a relatively little investment paid huge dividends. Indeed the cost of the operation, including training, must have cost only something to be measured in millions of dollars and the lives of 19 volunteers. The return was getting the United States involved in two wars that have costs amounting to trillions, brought the federal government in major financial difficulties, have lead authorities to neglect essential infrastructure investment for a decade, has kept the population in a nevrotic state for a decade, has given us higher oil prices (with revenue going you-know-where) and has lead to major setbacks in civil liberties. And that is just for the United States, as Europe has also been affected. And the costs will continue to mount, as the US is none the wiser and will have to face in addition the costs of care for veterans.

The impact of fiscal uncertainty

Current US fiscal policy is absolutely frustrating. There does seem to be a clear direction, in particular because policy making is rather irrational due to a set of unduly influential and crazy lawmakers. In the end, this means considerable uncertainty about future fiscal policy, in particular because it may not react to economic events in ways that make economic or historic sense. What is the impact of such uncertainty?

Jesús Fernández-Villaverde, Pablo Guerrón-Quintana, Keith Kuester and Juan Rubio-Ramirez address this with a New Keynesian business cycle model that feature variable volatility in fiscal policy. Their conclusion is that the current uncertainty lowers activity and has the policy equivalent of a 25 basis point increase in the federal funds rate, which I find rather minor. The model rightfully yields that the main mechanism is through investment and the uncertainty on capital return taxation. I find it interesting that it leads to stagflation, as firm opt for higher prices to reduce miss-pricing costs. In the end, the authors show that if one removes the usual automatic stabilizers and assume very persistent fiscal shocks, which may be a good characterization of the current situation, the prediction is a 0.5% reduction in output, which I am ready to believe.

The polygyny-slave trade connection

Polygyny, a male marrying several females, is now rare except for Africa and especially Western Africa. Why would it be so prevalent in West Africa? To sustain polygyny, one needs an unbalanced sex-ratio, which is not the case there.

John Dalton and Tin Cheuk Leung claim that this is just a matter of very persistent institutions. Indeed, the sex-ratio used to be unbalanced for extensive periods in West Africa, and in a more pronounced and persistent way than anywhere else, due to the slave trade. Indeed, it took away many males from the region through the actual forced emigration, but also because of the many tribal wars associated with slave capture raids (which Dalton and Leung do not take into account).

Econophysics: an introduction

I have criticized a number of times Econophysics as a rather naive venture of physicists into Economics, where there is too much focus on "automatic" data exploration and too little use of theory and understanding of what the data measure. But may it is just my prejudice against and my ignorance of Econophysics.

B. G. Sharma, Sadhana Agrawal, Malti Sharma, D. P. Bisen and Ravi Sharma offer in six pages an account of what Econophysics is, what its goals are, what it can contribute and where it is headed. The basic idea is that economic agents are like particles in that they are in large numbers and interact in complex ways. The dynamics of such complex processes are studied with powerful statistical tools in Physics, and physicists think that this should also apply to Economics. The focus is very much on the stock market, probably because physicists have realized where money can be made. There is no sense that there would be an attempt to improve welfare. They are also much more likely to completely discard a model in one set of observations does not corroborate it. Physicists are especially critical of how economists stick to rejected dogmas and of their inability to explain how small shocks can pan out into large crises.

The focus is really on the description of data process and documenting there statistical properties. In particular, econophysicists want to find ways to exploit even the smallest opportunities for arbitrage by finding, often through obscure and complex black box processes, the right price of an asset at any moment in time. However, there is no attempt at understanding why these arbitrage opportunities arise, say because of some form of irrationality, asymmetric information or perverse interactions in the price mechanism. From this I conclude that Econophysics can be interesting to make money on the stock market, but at least at this point, does not help us in any way in understanding why the world is like it is. Which I find rather ironic for Physics.

Progesa: a success story thanks to academics

I have written a few times about the frustration when policy makers ignore the advice of economists. Yet, there are a few cases where economists were given free reign over the design of policy interventions, which not only allowed to obtain positive outcomes but also useful information for further study.

Nora Lustig reports about Progresa, the Mexican cash transfers program designed to elicit parents to send their kids to school and make sure necessary health check-ups were attended. From the start, the program was designed and administrated by people with an academic background. Progresa has worked remarkably well, to the point that it was not only not scrapped, as is usual, with presidential changes, its coverage also kept increasing. The only setback was a name change to Oportunidades. The critical ingredient to this success was the scholarly involvement, that not only designed it for success, but also provided the tools to measure this. And along with that a wealth of data that has allowed to understand even better what makes good intervention in practice.

Emotions in economic interactions

How do you get people to cooperate. By increasing utility, of course, but that is difficult to measure, obviously, and there may some components beyond rationality in emotional contexts. However, we have some interesting ways to get some neurological hints about positive and negative emotions by measuring the conductance of skin. This may help to explain why people are sometimes willing to hurt themselves in order to punish others.

Mateus Joffily, David Masclet, Charles Noussair and Marie-Claire Villeval conduct an experiment where cooperation, free-riding and punishment can happen. They measure skin conductance to reveal the intensity of emotions and let players reveal whether their emotions are positive or negative. Cooperation and punishment of free-riding elicit positive emotions, the latter indicating that emotions can override self-interest. That is also because punishment relieves some of the negative emotions from observing free-riding. And one does not like being punished, which lends one to cooperate more in the future. Finally, people like being in a set-up where sanctions are possible, in particular because it allows a virtuous circle of emotions that reinforce each other and lead to more cooperation.

The Bruno Frey Bubble

About four months ago, I reported about the apparent self-plagiarism by Bruno Frey, David Savage and Benno Torgler. I found the case particularly ironic, as Bruno Frey repeatedly wrote about the fact that the pressure to publish to get tenure can lead to scholar to unethical behavior, and about the lack of space in journals for young scholars to publish the articles needed for tenure.

The case has taken a much larger dimension now, as many more cases of self-plagiarism by Bruno Frey and his students have appeared (see many links in the comments on the post mentioned above). This raises two very important questions: 1) how could such a culture of self-plagiarism arise? 2) How could they get away with it for so long?

To answer the first question, I think we need to put Bruno Frey is the context of the German(-speaking) academic environment. At least in Economics and Business, the typical German professor publishes a lot of rather insignificant articles, in particular book chapters and "Festschrifts." These works are rarely original, and are not expected to be so. There is also a tradition of writing "educational" pieces that explain economic concepts, say the Edgeworth box or voluntary export restraints, for journals targeted towards professionals in industry and government (as well as students). Again, there is nothing original in there, except maybe the way something is explained.

Bruno Frey works within this paradigm. His work lacks creativity in the sense that he recycles a lot of his ideas for multiple publications, often copying extensively his own words. The differences is that he does that at a higher level than his German colleagues, in international journals that are actually read. And many of his original papers are in fact not that original it appears. If we take the Titanic paper as an example, the empirical exercise he performs is routinely done in undergraduate statistics classes with the same dataset. His contribution is pedagogical, he found a good and interesting way to explain something already present in the body of knowledge.

Like a bubble that keeps getting fed by self-fulfilling expectations, Bruno Frey built on his initial success and continued with this strategy and encouraged his students to do the same. And several of them have assembled remarkable portfolios that way. I mentioned that of Benno Torgler in my original post, but there are several others who got into positions that seem beyond the usual reach of a Swiss doctoral program.

There is another way in which this resembles a bubble. The Economics department at the University of Zurich has made considerable efforts over the past decade or so to become a program that can compete with the better departments in the world. It is certainly among the best in Europe. It did so by americanizing itself: dropping to a large extend the rigid chair structure so prevalent in German speaking universities, hiring internationally respect scholars and creating a proper PhD program with courses and exams. Bruno Frey has not followed this trend at all. In fact, he insisted on exempting his students from the course and exam requirements. The Frey group lives in a cocoon apart from the rest of the department, and lives entirely following the role model of Bruno Frey. Call this living in a bubble.

Or a cult. The interaction of Bruno Frey and his students is reminiscent of a prophet and his disciples who follow him everywhere and write down every word he utters. Well, I exaggerate somewhat, but this does definitely not look like a standard interaction between a mentor and his students. It looks like they follow him blindly, and with his everlasting confidence, he makes them follow his example in publishing.

But this bubble is now popping under the assault of widespread scrutiny from editors, the Economics community and an internal investigation at the University of Zurich. The second question of course is how it was possible for Bruno Frey to act so unethically for so long (he is 70). It appears that he has been caught in the past, but it never became public, or at least explicitly. For example, he has been booted out of an editorial board, but there was no mention of why, his name just disappeared from the list. Also, the journals he has been publishing in are often not prominent and thus not that well read. In fact, it looks like he targeted them so that the audience would not overlap, including editors and referees (the added bonus of this strategy that it satisfies the goal of increasing the pedagogical reach by reaching very different audiences).

Hiding this unethical may have been helped by the fact that Bruno Frey actually tried to present himself as an expert on publishing ethics in Economics. He has written about the perils of publication pressure and how this can lead to slicing papers into insignificant bits, to self-plagiarizing and other unethical behavior. He has complained loudly about the ranking craze which he has been so adept to exploit, both with his self-plagiarism and by requiring authors to cite other works in Kyklos to increase its impact factor. While he is certainly not the only editor to do so, it is ironic that he openly campaigned against such practices. Bruno Frey abused the moral high ground in which he pictured himself.

But as every lie that grows too big over time, this is unsustainable. And it will be less likely to happen in the future with initiatives like this one. Making this unethical behavior more visible will prevent it.

That said, self-plagiarism is not limited to the Bruno Frey group or German speaking economists. I will discuss soon another case that I find particularly enraging.

Taking peak oil seriously

For about forty years now, individuals and organizations have warned of peak oil and predicted a particular date for this event, which is inevitably associated with some sort of impeding doom. Yet, their predictions have not come to fruition (yet). Indeed, there is very little economics in those predictions beyond extrapolating trends. Economics has much more to offer in this regard.

Indeed, theory would tell you that an exhaustible resources would be used up at a decreasing rate as long as there is a positive discount rate, thanks to increasing prices for this commodity. Yet we seem to observe increasing consumption. Stephen Holland offers several explanations why peak oil may arise as an equilibrium and optimal outcome. There are four ways that can lead to upward-trending oil production, at least for some time: increasing demand, increasing reserves, technological change and site development. Demand and reserves are easy to understand, the other two need explanations.

Technological change can lead to increasing production through a decrease in the cost of drilling. The end effect is similar to discovering accessible reserves. As for site development, the idea is that the most promising sites are developed first for extraction, and the next ones come online while the previous ones are not done yet, yielding a temporary increase in production. And I would add a fifth reason for a temporary increase in production: the introduction on alternative fuels. Overall, the general picture that emerges is that in the long run production decreases, but there may be bumps along the way. But if price play their role, their is nothing evil in peak oil.

Are income-contingent loans for higher education feasible?

There is considerable discussion, in particular in the UK, about making education loans contingent on realized income after completion of education (and those who do not graduate have the loan paid by general taxes). On the face of it, it makes much sense as those who reap the most benefits from their education pay the most for it. But the bigger advantage is thought to come that such a scheme would help overcome risk-aversion, educational outcomes are risky after all, and thus help more people to get higher education. Also, because education then does not require upfront payments, it helps alleviate liquidity problems young people typically face.

Elena del Rey and María Racionero see that this is not that easy to implement. Indeed, some people would lose if such loans would be implemented, foremost those who do not need loans (but this can be reversed if they are very risk averse) and those who are little risk averse. Regarding education subsidized from general taxation, those who can afford private education are again opposed, as well as those who are less able to acquire higher education. If one were to choose between the two financing schemes, it would all depend on the political power. If we assume everyone has a vote of equal weight, then all boils down the level of risk aversion of the population, the distribution of which we know very little about, and the aptitude to education, which is rather uncertain at the individual level. So in the end, we are not much wiser.