Groom yourself to publish better research?

There is plenty of evidence that being beautiful helps you on the job market. First impressions count a lot, and physical appearance is likely the main factor in first impressions. But does beauty matter in situations where there are no such first impressions? Take the case of scholarly publishing: editors and referees do not see a picture of the author(s), thus it should not matter. If it still matters, it must be that beauty is correlated with something that makes your more likely to get published, say, confidence or more subtly that beautiful people are more healthy, and thus should have had less illness disruptions in schooling and have more human capital. Anyway, we need some evidence.

Alexander Dilger, Laura Lütkenhüner and Harry Müller want to offer some. They asked attendees at a conference of business researchers about their happiness, took their pictures and had others judge these mug shots. They then looked for the publication records of their subjects over the next two years. It turns out that happy people publish more, but of course the causality could run the other way, as you may be happy that your research agenda is progressing well, especially when you are asked about your happiness at a conference in your research field. Maybe more interesting is that a trustworthy appearance is correlated with a better publication record. Is it really the appearance that matters here, or simply that a person who is capable of keeping himself in order is also more likely to be well organized to publish well? Also the population under study (n=49, by the way) is faculty from business schools. It is notorious that in business schools appearances matter a lot, and after law schools it is where it matters the most. Not the kind of sample I would use to make general claims about the research productivity of scholars as it relates to appearance.

The top 1 percent

Much has been written lately about the rise of the top one percent earners in the United States, yet it very little about why this rise has happened. Indeed, this rise in only partially visible elsewhere in the world, which may hint that factors that are not universal may play an important role, and thus there is potential for policy if you want to revert this rise.

Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez notice that the rise seems to be most pronounced in English-speaking countries, and they try to identify which factors could lead to such differences in the income share of the top one percent over time and space. They come to the conclusion that there are four factors in play: 1) Tax policy, and especially tax rates for top incomes. There is simply more left after taxes for top earners, but as the other factors show, the impact is larger than that. 2) Lower top tax rates lead to incentives that make it more worthwhile for the top earners to get a larger share of the surplus. This redistribution of the surplus would be consistent with the reduction in the labor income share and the stagnation of wages for large parts of the wage distribution. 3) Capital income is becoming independently more important, especially in Europe where inherited wealth makes a comeback. 4) The correlation between earned income (from labor) and capital income has increased a lot in the United States, widening the distribution of total income. Given all this, I find it difficult to imagine a model of optimal taxation that would not involve an increase in top marginal tax rates.

How many mortgage defaults resulted from lofty expectations?

A housing bubble is sustained by expectations of further increases in house prices. There is strong suspicion that this is what happened during the US housing boom preceding the last crisis, and that these expectations have triggered excessive mortgage borrowing. Actually verifying that claim is not that straightforward, though, as one needs to find extensive household level data.

Steven Laufer found this for Los Angeles County with panel data that tracks a property and all its mortgages. He comes to the sad conclusion that only 30% of mortgage defaults there were a result of household level shocks. The rest is all about borrowing and mostly extracted additional cash excessively with the expectation that the loan-to-value ratio would be reduced as house prices continue to grow. When this did not materialize, massive defaults resulted. Using the estimation model, Laufer finds that could have been mostly avoided by imposing the 80% loan-to-value ratio. Although this would have lowered house prices by a considerable 14%, this would have reduced defaults by 28%, as small number given the price drop but a large one considering the number of defaults. And house prices in LA are too high anyway.

The AEA executive is still not representative

A year ago, I modestly called on the AEA to open its ranks officers to those who are not at (mostly private) elite universities. They are not representative of the profession, as many of us work at lower ranked research universities, liberal arts colleges, government, industry and think tanks. They all deserve some representation as their interests differ quite a bit from big shots with almost guaranteed grants and easy access to top journals and conferences.

At the time, I suggested to write in Gregory Burge (link corrected) on the election ballot. As the AEA did not disclose election results (if it did, please tell me where), I have no idea whether it had any impact. I suggest to try again this year. Last year, I posted about this when I got the ballot, which may have been too late. This year, I make the call earlier, so that more people can adjust their vote. Indeed, the candidates this year are:

For President-elect:
Richard Thaler, The University of Chicago Booth School of Business

For Vice-Presidents:
David Card, University of California, Berkeley
Judith Chevalier, Yale School of Management
N. Gregory Mankiw, Harvard University
Jeffrey Wooldridge, Michigan State University

For Executive Committee:
Dora Costa, University of California, Los Angeles
Guido Imbens, Stanford Graduate School of Business
David Laibson, Harvard University
John Williams, Federal Reserve Bank of San Francisco

While there is at least someone for a non-university environment and three candidates from public universities, which is an encouragement, this is still far from representative. Vote for Gregory Burge (write-in) for every position.

The social pressure of overborrowing

The recent financial crisis has highlighted the sometimes very poor financial choices of households, in particular overborrowing. What leads people to borrow beyond their means or to take excessive risk of default or bankruptcy? Is it because of predatory lending with perverse incentives for loan underwriters? Plain stupidity of the borrowers? Or rational exuberance?

Dimitris Georgarakos Michael Haliassos and Giacomo Pasini look at Dutch data and find rather something that looks like social pressure. Indeed, they find that borrowing is heavier among those who consider themselves poorer than their peers. In other words, they are trying to keep up with the Jones in the sense that they want to display the same material wellbeing as their peers, on a borrowed dime. I do not know how much peer pressure there is in the Netherlands, but I can imagine a series of countries where such pressures would be important, where you need to fit in by having the right car or the right house, or by taking the right vacations. And it seems unavoidable that some people will overextend themselves in such an environment.

Byebye Google Reader

Goodle Reader is set to close on Monday, and like me many have complained about the selfish decision of Google to trim services that are not profit making. People were hoping Google would reverse its decision given the loss of goodwill, but to no avail.

While I have a good substitute in the Old Reader, one can wonder what less substitutable Google service could be next on the choppimg block. That would be a service that provides little ad revenue and little information useful for ad optimization. Among the services I find most useful, Gmail and Google Maps seem safe. Google Scholar is not, as I do not see how Google an find something profitable in this rather niche product. But at least there is a good substitute for economists. Google Translate. however, has no viable substitute and I see no business case for it.

Raising the bar of falsifiability in Economics

Economists do not dismiss theories easily. Although Popper taught us that once a falsifiable theory is reject by the data we should move on to better theories, it takes a lot of rejections for economists to move on. This may have two reasons: first, we all know that there can be serious issues with the data as we almost never have clean experiments to draw from. We are thus more tolerant for theories. Second, we tend to think that if a theory is rejected, we need to also propose a new one that is consistent with the data. That is quite a challenge.

Ronen Gradwohl and Eran Shmaya build on this second argument to amend the falsifiability criterion of Popper by adding a new one: that each rejection by the data be accompanied by a short proof on the inconsistency. If I understand this right, it would not be sufficient to show that the theory predicts, say, a positive relation between two variables, and the data finds a negative one, one also needs a convincing sketch of a proof that would convince a court that the data is indeed identifying the right relation and that it is relevant for the the theory. And this needs to be short because courts (or the scientific community) are busy. It seems we are doing it all wrong in Economics, as our arguments are excessively long, and getting longer. This is at least in part due to the fact that we require not just a short proof, but an extensive, complete one, and then we are still not convinced. Are we overdoing it? Possibly, at least the length and complexity of papers in Economics are becoming too much.

Income divergence in the face of faster technology adoption

We live in an increasingly global world. As production moves to where capital and labor are the cheapest, we should be expecting a convergence of incomes across the world. Know-how and technology also flow more rapidly from leaders to followers, which should reinforce this convergence. Thus, unless something is really messed up with other factors of production (institutions, climate, ...), we should observe convergence. Yet it has not happened as much as one would have expected, quite to the contrary. What is wrong with my reasoning above?

Diego Comin and Martí Mestieri focus on the diffusion of 25 technologies across 132 countries over two centuries. They conclude that the adoption speed of new technologies has indeed increased faster in poor countries, but not the penetration rates (once diffusion is completed). That means that while countries first use new technology earlier than before, especially developing ones, the later use the technology relatively less throughout the economy. This has an ambiguous impact on convergence, but with a simple model Comin and Mestieri show that the latter effect is predominant, and how. With their numbers they can justify a multiplication by 3.2 of the income gap between rich and poor countries over the last two centuries, that is, almost all of the fourfold increase in that gap observed in the data. One more reason to wean the poorest countries off the illusion that they must grow a healthy agricultural sector, which uses little technology on land that is not well suited for agriculture in the first place (more). They need to jump to stronger manufacturing and adopt more technology throughout the economy.

Home production vs. unemployment insurance

Many are worried that generous unemployment insurance benefits lead to moral hazard: the unemployed do not search hard enough for a new job because the benefits give them excess security. These benefits may also have other consequences. It is known that people become much better with managing a smaller budget once they retire because they have the time to look for shopping bargains and they can substitute goods bought on the market with good produced at home. In the case of the unemployed, we covered bargain shopping before, now let us discuss home production.

Bülent Güler and Temel Taşkın use the American Time Use Survey and find that more more generous state unemployment insurance benefits are, the less time unemployed workers spend productively at home (We have shown before they spend a lot of unproductive time). Indeed we can understand home production as a different insurance mechanism which can be a substitute for unemployment insurance. Of course, there is also the extreme case in home production insurance, living with your parents.

Insider bank runs

Bank runs occur when depositors believe a bank is insolvent. They rush to withdraw their deposits before everyone else as funds dry up. Who is first in the queue at the wicket? When such panics break out, they must originate somewhere, whether justified or not. In particular, somebody must have had some privileged information that there is a problem with this bank. I doubt bank runs start as the bank releases its latest numbers and everybody is surprised.

Rajkamal Iyer, Manju Puri and Nicholas Ryan got access to the deposit withdrawal logs from a bank that has been subject to two runs. The last one is particularly informative, as a regulatory audit found the bank insolvent, and despite this information being private the bank run ensued. It is then no surprise to see bank employees as the first ones to withdraw their funds, followed by depositors with uninsured funds, who are the most vulnerable and may have been tipped off by some employees. Insider information appears unavoidable and leaks to the public. It appears difficult to avoid a run when a bank is indeed insolvent, unless it comes as a sudden development over the week-end. As a policy maker, this means that you better make sure banks never become insolvent, or you end up always insuring the bad risks, those that do not have insider information.

homo socialis

Everyone is familiar with homo œconomicus, the greedy economic agent that brings an economy to its most efficient allocation under perfect circumstances. But circumstances are less than perfect (externalities, imperfect competition, lack of commitment, asymmetric information, etc.) and Adam Smith's invisible hand needs a little help from some authority. Through regulation, taxation, subsidies and punishment, that authority can try to get closer to the first-best allocation, but at a cost.

According to Dirk Helbing, this cost is now overwhelming, because in current societies top-down management of an economy is not computable anymore. One should rather find a bottom-up approach, following the craze about Web2.0 and social media. Thus enters homo socialis, an economic agent who is very aware of all the ills of unfettered markets. If this sounds like one of those revolutionary solutions that would end world hunger, it is. It even comes with a new type of money, a must for these types of exercises.

So, how does this work? Homo socialis is an economic agent with other-regarding preferences. He needs institutions that allow him to express such preferences instead for reverting to the greedy homo œconomicus. Hence the institution of "qualified money" that rewards good behavior by this friendly and altruistic market participant by giving him "reputation." But if he is that altruistic, why does he needs such rewards? That is not clear. And who gives them? Is there any budget constraint here? It would really help to formalize a little bit all the author's ideas, but it is quite confusing. For example, the value of qualified money depends on its history. In other words, every single banknote may have a different value, depending on the context in which it was used. How is that simplifying the problem of complexity?

Helbling gives as as example the management of traffic lights in a city, a rather bizarre example. In the homo œconomicus scenario, an authority sets traffic light patterns and does not adapt them when lines become too long somewhere. In the homo socialis, this adaptation happens, presumably from a feedback coming from car drivers. Why the restriction in the first scenario? In fact cities do have feedback rules in place (notice the cameras along the roads?) without the drivers needing to do anything. But foremost, why such an example? It is unrelated to the question at hand. The argument that the computation would be too complex for a central planner fails because at least he has a complete picture. Individual car drivers suffer from a lot of asymmetric information when taking decisions, even altruistic ones. Note also that the example does not use the crazy qualified money scheme.

What a confusing and confused paper. You would think this would be a first draft for someone who works for the first time in the area. But no, except for the methodological silliness and conceptual errors, this paper is actually quite well written and the literature well researched, including 22 self-citations.

Milk quota markets are not efficient

Many countries have some sort of rationing system in place for their dairy industry, because apparently farmers have a tendency to produce too much milk and depress its price, in the end getting less, I guess because the price elasticity of demand is high. This rationing is typically done through a quota system, and these quotas are sometimes tradable. This last point is important as it makes it possible for the allocation to be efficient: the most efficient producers should indeed acquire more quotas, which they buy from the least productive farmers.

Rebecca Elskamp and Getu Hailu tell us this is not at all what is happening in Ontario, Canada. Elskamp and Hailu identify quota net buyers and sellers and they try to match them with various characteristics. As the milk sale price is uniform, it must have to do with production and costs. The latter do not seem to matter at all. Scale does, though. Thus, if you are a farmer who happens to have an empty barn, you buy quotas whether your costs are high or not. But if you are a very inefficient farmer with high costs, you do not think of selling your entire quota and live from it. Strange.

Uncertainty, slow government and optimal taxes

The optimal taxation literature has come up with incredibly complex and non-linear taxation schemes that have no way of making it into policy. The most complex tax code, the US one, is not complex because that would be socially optimal, it is complex because of special interests. Complex code does not make it past the politicians because they do not understand it, because it appears not to be transparent, or because its mathematical complexity scares everyone.

Marcus Berliant and Shota Fujishima claim rather that the lack of complexity on the tax code has to do with sluggishness. Governments can simply not adapt the tax code as fast as conditions change. Of course, they could also set up contingent rules, but I suppose that this is deemed opaque and subject to interpretation. Anyway, one consequence of this sluggishness is that optimal taxes start looking very different. A typical result of standard theory is that the top earner should have a zero marginal tax rate, so as to encourage this most productive person to work more. But when this person changes from period to period, or if this is the same person but he does not reach the maximum income every period, the result does not carry through. The top marginal tax rate needs to be positive to leave some headroom. But the marginal tax rate is still declining at the top. In a way, this is achieved in many countries by allowing for "loopholes" that makes it possible for the most productive people to pay less taxes.

Why is living in poor countries so cheap?

Theory tells us the law of one price should hold: the same good should have the same price throughout the world after taking into account exchange rates (and transportation costs). Yet, there is plenty of empirical evidence that this is not true. And anecdotal evidence, too, think of how it is noticeably less expensive to live in developing countries. Why?

Daniel Murphy offers a new and simple explanation: complementarity between tradable and non-tradable goods. In a rich country, more non-tradable goods are available as complements, thus providers of tradable goods can charge higher prices if competition is not perfect. This conjecture is supported by empirical evidence showing that where more complements are used the prices of tradables are also higher. But given that the extend of complementarity seems to change from one country to the other, it seems to me that we are not really talking about the same good. We may measure it as the same good, but people seem to perceive it as a different good. It is just a measurement issue.

Why should we debate the contributions of particular dead economists?

Pier Luigi Porta reports that there is currently a lively debate on the legacy of Piero Sraffa's research and its contribution to modern economics, all this in conjunction with the opening of Sraffa's archives twenty years ago. Sraffa's major work was published half a century ago, and it influence economic thinking back then. But Economics moved on, we found new techniques, models and evidence. What is the purpose of going back to outdated theories? I realize that sometimes you need to take a few steps back when you realize you got into a dead-end, but that does not mean one should worship old science and look for its traces everywhere.

There are, however, circumstances where the history of economic thought is useful. For example, there certainly are some fads in economic research and it would be useful to learn how they emerge. Fads are a waste of time and should be prevented. It can also be useful to understand how some people can lead economic thinking onto a particular path, especially when there are some self-interests attached (and the path turns out to be a dead-end). But this is more about group psychology than hero worship.

Maybe someone can help me understanding why we need this debate about the importance of Sraffa in current economic thinking. I do not see it.