Thursday, September 29, 2005

Have you updated your plans lately?

Lennon said that "life is what happens to you when you're busy making other plans"... And now we have a model for people who are too busy / too lazy / too dumb to plan--that is to say, everybody.

Inattentive Consumers - RICARDO A.M.R. REIS


This paper studies the consumption decisions of agents who face costs of acquiring, absorbing and processing information. These consumers rationally choose to only sporadically update their information and re-compute their optimal consumption plans. In between updating dates, they remain inattentive. This behavior implies that news disperses slowly throughout the population, so events have a gradual and delayed effect on aggregate consumption. The model predicts that aggregate consumption adjusts slowly to shocks, and is able to explain the excess sensitivity and excess smoothness puzzles. In addition, individual consumption is sensitive to ordinary and unexpected past news, but it is not sensitive to extraordinary or predictable events. The model further predicts that some people rationally choose to not plan, live hand-to-mouth, and save less, while other people sporadically update their plans. The longer are these plans, the more they save. Evidence using US aggregate and microeconomic data generally supports these predictions.

JEL Classification: D1, D8, D9, E2

Learning by writing

This is Robert Frank on having his students look for interesting questions and stories and then write about them, like:

"Why do brides often spend thousands of dollars on wedding dresses they will never wear again, while grooms often rent cheap tuxedos, even though they will attend many formal social events in the future?"

(...) there is no better way to master an idea than to write about it. Although the human brain is remarkably flexible, learning theorists now recognize that it is far better able to absorb information in some forms than others. Thus, according to the psychologist Jerome Bruner, children "turn things into stories, and when they try to make sense of their life they use the storied version of their experience as the basis for further reflection." He went on, "If they don't catch something in a narrative structure, it doesn't get remembered very well, and it doesn't seem to be accessible for further kinds of mulling over." Even well into adulthood, we find it easier to process information in narrative form than in more abstract forms like equations and graphs. Most effective of all are narratives that we construct ourselves.

The economic-naturalist writing assignment plays to this strength. Learning economics is like learning a language. Real progress in both cases comes only from speaking. The economic-naturalist papers induce students to search out interesting economic stories in the world around them. When they find one, their first impulse is to tell others about it. They are also quick to recount interesting economic stories they hear from classmates. And with each retelling, they become more fluent in the underlying ideas.

Many students struggle to come up with an interesting question for their first paper. But by the time the second paper comes due, the more common difficulty is choosing which of several interesting questions to pursue.

(...) Daniel Boorstin, the former librarian of Congress, used to rise at 5 each morning and write for two hours before going into the office. "I write to discover what I think," he explained. "After all, the bars aren't open that early." Mr. Boorstin's morning sessions were even more valuable than he realized. Writing not only clarifies what you already know; it is also an astonishingly effective way to learn something new.

I agree, a most good economics boils down to good story-telling--but you have to understand the underlying model, btw. Unfortunately, many economists focus more on the size of their toolbox than in the power of the stories they can tell with even the most basic tools.

Monday, September 26, 2005

Institutional choices, risk aversion and women rule

Two (unrelated?) papers on institutional choice... one with an innovative
methodology, the other with a cool history lesson.

"The Choice of Institutions: The Role of Risk and Risk-Aversion"
University of London
Claremont Graduate University

Institutions can affect individual behavior both via their efficiency impact
and via their risk reducing mechanisms. However there has been little study
of the relative importance of these two channels in how individuals choose
between simultaneously extant institutions. This paper presents a simple
model of institutional choice in a labor market when there is a risk/reward
trade-off, and tests the predictions of the theory. Using a novel empirical
approach that adapts an ARCH-in-mean to cross-sectional survey data from
China, we find that risk and risk aversion are strongly related to the
choice of a labor market institution. Further, risk and risk aversion are
quantitatively more important than the sectoral wage differential in
explaining employment institution choices. Specifically, we find that wage
risk has two orders of magnitude greater impact on labor market
institutional choice than the wage difference, with a one standard deviation
increase in earnings risk reducing the number of workers choosing jobs in
the private (risky) sector by 22%.

JEL Classification: P3, J21, J40

"'Rulers Ruled By Women' An Economic Analysis of the Rise and Fall of
Women's Rights in Ancient Sparta"
Montana State University - Bozeman
Montana State University - Bozeman

Throughout most of history, women as a class have possessed relatively few
formal rights. The women of ancient Sparta were a striking exception.
Although they could not vote, Spartan women reportedly owned 40 percent of
Sparta's agricultural land and enjoyed other rights that were equally
extraordinary. We offer a simple economic explanation for the Spartan
anomaly. The defining moment for Sparta was its conquest of a neighboring
land and people, which fundamentally changed the marginal products of
Spartan men's and Spartan women's labor. To exploit the potential gains from
a reallocation of labor - specifically, to provide the appropriate
incentives and the proper human capital formation - men granted women
property (and other) rights. Consistent with our explanation for the rise of
women's rights, when Sparta lost the conquered land several centuries later,
the rights for women disappeared. Two conclusions emerge that may help
explain why women's rights have been so rare for most of history. First, in
contrast to the rest of the world, the optimal (from the men's perspective)
division of labor among Spartans involved women in work that was not easily
monitored by men. Second, the rights held by Spartan women may have been
part of an unstable equilibrium, which contained the seeds of its own

JEL Classification: D23, D70, J16, J20, K11, N33, N43

Thursday, September 22, 2005

Academic careers

This is Pete Boettke on the incoming class to my Ph.D. program at GMU:
"Our students are unusual for PhD students and many of them are more likely
to be weighing a PhD in another discipline rather than another economics
department when making their decision."
In my case, that was true--during my first year I considered switching to Political Science in Rochester, of all places. And these are words of wisdom:

"For those entering the PhD program with the hope of pursuing an academic career, they need to start thinking about research papers right now. For students coming from an out of sync [that is, non-mainstream] department such as GMU the most important signal they can send is with published papers in refereed journals, and in particular published papers in mainstream journals. Failure to do so will result in a frustrating job search. I have been telling graduate students for a decade that the formula for success is:

PhD in hand + refereed publication(s) + strong teaching evaluations = tenure track job

The other factor in this equation is the 'lunch tax' that the individual represents. The more difficult the person is to take as a personality, the stronger publications they will have to have in order to signal that they are worth it."

Did I land my first job with a publication in hand? No. And I don't have my Ph.D. yet either, which tells you how lucky I was when CIDE bought my services--I guess I must have a big "lunch subsidy" somewhere :-). More seriously, notice the direction of causality: If you have all those observable ingredients, a good job is secured--if not, your job prospects are less certain and cling on other unobservable factors.

Bottomline: Make whatever you need so that your skills and potentials are observable.

Mr. Pessimister: you are wrong

Pessimister thinks all times past were better. But in case you haven't noticed, these are clear long run trends in the U.S. economy--a successful market-oriented economy:

1. Working hours decrease while real salaries rise--the pie gets bigger and people have more time to spare.
2. Women labor force participacion has increased while household work decreases--given the payoffs, women are revealing their preferences towards non-household working hours.
3. The share of expenses in recreation goods increase while its price decreases--people are having fun!

There are no ifs or buts here: these are good news. So... how come? Jeremy Greenwood and Guillaume Vandenbroucke provide and answer in Hours Worked: Long-Run Trends:

For 200 years the average number of hours worked per worker declined, both in
the market place and at home. Technological progress is the engine of such
transformation. Three channels of effect will be stressed here.

First, technological progress increases wages. On the one hand, an increase in real wages should motivate more work e¤ort since the price of consumption goods in terms of forgone leisure has fallen. On the other hand, for a given level of work effort a rise in wages implies that individuals are wealthier. People may desire to use some of this increase in living standards to enjoy more leisure.

Second, the value of not working has also risen due to the advent of many new leisure goods. Leisure goods by their very nature are time using. Think about the impact of the following products: radio, 1919; television, 1947; monopoly, 1934; videocassette recorder, 1979; Nintendo and Trivial Pursuit, 1984.

Third, other types of new household goods have reduced the need for housework. These household goods are time saving. Examples are: electric stove, 1900; iron, 1908; frozen food, 1930; clothes dryer, 1937; Tupperware, 1947; dishwasher, 1959; disposable diaper (Pampers), 1961; microwave oven, 1971; food processor, 1975. Some goods can be both time using or time saving depending on the context: the telephone, 1876; IBM PC, 1984.

Wednesday, September 21, 2005

India and country-based studies

India seems to be a good testing ground for all kinds of things--which is a bit surprising since one would expect poor data availability in that country. You can also tell that Indian economists are the ones pushing this agenda (not that there's anything wrong with that!). Bottomline: We should be able to do similar things based on Mexican data and advertise/sell them as successfully as these Indian studies do (a quick JSTOR search for "India" in title will show what I mean).

"Political Selection and the Quality of Government: Evidence from South India"
TIMOTHY J. BESLEY, London School of Economics & Political Science
ROHINI PANDE, Yale University

This paper uses household data from India to examine the
economic and social status of village politicians, and how individual and
village characteristics affect politician behavior while in office.

Education increases the chances of selection to public office and reduces
the odds that a politician
uses political power opportunistically. In contrast, land ownership and
political connections enable selection but do not affect politician opportunism.

At the village level, changes in the identity of the politically dominant
group alters the group allocation of resources but not politician opportunism.
Improved information flows in the village, however, reduce opportunism and
improve resource

JEL Classification: O12, H11, H42, O20

ESTHER DUFLO, Massachusetts Institute of Technology (MIT)
ROHINI PANDE, Yale University

The construction of large dams is one of the most costly and controversial forms of public infrastructure investment in developing countries, but little is known about their impact. This paper studies the productivity and distributional effects of large dams in India. To account for endogenous placement of dams we use GIS data and the fact that river gradient affects a district's suitability for dams to provide instrumental variable estimates of their impact.

We find that, in a district where a dam is built, agricultural production does not increase but poverty does. In contrast, districts located downstream from the dam benefit from increased irrigation and see agricultural production increase and poverty fall. Overall, our estimates suggest that large dam construction in India is a marginally cost-effective investment with significant distributional implications, and has, in aggregate, increased poverty.

JEL Classification: O21, O12, H43, H23

Tuesday, September 20, 2005

Are you an altruistic cynic (or a cynical cynic)?

Robin Hanson, (former professor of mine--always smart, sometimes hard to read, and very hard to please in an exam) wrote an excellent short piece on "cynical beliefs" and "cynical moods". IMHO, some cynics are very smart and they actually become successful, but it is the extreme cynics--those who deprecate not only everything they see but also everything they do--who end up looking like losers.

The scornful sneering contemptuous cynical mood is not particularly attractive. So why does anyone ever adopt it? And why is such a mood associated with the cynical belief that hypocrisy and low motives are widespread?

Let us first notice some patterns about cynical moods. It seems that the young tend to be more idealistic, while the old are more cynical. People can remain idealistic their entire lives about social institutions that they know little about, but those who know an institution well tend to be more cynical. Leaders and the successful in an area tend to be less cynical than underlings and failures in that area. Things said in public tend to be less cynical than things said in private. People seem to prefer the young to be idealistic, and to discourage the teaching of cynicism. Cynicism is not considered an attractive feature.

Now how can we explain cynical moods? I can see two main explanations, one idealistic and one cynical, varying the motives and abilities they posit for the cynic.

The idealistic explanation of cynical moods is that the cynic has unusually high motives or insight. He was better able to see behind false appearances, and he was more shocked and disapointed to discover the low motives of others. Because he is unwilling to be hypocritical, he is less popular and so he succeeds and leads less. People dislike cynics because cynics expose their hypocrisy.

The cynical explanation of cynical moods is that the cynic has unusually low motives or ability. He can better see low motives because he has them in spades, and the cynic complains to belittle the success of others. That is, if he cannot win in some area then he will complain that the game is unfair, or that those who succeed are not really very praiseworthy. People do not like cynics because cynics are losers.

Monday, September 19, 2005

Judging the justices

The Economic Effects of Judicial Accountability. Some Preliminary Insights.
Stefan Voigt

Judicial independence is not only a necessary condition for the impartiality
of judges, it can also endanger it: judges that are independent could have
incentives to remain uninformed, become lazy or even corrupt. It is
therefore often argued that judicial independence and judicial
accountability are competing ends. In this paper, it is, however,
hypothesized that they are not necessarily competing ends but can be
complementary means towards achieving impartiality and, in turn, the rule of

It is further argued that judicial accountability can increase per capita
income through various channels one of which is the reduction of corruption.
First tests concerning the economic effects of JA are carried out drawing on
the absence of corruption within the judiciary as well as data gathered by
the U.S. State Department as proxies. On the basis of 75 countries, these
proxies are highly significant for explaining diffe rences in per capita

Keywords: Judicial Independence; judicial accountability; rule of law;
economic growth; corruption; constitutional political economy.

JEL:H11 K40 O40 P51

Thursday, September 15, 2005

The opportunity cost of college is higher than you think much for the wishful thinking of Art. 3 of the Mexican constitution...

"A cost-benefit analysis indicates that tuition reduction can be a socially efficient method for increasing college completion. However, even with the offer of free tuition, a large share of students continue to drop out, suggesting that the direct costs of school are not the only impediment to college completion."

Building the Stock of College-Educated Labor
Harvard University
John F. Kennedy School of Government

Half of college students drop out before completing a degree. These low rates of college completion among young people should be viewed in the context of slow future growth in the educated labor force, as the well-educated baby boomers retire and new workers are drawn from populations with historically low education levels. This paper establishes a causal link between college costs and the share of workers with a college education. I exploit the introduction of two large tuition subsidy programs, finding that they increase the share of the population that completes a college degree by three percentage points. The effects are strongest among women, with white women increasing degree receipt by 3.2 percentage points and the share of nonwhite women attempting or completing any years of college increasing by six and seven percentage points, respectively. A cost-benefit analysis indicates that tuition reduction can be a socially efficient method for increasing college completion. However, even with the offer of free tuition, a large share of students continue to drop out, suggesting that the direct costs of school are not the only impediment to college completion.

Wednesday, September 14, 2005

Your city is gone: To rebuild or not to rebuild?

Tyler gives reasons why politicians will rebuild New Orleans even if cost-benefit aalysis would indicate otherwise.

This quote is from Ed Glaeser:

"We have an obligation to people, not to places," says Edward Glaeser, a Harvard professor who specializes in urban economics. "Given just how much, on a per capita basis, it would take to rebuild New Orleans to its former glory, lots of residents would be much [better off] with $10,000 and a bus ticket to Houston."

Sounds like an un-compassionate statement. What kind of person would desire for a city NOT to be rebuilt? Answer: an economist who values local individuals well being more than that of non-locals (tourists, postcard sellers, public opinion, etc.)--that is a compassionate economist without the sugar coating.

Becker & Posner also opine here.

Wednesday, September 07, 2005

Bureaucracies and crisis management

Brad DeLong--who is always funny when he gets mad--is probably on target when bashing Bush for FEMA's mishandling of Katrina's crisis...  On the other hand, maybe he expects too much from a bureucracy:
"(...) should we be surprised at this?  (...) Yes, we should be surprised. FEMA is a bureaucracy. A bureaucracy is designed to keep functioning even when it is headed by a man who was suddenly told by his private-sector bosses to find a new job and whose only qualification is that he is the friend of a friend of the president. When faced with a situation, you pull out the plans and you follow the standard operating procedures. When hurricanes threaten the Gulf coast, you pre-position hospital and rescue ships offshore. You have a meeting beforehand and ask: “if this truly goes south – much worse than we are expecting – what things will we wish a month from now that we had done today?” In the case of New Orleans, you know that there will be floods so you prepare to drop support from the air.

But here the plans were not pulled out of the filing cabinets, the standard operating procedures were not followed, and the “what will we wish we had done?” meetings were apparently not held. In any other form of government besides that of the US – where the president has the formal legal powers of the 18th-century British monarch, and where each party’s presidential candidate emerges from an undignified struggle among party activists – Mr Bush would have been eased out by now. The barons of his party would have told him that he had to step aside.

It would be better for the country--and for the Republican party--if some way were found to ensure its future presidential candidates have some skill in public administration.

Tyler Cowen offers his insight, too:

Why don't governments handle all crises well?  (...):

1. The event is often small-probability in nature.
2. The event has very negative consequences, and we don't have optimal punishments for those who get it wrong.
3. Many crisis-related events and required decisions happen quickly in immediate sequence.  First, it is hard to get the decisions right, second it is even harder to look good, given some inevitable mistakes.
4. Media scrutiny is intense, and voters care about the issue.  This encourages ex post overreactions and overinvestments in symbolic fixes, especially when combined with #1.
5. A crisis is, by definition, large.  This puts federalism, whatever its other merits, at a disadvantage.  No one is sure who is responsible for what, or how a chain of command should operate.

All of these seem to have operated in New Orleans, plus they were combined with one of our worst-functioning local governments and an administration especially weak on the issue of accountability.  Roger Congleton has a paper on the public choice of crisis management. 

Tuesday, September 06, 2005

Platón vs. los poetas

Hoy divagué contra los poetas en clase. No hay nada malo con ser poeta. El problema es otorgarle (o esperar) razón y verdad de los poetas solamente porque hablan bonito.

Estirando el argumento: desde su tumba, Platón sabe que los filósofos corren regresiones, pero no los poetas. (Nota: Si eres poeta, por favor no te tomes esto en serio :-)

Platón vs. los poetas en tres caídas:
(From Plato's Republic, Book X)

"there is an ancient quarrel between philosophy and poetry; of which there are many proofs, (...) and there are innumerable other signs of ancient enmity between them"

Round 1: El pintor está más interesado en las "apariencias" que en las "realidades":
(Traducción cuant: El pintor se basa en pocas observaciones que "parecen reales")

Which is the art of painting designed to be --an imitation of things as they are, or as they appear --of appearance or of reality?

--Of appearance.

Then the imitator, I said, is a long way off the truth, and can do all things because he lightly touches on a small part of them, and that part an image. For example: A painter will paint a cobbler, carpenter, or any other artist, though he knows nothing of their arts; and, if he is a good artist, he may deceive children or simple persons, when he shows them his picture of a carpenter from a distance, and they will fancy that they are looking at a real carpenter.

Round 2: El poeta no es más que un pintor
(Traducción cuant: El poeta sabe poco, pero lo adorna como si supiera mucho)

Then must we not infer that all these poetical individuals, beginning with Homer, are only imitators; they copy images of virtue and the like, but the truth they never reach? The poet is like a painter who, as we have already observed, will make a likeness of a cobbler though he understands nothing of cobbling; and his picture is good enough for those who know no more than he does, and judge only by colours and figures.

--Quite so.

In like manner the poet with his words and phrases may be said to lay on the colours of the several arts, himself understanding their nature only enough to imitate them; and other people, who are as ignorant as he is, and judge only from his words, imagine that if he speaks of cobbling, or of military tactics, or of anything else, in metre and harmony and rhythm, he speaks very well --such is the sweet influence which melody and rhythm by nature have. And I think that you must have observed again and again what a poor appearance the tales of poets make when stripped of the colours which music puts upon them, and recited in simple prose.

Round 3: El poeta apela a las pasiones y no a la razón.
(Traducción cuant: El poeta no tiene una teoría subyacente)

Then the imitative poet who aims at being popular is not by nature made, nor is his art intended, to please or to affect the principle in the soul; but he will prefer the passionate and fitful temper, which is easily imitated?


And now we may fairly take him and place him by the side of the painter, for he is like him in two ways: first, inasmuch as his creations have an inferior degree of truth --in this, I say, he is like him; and he is also like him in being concerned with an inferior part of the soul; and therefore we shall be right in refusing to admit him into a well-ordered State, because he awakens and nourishes and strengthens the feelings and impairs the reason. As in a city when the evil are permitted to have authority and the good are put out of the way, so in the soul of man, as we maintain, the imitative poet implants an evil constitution, for he indulges the irrational nature which has no discernment of greater and less, but thinks the same thing at one time great and at another small-he is a manufacturer of images and is very far removed from the truth.

Thursday, September 01, 2005

Taking ideology seriously

Rafael DiTella et al. take endogenous beliefs (ideology?) VERY seriously.  Assuming that pro-market beliefs and policies are conducive to growth, their findings are extremely relevant:

First, some micro level evidence:

Property Rights and Beliefs: Evidence from the Allocation of Land Titles to Squatters
Rafael Di Tella, Sebastian Galiani, Ernesto Schargrodsky

The possession of property rights may change the beliefs that people hold. We
study this hypothesis using a natural experiment from a squatter settlement in the
outskirts of Buenos Aires ensuring that the allocation of property rights is
exogenous to the characteristics of the squatters. There are significant differences
in the beliefs that squatters with and without property rights declare to hold.
Property rights make beliefs closer to those that favor the workings of a free
market. Examples include materialist and individualist beliefs (such as the belief
that money is important for happiness or the belief that one can be successful
without the support of a large group). The effects appear large. The value of a
(generated) index of pro market beliefs for squatters without property rights is
78% of that of the general Buenos Aires population. The value for squatters that
receive property rights is 98% of that of the general population. In other words,
giving property rights to squatters causes a change in their beliefs that makes
them indistinguishable from those of the general population, in spite of the
dramatic differences in the lives they lead. Our experiment is less informative as
to the precise way property rights change beliefs, although there is suggestive
evidence of a behavioral channel.

Next, some macro-level evidence:

Why doesn't Capitalism flow to Poor Countries?
Rafael Di Tella and Robert MacCulloch

We find evidence consistent with the hypothesis that governments in poor countries
have a more left wing rhetoric than those in OECD countries. A possible explanation is
that corruption, which is more widespread in poor countries, reduces the electoral
appeal of capitalism more than that of socialism. The empirical pattern of beliefs within
countries is consistent with this explanation: people who perceive corruption to be high
in the country are also more likely to lean left ideologically and to declare to support a
more intrusive government in economic matters. Finally, we show that the corruptionleft
connection can be explained if corruption is seen as unfair behavior on the part of
capitalists (more than of bureaucrats). Voters then react by moving left, even if this is
materially costly to them. There is a negative ideological externality since the existence
of corrupt entrepreneurs hurts good entrepreneurs by reducing the general appeal of