On the ethics of research cloning

Even though the Journal of Economic Perspectives recently went open access, a move the American Economic Association should be applauded for, I am still receiving physical copies. It is a nice journal to read while lounging in the garden or on a plane ride. The last issue has as usual a good set of interesting articles, including one I had reported on earlier when it was still a working paper. But while checking what I had said about it, I noticed something rather odd: the paper I discussed was ultimately published in the Journal of Economic Behavior and Organization. I had to investigate.

The two papers are by Bruno Frey, David Savage and Benno Torgler. They both report on the sinking of the Titanic and discuss the characteristics of the passengers who survived versus those who perished. Both papers come to the same conclusions. The texts are different, though, and the published regressions are slightly different, with no explanation why, because there is no reference to the other paper. One has therefore to read in much detail to understand what the contribution of each paper is, if there is any.

All this is very fishy. It really looks like the authors are playing games here, trying to get multiple publications out of the same work. They do not mention the other work to fool editors and referees into thinking these are original contributions, as required for any submission to those journals. They tweak the results and rewrite the text so that they cannot be accused of blatant self-plagiarism. This is unethical behavior, but it is not unheard of in the profession.

But like a late-night infomercial, there is a bonus. Looking at the author's CVs, I notice that they have a third publication with the same topic and results, in the Proceedings of the National Academy of Sciences. Bruno Frey has also published two short pieces in German in magazines prior to the academic publications: 1, 2, both pdf.

Now, who are the authors? David Savage is a PhD student at Queensland University of Technology. He must have been following orders of the more senior authors, either without realizing their unethical behavior or watching in horror and not being able to do something about it. Let us give him the benefit of the doubt. His adviser is Benno Torgler, who has already an impressive track record for someone whose first refereed publication was in 2002. His RePEc profile lists 105 working papers and 52 journal articles. Looking at the published works, it seems to like to revisit previous papers by adding new twists to them. Nothing wrong with that, but it may explain why there is no major hit in the publications. There is simply too much slicing and no single slice is a major contribution worth a good publication. But early in his career, he published a series of articles on tax morale using the World Values Survey. Using the same data and the same methodology, he managed to publish several articles whose distinguishing feature is only that they look at a different set of countries: Asia, transition countries, Canada, Latin America, and possibly more. While I must confess that I have not read the papers in detail, there is simply too much material, and Benno Torgler may be innocent, I still find these patterns very disturbing.

It took me some time to figure out where Benno Torgler earned his doctorate. It is at the University of Basel, under the supervision of René Frey (Basel) and Bruno Frey (Zurich), who are brothers, after undergraduate studies at the University of Zurich. Which bring us to Bruno Frey. He is a researcher of international recognition, mostly for his work on welfare economics, happiness research, and critiques of fundamental assumptions in economic models. He credits himself with over 600 published articles and books, an astounding number in Economics. Of course, if this number comes about by slicing papers or republishing known results as described above, this number is less surprising. Looking at his list of major articles, one can surely suspect something is not quite right. I do not have the time (or the will) to go all of this, but there is indeed a lot of rehashing the same themes, which is OK when one uses new data sets or new approaches. But seeing those quantities, that seem unlikely.

Another aspect that I find disturbing in Bruno Frey's record is that his recent work has been railing against the tendency of academics (and especially their administrators and grant makers) to look for quantifiable evidence of their productivity, what he calls "evaluitis." He writes against the pressure to publish and the prominence of rankings of research output. I have reported about some of this writing myself (1, 2, 3). But again he seems to be repeating himself a lot, even in published articles, essentially criticizing a game that he seems to be excelling at. Either he is sarcastic or hypocritical, I cannot decide.

I realize the accusations I am making here can have severe consequences. But I am only accusing, not condemning. I leave the reader the opportunity to make her own opinion, as I have linked to plenty of evidence. I hope to be proven wrong, that these three individuals are indeed extremely innovative and productive. But from what I have seen so far, my prejudice is strongly negative in this regard.

Update (Sunday): I have been alerted that there is a fourth publication about the same Titanic study, in Rationality and Study.

Further update: A follow-up post.

Using public firms to regulate the environment

There are various approaches to regulate the pollutions of firms. One can regulate them, one can tax them, or one can create a market for pollution permits. Or one can ask the firms to self-regulate them. Or the government can take over one firm and let it set an example. Which option works best depends on market conditions and how emissions can be observed.

Davide Dragone, Luca Lambertini and Arsen Palestini look at a Cournot oligopoly for the last option. We know that when competition is less than perfect, less will be produced, which is good when the externality is negative. To adjust production to the right level, the public firm choose output and price to coerce the private firms to do the right thing. Basically, the latter are forced to internalize the externality. But this only works if there are not too many firms. The public firm reduces output such that the private one reduce as well, due to lower aggregate output and increased market power. One could thus imagine the government simply shutting down firms. But of course, this is valid only if there is no free entry in the industry, a big if.

An empirical nail in the coffin of Calvo pricing

I have never been shy about the fact that I am no fan of Calvo pricing as commonly practiced in New-Keynesian model. I have presented on this blog at several occasions theoretical evidence against it, as well as empirical evidence that price are either not rigid enough to matter, or that the way they change is not consistent with Calvo pricing.

Sascha Becker pushes the argument further. There is ample evidence that the relationship between inflation and price dispersion is U-shaped: At very low inflation, the is maximal dispersion. It decreases and increases with higher inflation. Monetary models can explain this, but very differently. Money search models require market power for this to happen. New-Keynesian models with Calvo pricing need sticky prices. Using monthly data from price level indices for 38 sectors in 12 countries over 13 years, Becker looks for sectors where there is more or less competition and more or less price stickiness. The U-shape is systematically found where there is more market power, but not where there is price stickiness...

Economists did see the bubble coming

Economists have been lambasted for not alerting the public that a bubble was in the making in US real state, except for a few oddballs. Of course everyone is wiser in hindsight, but what did economists actually say? It never hurts to look at the facts.

Martha Starr analyzes statements in 24 California newspapers from 2002 to 2007. From 1998 to 2005, the state's house prices increased by more than 10% each year. This prompted the newspaper to run 379 stories with 688 statements by economists on house prices. Academics were clearly warning that house prices were not sustainable. Economists employed in the real-industry, however, were resolutely optimistic. What emerges is a mixed message that gave no guidance to the public, which was even reassured by positive messages from the Federal Reserve.

It is entirely possible opinions could have diverged based on the same evidence. But it seems more likely the professionals were not acting in good faith. They had everything to lose from predicting an end of house price growth. The media should have learned not to trust such biased speakers, yet they continue to be interviewed. Now as to why Greenspan and then Bernanke were so optimistic is beyond me. There speeches are definitively strategic and while they may have realized there was a problem, they may have tried to prevent a bubble from bursting too brutally. Then all the credit to them for trying. But one cannot postpone indefinitely a bubble from bursting, and they knew that.

Trust and the business cycle

Public distrust in institutions (government, business justice and media) seems to be at an all time low in the United States, especially for banks. While conspiracy theorists have always been poplar in the US, they seem to have a field day now. It this just an impression, or it there some truth to it?

Betsey Stevenson and Justin Wolfers run a very simple exercise: they regress opinion poll results against the unemployment rate and a time trend. Except for the media, it appears that such an economic indicators explains very well confidence in institutions, both in the US and in Europe. That is not too surprising, people are quick to blame someone for a recession.

Unfortunately, the paper does not report the results for the time trends. The figures seems to indicate that confidence has a downward trend, and it would have been interesting to see whether this trend is statistically and economically significant.

Entrepreneurship and finger length

Entrepreneurship is the engine of growth, thus is it is important to understand what makes entrepreneurs tick and how to identify potential entrepreneurs. Entrepreneurship courses in BS (business schools) are often dismissed as BS (...), but they have the merit to explain the ropes of setting up a business, thus lowering the hurdle. Still not everyone has what it takes.

Luigi Guiso and Aldo Rustichini make the rather surprising discovery that people with lower second to fourth finger length ratio exhibit stronger entrepreneurial skills. There is actually some theory behind this correlation. Indeed, this finger length ratio is associated with prenatal testosterone. Thus it appears that biology has something to do with entrepreneurship and ultimately growth. Does this mean we should now adopt a policy injecting fetuses with testosterone to bolster the nation's growth rate? No, because these entrepreneurs also seem to be over-confident, tend to build empires and thus sub-optimal firm size. But I wonder when bankers will start measuring their clients' hands.

The key to understand money: vacations

Monetary theorists have struggled for decades if not centuries to explain why we use and value money. Modern theory, which needs to be more explicit about its assumptions, has highlighted how silly some axioms of monetary theory are. For example, why would money make any sense in a utility function when future consumption is already taken into account? Or what about cash-in-advance in quarterly models of the business cycle. Money search model bring progress to the table as they model the problem of the absence of double coincidence of wants, although still with some rather crude assumptions. But at least it is going in the right direction.

Andrew Clausen and Carlo Strub come up with a new motivation for money. Suppose that there is a fix cost in production. Unless you want to produce at full capacity every period, you will then choose to close all operations from time to time and take a vacation. But you must live from something when you do not work and you have no savings technology. This is where money comes to the rescue. Without it, it would have been impossible to smooth consumption across periods, and thus money is valued and welfare enhancing. But beyond the possible elegance of the model, is anybody actually believing this story? I do not think in makes sense to discuss the intertemporal allocation of resources in a world without assets, especially if you want to apply it to anything modern.

How to kill growth: corruption and large military

While it is not a slam dunk, there is pretty good empirical evidence that corruption and government expenses that are not tied to public infrastructure are not good for economic growth. This evidence comes largely from linear cross-country regressions of the kind that anybody with a little sense of theory or econometrics shudder. But sometimes this is done a little bit better.

Giorgio d'Agostino, John Dunne and Luca Pieroni take a simple growth model where government expenses are divided in public infrastructure, public consumption and military expense. Along with private capital, all three enter the production function for reasons that are not entirely clear, but we can let the data speak here. In addition, each expense is adorned with a multiplier that identifies how much is lost through corruption. The result is an equation for the growth rate that can be brought to the data, specifically a set of 53 African countries over 5 years. This is were things become iffy, as it is by now well-known that using panel data in growth regressions leads to very spurious results, especially when African data is considered. Using instruments and GMM will not help you much when data is of poor quality, especially from one year to the next. And taking lags of growth rates will make things even worse.

Results show coefficients "of the right signs" and a particularly strong interaction between corruption and military expenses. I am not sure I can believe these results given the above problems, but they make sense. And if one can extrapolate this African result to other countries, I would be especially worried for the US, where military expenses are always high and bribery of politicians is common and legal.

Should universities focus on teaching or research?

The UK is going through a rather traumatic reform of the finances of its higher education system. There is much debate, both public and among academics, on how much of the burden should be carried by the students and how. If we take as given that universities are funded by public grants, how to allocated them is still complex, in part due to the dual goals of universities: teaching and research. Research grants are now quality driven, while teaching grants are mostly quantity driven. Given that their is a budget constraint, either at the government or at the university level, any economist would tell you there is a trade-off and choices need to be made.

John Beath, Joanna Poyago-Theotoky and David Ulph discuss how universities choose whether to focus on research or teaching. Universities are funded according to a formula depending on the number of students taught, the number of academics and their research quality, which depends itself on the academic/student ratio, Every academic gets the same pay, and universities maximize an objective based on the quality-weighted volume of research and the quality adjusted number of students, where the quality of teaching is a consequence of the academic/student ratio.

It is clear there is not going to be a free lunch. A university cannot be good at both teaching and research. As one plays around with the funding formula, all sorts of equilibria can emerge. For example, if research is well rewarded and a minimum quality of research is required for it to be funded, a bifurcation occurs where a few universities concentrate on research and others on teaching. Which funding formula is best for society remains open, though.

Crime on the job and the business cycle

The cyclical behavior of work effort is rather puzzling. One would expect that people would work harder during a recession to avoid getting laid off, yet measures of labor productivity (per worker or per hour) are consistently positively correlated with GDP. This also runs counter to the argument that the least productive workers are laid off first in a recession, which should improve the productivity of the remaining ones through a composition effect. Survey data is much more mixed, though, but that is often based on perceptions rather than facts.

One reason why labor productivity may vary could also come from counterproductive efforts from the workforce: stealing, sabotaging, annoying co-workers. Aniruddha Bagchi and Siddhartha Bandyopadhyay fold all these activities under the crime label and ask whether this is linked to the business cycle. There is no data about this, unless you think like the authors that this is only dimension that makes labor productivity vary. So you are left with purely theoretical exercises. The authors highlight here to contradictory effects. First, pretty much everyone gets a job in a boom, including those "criminals," which would lead to a negative correlation of labor productivity with output. But this effect could go the other way if labor market prospects are likely to weaken and jeopardize re-employment. Second, they assume that deviancy requires a setup cost, which one is less likely to bear when the labor market weakens. This would even reinforce this negative correlation.

This possible ambiguity would need to be sorted out with a tight calibration exercise at least, or some structural estimation with hidden variables. But the authors just wave hands and claim things can go either way. In any case, they are probably right not to pursue. Using a two-period model to study business cycles is silly anyway.

On the perception of time

As you age, time flies faster. The same applies to when you are busy. Psychologists have long studied how the perception of time varies with circumstances, but economists have barely touched the subject. If the perception of time depends on one's age, the fix is easy: adapt the discount factor to the life cycle (beyond what the probability of death implies, that is a separate matter), and you are ready to study the savings behavior across generations, etc. But this can be more subtle than that.

David Aadland and Sherrill Shaffer point out that the implied discount factor may not necessarily be exogenous. If you choose to have a busy life, you also modify your discount factor. If you are rational, you must take this into account in your occupational choice. I have certainly noticed how time has been flying much faster in the past years, and writing this blog beyond my normal work duties has certainly contributed to being busier than usual. I have asked myself whether the time spent on this is worth it, and now that I realize I may also reduce my enjoyment of time, I need to question it even more. But beyond these egocentric ramblings of mine, Aadland and Shaffer show that these consideration could explain why people want to scale back as they age the time they spend working, or why they retire earlier that previous generations despite expecting to live longer. They also find that unless people anticipate the changes in time perception, optimal plans are not time-consistent.

The exploitation of adjunct faculty

I have discussed previously that the US higher education system is not sustainable. In particular the low teaching loads in many institutions will have to increase in light of funding issues, and/or faculty salaries will have to decrease. And many professors will have to realize that their research is simply not for it and they will have to concentrate on teaching.

In fact, such an evolution has already been unraveling for a few decades, in the form of the replacement of tenure tracks faculty by contract teachers that go by various titles like adjunct professor, professor in residence, etc. For example, the proportion of tenured and tenure-track faculty in the US went from 45% in 1975 to 24% now. The share of graduate students in teaching is stable at 20% and the slack is taken by part-time faculty, whose share went from 24% to 41%. This shows that there is now a two-class society in higher education: rather well-paid regular faculty with low teaching loads, and exploited contract faculty.

Why exploited? Because their pay is low, they get no benefits, their classes can be canceled anytime, and they ofter have to teach at several places simultaneously to make ends meet. Below is a video from one such contract worker describing the situation at Marist University. While this seems to be a rather extreme case, it is not that far off what is happening at other places.

How is this going to pan out in the long term? I maintain that there is going to be higher teaching loads and lower pay for everyone but in a few top research institutions. This could take some time, as the current privileged faculty first needs to be replaced by attrition.

Is homework worth the time?

I have never been sure whether I should be assigning homework in my classes. For one, they give additional work, from their formulation to their grading. Second, I am not sure of their effectiveness, in particular given that the students doing them are the ones that least need them. The same applies to extra credit problems. But before college, homeworks are routinely given to children who mostly have no choice but hand them in. Are homeworks worth the time spent on them? While my children certainly spend spend less time on them than I did at the same age (it only appears they spend more time, they are constantly distracted, see yesterday's rant on the Internet at the workplace...), do they really learn with them?

Ozkan Eren and Daniel Henderson use the National Educational Longitudinal Study to not only look at achievement in mathematics, as previous studies, but also in science, English and history. And it is only in mathematics that homework matters (positively). I am especially astonished that homework does not matter in English, as practice certainly improves ones writing (and I should obviously have done more homework). But my impression appears to be wrong.

On banning Youtube at work

While a strong case can be made that the information technology revolution has markedly improved productivity at the workplace, it is not that obvious that Internet at the workplace has such a positive impact. Indeed, it is very tempting to get distracted, and Youtube has certainly contributed to a shorter attention span in offices around the world (not to mention that these flash applications are huge resource hogs that require better and better computer equipment). And I cannot deny the Internet is providing me with a distraction that prevents from pursuing my regular duties, this blog for which my employer is not getting any credit whatsoever. Is then the solution to ban the Internet from work?

Alessandro Bucciol, Daniel Houser and Marco Piovesan do an experiment where some people get to see a funny video while others do not. The "frustrated" ones then turn out to be less productive thereafter. One should thus weigh whether to forbid the Internet, yes it wastes time, but you do not want to create this frustration effect. The authors conclude some basis that eludes me that the second effect is stronger.

But wait a moment. The experiment they perform is based on the fact that the frustrated ones hear a video but cannot see it. How would this relate to the Internet being banned from work? If that were the case, no one would hear the video and no one would get frustrated. And no time would be wasted. I cannot follow the authors' reasoning here. Maybe I am too distracted by the Internet.

The role of independent fiscal watchdogs

As discussed a few days ago, politicians have a rational tendency to lie. One remedy against this is to improve information. One area where political lies hurt the most is when politicians distort (or blatantly ignore) the consequences of their actions or policy proposals. The starkest recent examples come from the second Bush Administration with the Iraq war ("it pays for itself with Iraqi oil") and the prescription-drug plan for the elderly. How do you improve the information of the public in this regard? And you may also want to inform politicians as well as they may be ignorant or easily influenced (many are lawyers after all, and certainly not economists who can gain their own insights). Finally, you want to redress short-sighted politicians and find a way to commit them to long-term policies and outcomes. One way is to institute some fiscal watchdogs. There are plenty of think tanks willing to take this role, but they usually have some vested interests in the debate and rely on funds from interest groups to function. The fiscal watchdog thus needs to be independently funded.

Lars Calmfors makes the case for independent fiscal watchdogs in a report to the Prime Minister of Finland. He forcefully argues that the rules vs. discretion problem of central banks is just as valid for fiscal authorities, if not more as political terms are typically shorter than those of central bank governors. The ideal would be to have an independent fiscal authority, but this is clearly not feasible, so an independent fiscal watchdog is the next best solution. The paper focuses on the example of the Swedish Fiscal Policy Council, but there are others. They work as long as people are willing to listen to them. One example where it does not seem to work as well as before in the United States, where the Congressional Budget Office is not viewed as being credible due to the general attitude against scientific evidence in the country, and due to partisan bickering. But beyond criticizing fiscal policy, fiscal watchdogs can help with the formulation and enforcement of fiscal rules, like the German one that forces the government to act once deficits exceed some level.

In any case, this paper is a good read for anybody who is worried about the unsustainability of fiscal practices and who wants politicians to think harder about the consequences of their actions.

Optimal securitization

Before the crisis, securitization of debt was quite uniformly seen as a very good idea, after all it made house ownership available to many families. After the crisis the assessment is much more negative, in fact there is a large backlash against the idea, seeing at the root of all evil. Of course, the truth is somewhere in the middle. Securitization provides a powerful way to diversify risk, but as the crisis showed, it can make fraud easier.

Guillaume Plantin tries sort this out by looking at how banks react to the availability of securitization. He points out that the risk diversification gives less incentives to banks to screen well loans. This is not necessarily a bad thing, as the optimal contract literature would tell you that the bank would be required to bear some more risk. The fact that their would be more borrower failures would have to be weighted against the increased availability of credit, and society would overall likely be a winner from securitization. The problem is that these contracts were not optimal. There is evidence that banks have been negligent if not misleading with information about the underlying loans. The issue thus goes beyond the (fixable) moral hazard with selecting loans. Indeed, when banks have private information about the loans, we have a lemons problem wherein they push the worst loans to the securitization market (and when the US Treasury buys up those loans from the banks, of course it inherits the lemons as well). The policy prescription is clear: either restrict to some degree securitization or, better, alleviate the opaqueness of the securitization market.

Search effort under mass unemployment

As discussed previously here, one good reason for prolonging the duration of unemployment insurance insurance coverage in a deep recession like the last one is that it would be unfair to expect from the unemployed workers to find as easily a job as in normal circumstances. Or, in other words, even if they apply the same work effort, they have a smaller chance of finding a job given the labor market tension and should be allowed to be protected for a longer time.

Alan Krueger and Andreas Mueller study what happens to search effort when there is a smaller change of finding a job. Specifically, they interviewed several thousand unemployed weekly during the last recession about their reservation wage and their search effort. They find that the reservation wage is essentially constant, expect for older workers with sufficient cash reserves, but workers are willing to go below that reservation wage for part-time work. The time devoted to search, however, dips quickly over the unemployment spell. That should not be surprising given how little time people spend looking for a job (from a study by the same authors). What is more interesting is how all this compares to a normal recession. Unfortunately, Krueger and Mueller offer no discussion in this regard.

Why American politicians lie

Many advertisements are misleading, with the intend of making people buy goods they would not buy had they known the truth. This overconsumption leads to welfare losses, which is why you would want to regulate truth in advertising. But, in a market that is not competitive, households tend to consume less than optimal. Does this mean we should then avoid regulating ads, or regulate them less, in order to get to the optimal quantity of consumption?

This is the question Keisuke Hattori and Keisaku Higashida ask with a model of false advertising in a duopoly. They suppose that consumers are easily fooled and ads of one firm also increase demand for the other firm's good. They show that prohibiting truth in advertising (or educating consumers) may have negative welfare consequences if the goods are close to homogeneous because of the resulting under-provision of goods. But taxing misleading or joint advertising is welfare improving. In an interesting extension where there are smart and naive consumers, smart consumers suffer because the naive ones induce more misleading ads and higher prices.

Now think about politicians. There are only two parties who offer goods that are after all little different from each other. Voters are easily fooled. The model above implies that politicians will lie extensively and deliver very few goods. Draw your conclusions.

Paying farmers for landscaping

Switzerland has had for centuries a rather unique system of communal land tenure for the alpine areas. Indeed, cattle owners send their livestock up from the villages for the Summer season, and these grazing areas are commonly owned and rights to them are inherited. The returns of agriculture in the mountainous areas are, however, far from competitive in this era of globalization, and Switzerland has resorted to compensating farmers for keeping the cows up there. The reason is that cows and some other farming bring landscaping benefits, for example keeping the grass short improves snow management for avalanche prevention and skiing, or preserves biodiversity and prevents invasive plants to take foothold. These direct payments are very close to making farmers civil servants. Note that payments depend on the size of the farm, its location, the treatment of animals and the general ecological friendliness of the business.

A pair of recent papers analyze the new situation for farmers in the Swiss Alps. Chiara Calabrese and Gabriele Mack used an agent-based model to study how incomes of a large number of heterogeneous livestock farmer families would evolve until 2020. Different scenarios are explored (a not described status quo, more subsidy for summered livestock and lump sum subsidy to all alpine farmers proportional to farmed area). Results are not unexpected (no change, more summered livestock and income, less of both). Prices are assumed to grow at a steady rate unknown to reader. Give the recent wide fluctuations for food, that needs to be made more explicit and additional scenarios are needed. Also, this study basically assumes that the government does not face a budget constraint and will always be willing whatever it takes to maintain a policy. At least the costs of the program should be reported.

The other study by Nadja El Benni, Stefan Mann and Bernard Lehmann looks at how these direct payments to farmers influence the distribution of incomes. Due to the terrain, farms are small almost everywhere in the country, and Gini coefficients for farmer income have been rather low compared to other countries. The new policy increased the Gini coefficients even though the payments were implemented in part to redistribute income and they constitute now 79% of a farmers income. The reason is that the disparities in market income have increased tremendously and direct payments are tied to farm size after all.

The curse of the more trustworthy gender

It sucks to be a female entrepreneur. You are more likely to repay your loan, but you still keep getting smaller loans. As a consequence, your business is smaller than that of your male counterparts. Of course, all this could be due to some common correlates that cause women to be more trustworthy and yet get smaller loans. Or it could be just plain and simple discrimination.

Isabelle Agier and Ariane Szafarz test the latter hypothesis using rich data from microfinance in Brazil. The idea is to verify whether women are discriminated against in the loan application process. Testing for discrimination is not easy as apparent inequities may make economic sense. But if across to populations a lower or equal loan default rate is associated to a higher or equal loan denial rate, then we have an ethical issue. This what Agier and Szafarz test. Sadly, the news are not good. There is significant discrimination and despite being better creditors, they get smaller loans. Even worse, repeat applicants who could thus prove their trustworthiness get even more discriminated. Of course, there could still be some unobserved variable explaining all this, but I cannot imagine what that could be.

Why are Europe and the US so different in terms of regulation?

Europe and the United States have a different attitude towards many things, and one in particular is regulation. Think, for example, how Europe is adverse to genetically modified agricultural goods, while nobody really cares about that in the United States. Other examples abound, like the little checks there are in the American meat industry or the fact that helmets are not required for motorcycles in most US states. How can such drastic differences arise in countries that after all have a similar standard of living?

Johan F.M. Swinnen and Thijs Vandemoortele show that tiny differences in preferences can lead to large differences in regulation. To prove this, they develop a dynamic model with households, producers and political decisions on whether to allow a potentially objectionable technology. It implies that no regulation is imposed below some threshold level of preferences, and the technology is not allowed above that. This results is, I believe, mostly the consequence of the discrete nature of regulation here: either you allow or you do not. With intermediate levels of regulation, the story may be different. More interesting is the result that there is substantial hysteresis: once a decision is taken one way, it is very difficult to revert it even if preferences or the negative consequences of the technology change. This result is reinforced by the discreteness of regulation, but would most likely be present even without it. In other words, it is possible that tiny initial differences in preferences between countries can lead to large regulatory differences that cannot be overturned.

PS: As in much of this kind of literature, quadratic costs are imposed. I always wonder whether this functional form has implications on results, but nobody seems to care.

Waiting for the perfect job does not work

We usually think that one advantage of unemployment insurance is that it allows unemployed workers to take more time to find an appropriate job and not rush to the first available job for which they may not be qualified. As Acemoglu and Shimer have forcefully argued, the absence of unemployment insurance could lead to important mis-allocations for this reason, and thus losses of efficiency in the economy. This argument implies that workers with longer unemployment durations, after controlling for other characteristics, should be getting better jobs. Is this true?

Miki Kohara, Masaru Sasaki and Tomohiro Machikita test this for Japan using job tenure as a signal of job quality. It turns out the hypothesis above is easily rejected. Indeed, the longer the unemployment duration, the shorterthe subsequent employment duration. So it appears that other factors, like loss of skills and human capital during unemployment and stigma matter more than the search for the perfect job. Of course, it could also be due to some missing control variables, but the effect is so strong I doubt it can be overturned.

The impact of the extension of unemployment insurance benefits in the US

Given the depth of the last recession and the obvious difficulties unemployed workers have to find new jobs, the US government has successively and temporarily extended the usual 26 week period during which unemployment insurance benefits are given, up to 99 weeks for some workers. On consequence that has been worrying some is that this will leads job seekers to seek less jobs, as there is less urgency to be employed. But pointing to the longer duration of unemployment is not appropriate, as this depends to a (very large?) extent on the general business climate. Just looking at data is not sufficient, you need to put in some structure in the form of a theory.

Makoto Nakajima builds an elaborate model that features job search à la Mortensen-Pissarides with variable search effort, consumption-saving decisions, borrowing constraints, skill depreciation in unemployment and appreciation in employment. This complex model is then calibrated to the average state of the US economy, and set to start in a state as close as possible to the one in 2007. Then the transition paths are computed as the economy is hit by shocks, with and without benefit extensions, assuming economic agents did not expect the extensions. All in all an impressive exercise. The conclusion: about a quarter of the 4.8 point increase in the unemployment rate is due to the longer duration of benefits. This is not insignificant, but it could be an acceptable price to pay for the exceptional circumstances.