On the negative correlation between effort and pay

It would seem natural that in a system where pay is linked to performance, better performers are rewarded more handsomely. Yet, there are plenty of examples where this does not work. If it is difficult to find a metric of performance, then the selected metric may give wrong incentives. The classic example is programmers paid by the number of code lines written, which leads to bloated and confusing code. Another one is with many civil servant jobs where the output is not related to a marketed good. The issue can be so bad that a negative correlation between performance and pay emergence.

Ola Kvaløy and Trond Olsen show that this could happen in another way that is not related to monetary and non-monetary rewards, yet has an impact on intrinsic motivation: weak enforcement probability. Suppose the latter is variable. Then high monetary rewards may be associated with a low probability that the scheme will actually be used. Workers may then just slack off. The above hypothesis is not completely insane, as one can imagine situations where there is moral hazard on the side of the worker, and the work contract tries provide the worker both with incentives and with some insurance. It works also without worker risk aversion if there is limited liability.

Spouses and unemployment duration

When unemployed, some people search more intensely for a new job than others. That will of course depend on their personal circumstances. The urgency of getting some income is obviously more pressing when there is little alternative income, and one such alternative is the spouse.

Stefania Marcassa studies French couples where one spouse works and the other is unemployed. It turns out unemployed men search longer for a job if their spouse earns less, while it is reversed for unemployed women. That turns out to be consistent, in a standard labor search model, with a breadwinner stigma for men. French men do not seems to be able to bear the thought of having a successful wife while being unemployed, while women see no hurry to work if their husband is doing well. Clearly, the sexist ones here are the men.

Is obesity an information problem?

As mentioned yesterday, childhood obesity is a problem that can be reduced by giving more opportunities to be outside and away from the television. But one may also try to combat the problem with information campaigns. One way is to publish dietary information in restaurants, something that even benefits the restaurants, as I reported earlier. But most food is not consumed in restaurants, especially for poor households who also are most likely to be obese. But do such information campaigns really work?

Andres Silva, Marian Garcia and Alastair Bailey show that when news about childhood obesity hit the media in the UK, households change their food habits for the better, and without having an impact of expenses. It is thus possible for the poor to do something about the obesity risk without financial consequences.

The fact that information matters is corroborated in a study by Linda Thunström, Jonas Nordström, Jason Shogren and Mariah Ehmke that shows that people use strategic self-ignorance to make choice they know has bad future implication. Specifically they did an experiment where people could choose meals and obtain without cost calorie information. Most subject chose to remain ignorant and then took in more calories than the enlightened ones.

The fight against obesity: more city parks, please

Obesity rates are increasing pretty much everywhere, but nowhere is the obesity problem as massive as in the United States. And nowhere else is television viewing such a cultural focus. With ever increasing viewing times, now about 4 hours a day, one has to wonder what drives Americans to spend so much time in front of the TV with a beer and greasy finger food. Maybe it is the lack of alternatives. Indeed, walk around almost any US city and you will find very few people outside, in a large part because there is nothing to do outside: few parks, no pedestrian areas, no river fronts, etc.

Maoyong Fan and Yanhong Jin show that this does indeed matter for obesity, in particular childhood obesity, which is the most difficult to reverse. One needs to differentiate by various characteristics, though. Parks work particularly well for girls in unsafe neighborhoods, but not as well for white adolescents with high incomes. Now switch that TV off and go outside.

Children in out-of-home care and adult criminality

It always saddens me when children are born into bad families. In extreme cases, society's responses is to put them into foster care or into institutions, in the hope that they will have a better shot at good adult outcomes. While there are some prominent counter-examples, the norm is that they still face significant hurdles. One measure of this is how frequently they end up being convicted of a crime.

Matthew Lindquist and Torsten Santavirta look at Sweden and children sent to foster or residential care. The latter seems seems to increase the likelihood of criminality in later years, as does placing boys in foster care after 13. Girls seems largely unaffected by this, except for residential care. Of course, this could all be selection bias, as the worst cases cannot be put in foster care. But in this study, much of the case record is known to the econometrician, in particular whether placement is due to child or parent behavior.

Are consulting and research substitues or complements?

Think tanks have a horrible reputation everywhere by in the media. The reputation is because they are often very biased and sell out to their finders. The media is because think tank staff are willing to provide the expected sound bites to journalists, no matter what the topic. All this would be OK if think tanks were good at conducting independent research. It turns out the most prominent ones, do not do much of it on the hot topics they talk about, according to Dan Farber, who finds that they do not publish much of relevance (and this is not even considering peer reviewed research).

Interestingly, the picture is very different with respect to consulting. Looking at academics across all fields from five Spanish universities, Pablo D'Este, Francesco Rentocchini, Liney Manjarrés-Henrìquez and Rosa Grimaldi find that getting grant money is positively associated with getting consulting contracts. In other words, good researchers also get consulting gigs. And in some fields, consulting is where the financial rewards of research really lie, especially in social sciences where grants are usually relatively small.

Game theory with pipelines

It seems every winter brings a new situation where Russia is holding up one of its neighbors, or one of them another one, over the delivery of natural gas. The pipeline transfer of natural gas through various countries seems to be the perfect example of a problem that has been haunting human history since trade began: local fiefdoms extracting tolls on transiting merchandise. The case of natural gas is a very pure example, because it is rather difficult to find an alternate route, given the gigantic fix cost of laying the pipeline.

Yet, there is talk of constructing some new pipelines to circumvent the hold-up problem. The question is what the new route should be. Technical considerations are here secondary, capacity and supply as well, all that matters is how bargaining power is impacted. Franz Hubert and Onur Cobanli use cooperative game theory and Shapley values of coalitions to analyze three proposed pipelines. The best seems to be North Stream, which runs thorugh the Baltic Sea from Russia to Germany, bypassing all the troublemakers. South Stream, which goes through Bulgaria and then the Balkans or Greece and Italy, is of little strategic value, as too many players are involved. And Nabucco, which taps fields in the Middle East and runs through Turkey and Bulgaria is of substantial value, but the rents accrues mostly to Turkey.

On the secularization of America

How committed to religion are people? This is rather difficult to establish as surveys can be biased by social pressure. For example, it is nowadays perfectly acceptable to be an atheist in Europe, but an atheist would be a social outcast in many parts of the United States. Hence, many stay in the closet in the US and are not visible, for example by still attending church because of social pressure or because it is the only social activity in their area.

As so often, actions are more revealing than opinions. Fernando Lozano uses an indirect indicators of religiosity that is based of economic choices: working hours on religious holidays over the last 30 years in the US. A few interesting trends emerge: Jewish holidays have become more observed, while Christian ones have become more observed if they have been secularized (like St. Patrick) and less if not (Good Friday). This is consistent with the renewal of Judaism and the commercialization of Christian holidays.

Optimism and debt overload

Throughout the last crisis, there has been much talk about excessive borrowing by individuals (and countries), and how this seems to follow some irrational behavior. We have to understand here that irrationality is a very strong concept, in the sense that people would knowingly take decisions that are against their best interest. I am not saying this does not happen, but ignorance and wrong beliefs can lead to behavior that looks irrational but is in fact perfectly rational.

Ari Hyytinen and Hanna Putkuri explore some data from Finland and find that those who borrow excessively do so because they are much more optimistic about future outcomes. Believing that future incomes will be high seems a perfectly rational justification for borrowing, especially when the lender seems to share this assessment. What is more worrisome though is that those overly optimistic households have more difficulties revising their expectations when faced with evidence. Maybe they hate it to be proven wrong (who does not?). Maybe it is Finnish bankruptcy law that encourages them to go for broke once a point of no return is reached. The latter would be perfectly rational again.

About agricultural policies in developing economies

Policy advice and intervention in the poorest developing economies are all about agricultural policy. How to increase crop yields, how to select crops, how to empower various players, how to get them onto markets. The results, overall, have been dismal: the poorest countries have grown less than the world average, thus they are getting even poorer in relative terms. The reaction to this? Thinking even harder about agricultural policy and intervention.

A recent example is a paper by Erik Jonasson, Mateusz Filipski, Jonathan Brooks and Edward Taylor that builds an elaborate model that tries to understand why some farmers do not participate in markets, which should help in specialization and reaping gains from it. They then evaluate the impact of various policies, and find some could lead to improvements in welfare, but nothing dramatic.

Yet, the most important change that should be contemplated is completely absent from this paper: getting subsistence farmers away from agriculture altogether. Obviously, they are not living in areas that are good for farming, so why to reinforce their dependence on the wrong trade. Countries with excess of labor supply should rather industrialize and import if necessary food. This is where the gains from specialization (and trade) are.

Using unemployment insurance to compensate for losses from opening trade

It is quite obvious that the gains from trade are positive, but implementing a free trade agreement obviously also implies some losses, in particular for workers whose skills were locked into the industry that just opened up. The implementation of some free trade agreements includes some compensation for such workers, but it is not much used if available. Why? And why would we need such compensation schemes at all?

Indeed, Marco de Pinto points out that unemployment insurance fulfills this role remarkably well. Those who benefit the most from the free trade agreement, and work, contribute to it, while those who lost, and are unemployed, receive insurance benefits. And if the unemployment insurance is not actuarially fair, that is OK, as it corresponds to a side-payment to the losers (no pun intended). But of course, the necessary taxation is distorting to the point of destroying the gains from trade. In such a context, it appears to be better to finance the unemployment insurance with a wage tax, as it neutral on all markets, in particular because under unionized labor markets, after tax wages are unchanged in aggregate. A profit tax is worse, but better than a payroll tax because it does not reduce labor demand for low-skilled workers as much.

Why LIFO beats FIFO

When I write a blog post, it is usually about the last paper I read. I draw from a pile that goes by the LIFO principle, "last in, first out." That guarantees that my "stories" are super-fresh, but when there is nothing I go down the pile. I could use the FIFO principle, "first in, first out," which would give each paper a fair chance to be featured, but then I may end up with papers that are always older, instead of just occasionally (there are several dozen papers on the pile). Well, it turns out my principle is in fact better than FIFO (well not exactly, my case is different, but anyway).

Trine Tornøe Platz and Lars Peter Østerdal model a situation where people queue for service (say, boarding an airplane), where there is a bottleneck but it is open at all times. Agents then decide to queue depending on the way they are served. Suppose the cost of waiting is linear in time, people like to be served early, and everyone can be served. Then it is better to implement LIFO than FIFO. Indeed under FIFO, there is no reason for people to wait, they all come at the earliest possible time and have to wait the longest possible period. Under LIFO, there is less of an incentive to come early, indeed the first ones are not served first if anybody arrives right after. Waiting time is then reduced and everybody is better off, in expected terms.

Can electoral districting be optimal?

Drawing electoral district borders is difficult to think of as an optimal outcome in the mechanism design of elections. It has all the ingredients that lead to manipulation by the incumbent majority, leading to suboptimal persistence of power. On the surface of it, it would much simpler and less strategic to just have everyone elect as many people as there are openings within a jurisdiction (say, a US state for federal elections), which has the advantage of giving smaller parties a fighting chance, and forget about districts and especially that ludicrous gerrymandering.

Yet, Emanuele Bracco think one can optimize the districting process. The key aspect here is that the parties platform is endogenous, that is, they are responsive to the electorate's wishes, as all the parties care about is getting elected. Parties tries to match the preferences of the median district- While this seems to be a rather romanticized view of elections in some countries, an interesting result is that if the electorate is risk averse, the majority party actually suffers from redistricting, while it would have benefited under exogenous platforms. So there is some hope that the US electoral system is not beyond repair. I still wish there would be a few viable small parties, though.

Cobwebs on the law professor market

Law professors were among the first in universities, and Economics emerged in many places from Law Schools. This make the study of laws an old and established profession, but this is not why I am mentioning cobwebs here. I am rather referring to the cobweb model, where price and quantity bounce around along the path of a spiral to reach an equilibrium.

According to Christoph Engel and Hanjo Hamann, this is what is happening on the market for Law professors in Germany. Say there are a lot of open positions in the German university system. This pikes the interest of law students, who after their doctorates require to go through a "habilitation" process that takes 6-9 years before they can apply for a professor position. And lo and behold, about eight years later, there is a surplus of candidates, which discourages younger students to choose this career, and we enter the other part of the cycle. Engel and Hamann show that this is not just theory, but applies remarkably well to the data, as it has before to cattle, whose biology leads to a similar market (ROsen, Murphy and Scheinkman 1994).

Recycling tourism

In areas where waste collection is paid by the one creating the waste, it is obvious that people are going to try to shop for the best option. In some cases, that option is illegal waste dumping, which leads to the unfortunate creation of trash police forces. But except for this the latter unfortunate turn of events, there is nothing wrong with price competition for trash.

Except when these prices are subsidized by municipalities, and they then complain that people from other municipalities use their services. Simon De Jaeger and Johan Eyckmans look at such trash and recycling tourism in Flanders, where this is believed to be a major issue facilitated by the fact that pricing methods vary widely from facility to facility. They build a choice model of where households would bring their trash given prices and estimate it with spatial econometric techniques. The average price in neighboring municipalities is used to capture waste tourism, but I think the lowest price, not the average one, should be used. Maybe this is why De Jaeger and Eyckmans find no evidence for tourism except for bulky household trash.

What is up with Elsevier?

Whether you like it or not, Elsevier matters in the dissemination of research in Economics. By far the largest player in the field, it enjoys considerable market power (and a profit margin around 30% that comes with it). And even though journals are not at the frontier of research in Economics, it still matters what happens at Elsevier because it controls so many of the top field journals.

According to its web page on the global dissemination of research, Elsevier states:
We recognise that access to quality research is vital to the scientific community and beyond. For us this means providing support and the latest tools to maintain the quality and integrity of published scientific literature, achieving the widest dissemination of content, and embracing the opportunities of open access. We will continue to identify access gaps, and work towards ensuring that everyone has access to quality scientific content anytime, anywhere.

These are all nice words, but this is not all what Elsevier practices. First of all, all of the Economics content of Elsevier is gated, and academic libraries have to pay through the nose to let faculty access the content, including their own works. Even errata and retraction notices are gated. There is no open access journal in Economics, and even in other fields where it is available, the cost is prohibitive (usually US$3000, even more with color charges!), which cannot be justified in any reasonable way by hosting costs. Indeed, Elsevier spends considerable resources trying to keep potential readers away, by gating the material for the general public and making it difficult for individuals to buy subscriptions, especially for hard copies. All this management of subscriptions and filtering of web traffic would disappear with open access, making it much cheaper, not more expensive.

But this is not an issue only with Elsevier (Springer is much worse in this respect). Elsevier, with its market power is trying to kill any competition and any initiative that tries to open up the dissemination of research. For example, it was a huge backer of the Research Works Act in the US, which would have prohibited mandates that publicly funded research should be available in open-access repositories. Of course this generated a huge outcry from the scientific community (you know, the one that Elsevier claims to serve) and lead to a call for a boycott. This seems to have been successful, as Elsevier reversed its stance, thereby killing the bill.

Unfortunately, few economists seem to have participated in the boycott, which is probably why Elsevier continues to flaunt the research community with no remorse. For example, it has not updated the listings of its journals for over a year in RePEc, and still vigorously refuses to let RePEc perform citation analysis on its contents. Repeated attempts to get a reaction from Elsevier have unsuccessful from my part. My suspicion is that RePEc is threatening some of the products that Elsevier is pushing (Sciverse, Scopus), and the interest of the research community becomes second fiddle. From what hear, people are deserting the Economics desk at Elsevier, starting with its head, which makes you wonder who is in charge of "the widest dissemination of content."

To understand further what a fine business Elsevier is, here are some of my previous posts:
The evil empire strikes again
The evil empire strikes again (II)
Copyright and the lack of competition in academic publishing
Why I am boycotting Elsevier

When do employers support minimum wages?

Germany does not have minimum wages, but there is currently a renewed debate about their introduction. As collective bargaining is largely handled at the sectoral level, one idea is to adopt sectoral minimum wages, for example by negotiating them within collective bargaining. In some sectors, there is already an informal wage this way, but this could be formalized. Given this idea of sectoral minimum wages, it is of interest to see which sectors would support them.

Ronald Bachmann, Thomas Bauer and Hanna Kröger use a survey of 800 firms in 8 sectors and uncover some interesting patterns. It looks like minimum wages are most supported where they would raise barriers of entry for competitors. This means that agreeing on a minimum wage is getting very close to cartelization. This is a feature of the fact that negotiations are done at the sectoral level. It would lead to a reduction in the number of firms, and likely to a reduction in employment as well, but for a different reason than usual with minimum wages: the cartelization reduces output and thus the labor force required for production. I suspect that if the minimum wage were set nationwide, though, this kind of support would largely vanish.

What is wrong with European central banking: the view from Cyprus

These are times where policy coordination between central banks and fiscal authorities seems to be particularly welcome. For one, monetary policy, which seems to be the only sustained and coherent policy, cannot right the ship beyond the short term, and the short term is shorter than the current crisis. For two, fiscal authorities are completely stuck in political wars exactly at the wrong moment. Upcoming elections in Europe and the United States certainly do not help in that. Central bankers have been rather frustrated with the political climate, yet they are still willing scape goats to deflect the furor of the public about unpopular policies.

But sometimes, enough is enough. One such case has been the open criticism of the central banker of Cyprus, who railed against the ineptitude of its government which has completely ignored his advice. Cyprus may not seem a big deal, yet it is a major banking center that may go down with Greece depending on how things unravel there. And this central banker, whose mandate was not renewed, is also not a nobody, as he was previously a senior official at the Board of Governors of the US Fed.

In probably his last paper while in Cyprus, Athanasios Orphanides summarizes all what is wrong with central banking in Europe (Cyprus is part of the monetary union). He recognizes that banking supervision must be taken much more seriously by central bankers, as the stability mandate that was typically meant for prices and sometimes employment or output is now interpreted to include the financial sector as well. Of course, this implies that central banks need to take more responsibilities in supervising the financial all the way to regulating individual institutions, an authority they do not always have at this point. But foremost, Orphanides argues that the biggest liability is economic governance. This is especially important within a monetary union where several governments need to agree. A more uniform fiscal policy would help tremendously, especially when monetary policy, in its more rudimentary form, is applied uniformly across the union. Worse, problems from fiscal policies that are not sustainable in the long term are magnified in a monetary union. You need rules and you need to adhere to them. Politicians are rather bad at this. Central bankers much better.

Cashless banking in informal economies

We are used now to playing with plastic, yet we still hold cash. The fact is that there are still plenty of occasion where only cash can be used for transactions, either because the amount is very small, or because for some reason the merchant does not want to accept plastic. Not infrequently, it is because of the fear of a paper trail, or rather an electronic trail, or because of some tax avoidance. The fact that plastic money discourages the latter should be seen as beneficial, right?

Victor Olajide thinks that is not necessarily the case when the informal sector is substantial. Taking the example of Nigeria, he points out that if the informal sector cannot use cash anymore, then this could have strong implications for banking, as reserve requirements rely on deposits, and those could go missing. That does not seem to be a major problem to me, as reserve requirements can be changed or redefined. I find more problematic that the Central Bank of Nigeria is pushing for a cashless economy while many of the market participants simply do not have the means to tool up for it. I think there are more important issues to tackle in Nigeria than going cashless.

How did online journals change the economics literature?

Scientific publication is not the same as it was, now that we can easily access the literature over the Internet. No more trips to the library, much fewer waits for interlibrary loans, and no more chasing who took or misplaced the volume in the racks. But did all this change anything in the way we publish our results?

This is what Timo Boppart and Kevin E. Staub study by looking at the diversity of topics covered in journals and how the availability of on-line publication would have changed that. The idea is that on-line publication allows to discover and read more material, and one may in particular stray away from the usual topics. No doubt about that. But I wonder why Boppart and Straub have this focus on journals. After all, working papers is where its at in Economics, and journal readership has not really increased, I believe. The treatment variable is the share of cited articles available on-line the year before publication. This seems so wrong. There is no way it takes only one year from the literature search to the print issue. Not in Economics, where I would say it is a minimum three years, with really rare cases below that. In fact, a good share of mine took more than a year from final acceptance to actual publication. Then, what about working papers? This is what people read, not articles.

The origin of de-unionization in the United States

For better or worse, union are particularly weak in the United States. This was not always so. Why unions declined is not limited to Reaganism which merely accelerated a trend already present in the data. The difficulty is to explain this trend which is for example only present in some other countries and nowhere as pronounced.

Emin Dinlersoz and Jeremy Greenwood explore whether this has to do with the distribution of income, at least in the US. Indeed, over the past century and a half, union membership rates followed an inverted U-shape, while the income share of the top 10% did the opposite. Greenwood and Dinlersoz think that both can be explained by the evolution of skill-biased technical change: basically, while the assembly-line was the main means of production, unskilled labor garnered a higher higher income share and unions were strong, but both decline since as information technology became important. Nice story, but I wonder whether it can apply to more observations (i.e., countries). Also, I wonder whether the timing of events works out. Indeed, the ratio of of unskilled to skilled workers went into a tailspin starting in 1945, while union membership started decreasing only in 1955 and the income distribution started getting more skewed in the 1980's.

The value of human capital

How much is human capital worth? This is an important question when one this about the amount of resources that goes into education, both from public and private funds, as well as the substantial opportunity cost of attending school instead of working. The traditional approach is to compare the labor income of people with different levels of education and then come up with a return on investment or more often a return of one additional year of schooling.

Mark Huggett and Greg Kaplan take a different approach. They consider human capital to be an asset and decompose it into a bond (with fixed return), a stock (with variable return) and a residual. This becomes then a standard asset pricing problem. Then taking the labor income flow as a representation of the dividends from this portfolio, they can infer its composition, and how it changes over time. Using data for US males, it turns out the value of human capital is much lower than previously estimated. This is because the stochastic discount factor covaries negatively with earnings (they take into account capital income as well). Also, the bond component dominates the portfolio, especially for the college educated, which is not surprising given the large variance of income and employment among the less educated. What is more surprising, I think, is that stock market and human capital returns are not correlated. I would have thought that the business cycle would have had a strong impact there.