I a perfect world with heterogeneous workers and jobs, the matches are those that maximize efficiency. But when information about the quality of either is private and cannot be revealed credibly, the economy quickly looses efficiency. The solution is then to make hiring and firing easy, so that good matches can be found by trial and error. Employers also try to gather information about their potential employees, and their socio-demographic characteristics are certainly among them. While this looks like discrimination, it is OK if it is only statistical discrimination. But one can improve on this.
Christian Dustmann, Albrecht Glitz, and Uta Schönberg study job referrals from co-workers. They find that typically shunned minority workers are more likely to be hired the more other minority workers are already present, a clear sign of job referral. In addition, these workers earn on average higher wages and are more likely to stay in such firms. In some sense, this shows that job search networks can be better than open competition under some circumstances. One could even stretch the argument to claim that favoritism could be beneficial.
Penis size and growth
Understanding why some countries are poor and why some grow than others is probably one of the most important questions in Economics. The traditional tool to tackle this challenge has been growth regressions: use cross-country data and regress the GDP growth rate on various indicators that could be relevant in order to find which matter most. These regressions have been abused over the years, especially as there are obvious endogeneity and collinearity issues. Also, the results are driven by a multitude of (poor) countries where data quality is quite horrendous. The worst is probably all the data mining that is going on in this literature, which culminated with Xavier Sala-i-Martin's two million regressions.
Tatu Westling uses a variable the previous literature completely ignored: the average length of the erect human penis. Adding this variable to the regression shows a U-shaped relationship for the GDP level, explaining 15% of its variation. The optimal penile length is 13.5 cm, and 16cm is disastrous. For GDP growth, the relationship is negative, explaining 20% of the dispersion. This is not negligible, and more than institutional variables that are thought to be the key to growth and convergence.
I wonder how many people will take these results seriously and try to get policy recommendations from it. Westling hypothesize about the impact of self-confidence. The paper is very well written, taking the 'male organ hypothesis' very seriously, but in truth tongue-in-cheek. Very different from this study on flag colors I wrote about previously.
Tatu Westling uses a variable the previous literature completely ignored: the average length of the erect human penis. Adding this variable to the regression shows a U-shaped relationship for the GDP level, explaining 15% of its variation. The optimal penile length is 13.5 cm, and 16cm is disastrous. For GDP growth, the relationship is negative, explaining 20% of the dispersion. This is not negligible, and more than institutional variables that are thought to be the key to growth and convergence.
I wonder how many people will take these results seriously and try to get policy recommendations from it. Westling hypothesize about the impact of self-confidence. The paper is very well written, taking the 'male organ hypothesis' very seriously, but in truth tongue-in-cheek. Very different from this study on flag colors I wrote about previously.
Sustainable retirement pension reform?
With increasing longevity, it is obvious that something needs to be done to keep pension systems around the world sustainable. The main options are postponing the normal retirement age, lowering retirement benefits or increasing contributions. The typical studies that compare these options and are thrown around in the public arena are done by accountants and actuaries, who do not take into account the changing incentives of market participants. Economists can do better.
Peter Haan and Victoria Prowse take up the challenge and estimate a very complex life-cycle model for Germany. It includes idiosyncratic risk, consumption and labor supply decisions and a complex tax structure. They find that the 6.4 year increase in life expectancy over the next 40 years needs to be met either by an increase in the full-pension age by 4.3 years or a reduction of benefits by 38%. The first approach markedly increases the unemployment rate. This is ironic in Europe where a reduction of that age is typically viewed as a way to reduce chronic unemployment among the young. The other option would markedly increase savings, as people have to fend for themselves more. Consumption of retirees is higher in the first option though.
Am I satisfied with this study? It is much better than what you typically see, yet I want more. The easy bit is that one could actually determine whose welfare increases under which option. That could help in understanding the (political) feasibility of such reforms. And maybe a combination of them turns out best. More critically, the model does not attempt to consider the consequences in the changes in aggregate supply. Lengthening the work age this much increases the work force dramatically and must have consequences for aggregate, and thus individual, wages. Also, while the matching probabilities and wages of retirement age workers are estimated from current data, I do not think these estimates apply once more previous retirees are forced into this pool. The new ones have different qualities compared to those who would have continued working anyway. Therefore, I see more work to be done.
Peter Haan and Victoria Prowse take up the challenge and estimate a very complex life-cycle model for Germany. It includes idiosyncratic risk, consumption and labor supply decisions and a complex tax structure. They find that the 6.4 year increase in life expectancy over the next 40 years needs to be met either by an increase in the full-pension age by 4.3 years or a reduction of benefits by 38%. The first approach markedly increases the unemployment rate. This is ironic in Europe where a reduction of that age is typically viewed as a way to reduce chronic unemployment among the young. The other option would markedly increase savings, as people have to fend for themselves more. Consumption of retirees is higher in the first option though.
Am I satisfied with this study? It is much better than what you typically see, yet I want more. The easy bit is that one could actually determine whose welfare increases under which option. That could help in understanding the (political) feasibility of such reforms. And maybe a combination of them turns out best. More critically, the model does not attempt to consider the consequences in the changes in aggregate supply. Lengthening the work age this much increases the work force dramatically and must have consequences for aggregate, and thus individual, wages. Also, while the matching probabilities and wages of retirement age workers are estimated from current data, I do not think these estimates apply once more previous retirees are forced into this pool. The new ones have different qualities compared to those who would have continued working anyway. Therefore, I see more work to be done.
Procrastination in team work
Teamwork can turn out very bad when moral hazard is present: if people do not trust each other or care about each other, nothing gets done. When doing research, we are lucky to be able to choose our co-authors, but even then things can turn for the worse if a team member looses interest. And we remember how bad it is when a team is forced upon you during our studies. Now, this is all very loose reasoning, let us get on firmer ground.
Philipp Weinscheink studies team production in a dynamic game with moral hazard. If all players are rewarded equally, they will all wait until the last moment to participate. This is very like what we often see in political negotiations with a deadline, where nothing happens until the last moment, and player consciously wait for the last moment. The same often happens at collective agreement bargaining. And of course, the outcomes are far from optimal, as the debt ceiling mess in the US has recently shown.
If the rewards are not equally distributed, the outlook is better. Quite obviously, those who are rewarded better will tend to procrastinate less. But they are not necessarily better off that those less rewarded, as they put more effort. Thus, second-best contracts are unequal ones. But all this falls apart if some players have limited liability (which means they have better outside options) or if some can sabotage. Then everyone will wait until the last moment and very little gets done. Think about the US situation again...
Philipp Weinscheink studies team production in a dynamic game with moral hazard. If all players are rewarded equally, they will all wait until the last moment to participate. This is very like what we often see in political negotiations with a deadline, where nothing happens until the last moment, and player consciously wait for the last moment. The same often happens at collective agreement bargaining. And of course, the outcomes are far from optimal, as the debt ceiling mess in the US has recently shown.
If the rewards are not equally distributed, the outlook is better. Quite obviously, those who are rewarded better will tend to procrastinate less. But they are not necessarily better off that those less rewarded, as they put more effort. Thus, second-best contracts are unequal ones. But all this falls apart if some players have limited liability (which means they have better outside options) or if some can sabotage. Then everyone will wait until the last moment and very little gets done. Think about the US situation again...
Has the US economic policy been Keynesian for centuries?
Suppose the abstract of a paper starts with "It is demonstrated that the US economy has on the long-term in reality been governed by the Keynesian approach to economics independent of the current official economical policy." My first reaction is that of puzzlement, as I would not have thought as the US being particularly keen on Keynesian policy, except for the recent years (which are not considered in the quoted study). But again, data may speak differently from policy intentions, so let us dig deeper.
A. (Agung?) Johansen and Ingve Simonsen come to this stunning conclusion by looking at the correlation between (nominal?) (federal?) public debt and the Dow Jones Industrial Average. One can first question whether public debt is a good indicator of Keynesian policy. Public deficits or even public expenses would be better. And does the DJIA represent the US economy? It is certainly not an indicator of current activity, but rather of expected present value of future profits from a particular class of firms.
Whatever. Let us go with that. The analysis is done by computing over the 1791-2000 sample a sliding correlation between these two indicators over a five-year window. Surprise, the correlation is zero most of the time, except during some wars when it is strongly positive (and strongly negative during the second war with the Seminole Indians). From this they conclude the Keynesian policy was mostly pursued during wars. Now let us take a step back: the authors show that there is by their definition no Keynesian policy during peacetime. But during wartime, the government is credited with a policy geared towards expansion of the DJIA. They, one may ask, if this is the government overwhelming policy, as the authors seem to believe, why did the US wait so long to get into the two World Wars when the opportunity was there? I cannot make sense of all this.
A. (Agung?) Johansen and Ingve Simonsen come to this stunning conclusion by looking at the correlation between (nominal?) (federal?) public debt and the Dow Jones Industrial Average. One can first question whether public debt is a good indicator of Keynesian policy. Public deficits or even public expenses would be better. And does the DJIA represent the US economy? It is certainly not an indicator of current activity, but rather of expected present value of future profits from a particular class of firms.
Whatever. Let us go with that. The analysis is done by computing over the 1791-2000 sample a sliding correlation between these two indicators over a five-year window. Surprise, the correlation is zero most of the time, except during some wars when it is strongly positive (and strongly negative during the second war with the Seminole Indians). From this they conclude the Keynesian policy was mostly pursued during wars. Now let us take a step back: the authors show that there is by their definition no Keynesian policy during peacetime. But during wartime, the government is credited with a policy geared towards expansion of the DJIA. They, one may ask, if this is the government overwhelming policy, as the authors seem to believe, why did the US wait so long to get into the two World Wars when the opportunity was there? I cannot make sense of all this.
Land titling and access to credit
It is widely believe that a key ingredient of economic development is the accessibility of credit. Indeed, entrepreneurs typically need credit to develop their business plans, and much of capital accumulation is performed through credit. But no one is going to grant credit on a promise, some collateral is needed. And that is a problem in many developing economies, as people hold little property and even land is communal or without clear property rights. Hence the idea that distribution of untitled land, with well-established property rights, should provide collateral to a large fraction of the population and make credit possible. How does this work in practice?
Caio Piza and Maurico Moura study the case of a major land titling initiative in Brazil. They use an interesting natural experiment. Two neighboring and very similar communities of the city of Corosco (correction: Osasco) were to get property titles for every inhabitant, but five year apart (2007 and 2012). This leads to a nice control group, which allows to overcome the problem of the endogeneity of ownership rights of a typical study by using a difference-in-difference approach. Indeed, the authors conducted a survey in 2007 before the titling, and another one in 2008. In addition, the context here is urban, which is unusual for a titling study. It appears access to credit increases by 22 percentage points, or about a half, within 18 months of titling. This is major. I do not think such large estimates have been found in rural studies. And given that developing countries become increasingly urbanized, this is very interesting.
Caio Piza and Maurico Moura study the case of a major land titling initiative in Brazil. They use an interesting natural experiment. Two neighboring and very similar communities of the city of Corosco (correction: Osasco) were to get property titles for every inhabitant, but five year apart (2007 and 2012). This leads to a nice control group, which allows to overcome the problem of the endogeneity of ownership rights of a typical study by using a difference-in-difference approach. Indeed, the authors conducted a survey in 2007 before the titling, and another one in 2008. In addition, the context here is urban, which is unusual for a titling study. It appears access to credit increases by 22 percentage points, or about a half, within 18 months of titling. This is major. I do not think such large estimates have been found in rural studies. And given that developing countries become increasingly urbanized, this is very interesting.
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