Economic Logic

Risk taking and the menstrual cycle

2011-12-09T20:30:00.001-08:00

Women are grumpy during their period, and they have good reasons to be so. That this can impact some of their decisions should come as no surprise, yet it can be useful to determine how and how much.

Matthew Pearson and Burkhard Schipper do this by running an experiment that tries to tease out risky behavior and find that women bid higher in an auction when in the most fecund phase of their menstrual cycle or when they are on hormonal contraceptives. OK.

But wait, much like in an infomercial on TV, there is a bonus. In a second paper, the same authors find that the ratio of the length of the index and ring fingers of the right hand has no impact on risk taking. While that seems to be a rather odd measure to look at, there is a good reason to do so. But what annoys me that this is the exact same experiment as in the previous paper, they just use a different characteristic of the participants.

This is a bad case of turning a research project into many thin salami slices. The authors did not even bother rewriting much of the paper, with many part being cut-and-pasted from one to the other. Sadly, this second paper is already scheduled to appear in Experimental Economics. What are we to expect next? A paper about hair color? Astrological sign?

Are economists not humble enough?

2011-12-09T20:29:00.001-08:00

The Economics profession has been targeted on various fronts lately: one is for a lack of a code of ethics, as exposed by the documentary Inside Job, and another has been the lack of forecasting or warning about the current crisis. With respect to the first, the American Economic Association has convened a committee to create a code of ethics, although unfortunately with a rather narrow mandate. Regarding the second, I believe the accusations are overblown, in part because economists have warned about excessive house prices, because bubbles are by definition unobservable, and because the principal accused, modern macroeconomics, has addressed before the crisis many of the aspects it is being accused of missing. This latter point has mainly been put forward by some economists who have a rather antiquated knowledge of the field, as occasionally addressed here.

One of them is David Colander, who has an admirable art of getting into all the right committees at the AEA. This time, it is the Ethics Committee. In his latest paper, he argues that he is not too worried about the funding of economic research and the lack of disclosures. He is rather bothered by the fact that economists do not have the humility to declare how fragile their results may be. They should be more forthcoming about the risk of error, much as engineers do as they care a lot about failure.

I can see where Colander is coming from, but I do not think this is the fault of the economists, but rather of the public consuming economic research. From personal experience, nobody cares about alternative scenarios. Well many editors do, but people in the industry do not. All they want is a precise number to run with. And even if you include standard errors and such, all that is reported is the median. I am guilty of this on this blog as well, it would take too much time and space to report this for every paper, and it distract from the main message. Only when I think the authors have abused the simplification or neglected possible scenarios do I discuss this, and this does not happen too often. And I think it is very symptomatic how Thomas Sargent and Christopher Sims have recently been ridiculed in the press for refusing to provide instant answers to difficult questions. In short, I think the problem has less to do with the economists than with the readership.

2011-11-20T05:01:00.000-08:00

LBGPFOLQG0A298HCDFUR

Privacy Policy

2011-09-26T05:52:00.001-07:00

Privacy Policy for http://capitalmatters.blogspot.com/

If you require any more information or have any questions about our privacy policy, please feel free to contact us by email at 4n1nd4m4h4r4n1@gmail.com.

At http://capitalmatters.blogspot.com/, the privacy of our visitors is of extreme importance to us. This privacy policy document outlines the types of personal information is received and collected by http://capitalmatters.blogspot.com/ and how it is used.

Log Files
Like many other Web sites, http://capitalmatters.blogspot.com/ makes use of log files. The information inside the log files includes internet protocol ( IP ) addresses, type of browser, Internet Service Provider ( ISP ), date/time stamp, referring/exit pages, and number of clicks to analyze trends, administer the site, track user’s movement around the site, and gather demographic information. IP addresses, and other such information are not linked to any information that is personally identifiable.

Cookies and Web Beacons
http://capitalmatters.blogspot.com/ does use cookies to store information about visitors preferences, record user-specific information on which pages the user access or visit, customize Web page content based on visitors browser type or other information that the visitor sends via their browser.

DoubleClick DART Cookie
.:: Google, as a third party vendor, uses cookies to serve ads on http://capitalmatters.blogspot.com/.
.:: Google's use of the DART cookie enables it to serve ads to users based on their visit to http://capitalmatters.blogspot.com/ and other sites on the Internet.
.:: Users may opt out of the use of the DART cookie by visiting the Google ad and content network privacy policy at the following URL - http://www.google.com/privacy_ads.html

Some of our advertising partners may use cookies and web beacons on our site. Our advertising partners include ....
Google Adsense

These third-party ad servers or ad networks use technology to the advertisements and links that appear on http://capitalmatters.blogspot.com/ send directly to your browsers. They automatically receive your IP address when this occurs. Other technologies ( such as cookies, JavaScript, or Web Beacons ) may also be used by the third-party ad networks to measure the effectiveness of their advertisements and / or to personalize the advertising content that you see.

http://capitalmatters.blogspot.com/ has no access to or control over these cookies that are used by third-party advertisers.

You should consult the respective privacy policies of these third-party ad servers for more detailed information on their practices as well as for instructions about how to opt-out of certain practices. http://capitalmatters.blogspot.com/'s privacy policy does not apply to, and we cannot control the activities of, such other advertisers or web sites.

If you wish to disable cookies, you may do so through your individual browser options. More detailed information about cookie management with specific web browsers can be found at the browsers' respective websites.

How to publish prolifically

2011-09-24T07:54:00.000-07:00

I dedicated several posts to Bruno Frey and his chronic self-plagiarism. In retrospect, one should have seen that something was fishy from the mere fact that he was simply publishing too much for it to be normal, 600 articles by his own count. It is not possible for an academic, at least in Economics to be that productive. Yet, there are some who seem to be on a similar path.

Take, for example, Michael McAleer. He is an Australian econometrician who had a very respectable career in the 1980's, publishing in the AER with Adrian Pagan (and a homophone of Paul A. Volcker), four Review of Economic Statistics, a Review of Economic Studies, an Economic Journal and plenty of other decent publications. McAleer get elected into the Academy of Social Science in Australia in 1996. Then the quality of the publications dips, as he must be facing the same loss in productivity so many in the profession suffer in their forties. Still a good stream of publications.

Then suddenly, a burst of historic proportions.

Let us first look at working papers. According to his RePEc page (that is all I could find, a 2004 CV has 32 pages despite having no publications listed): 12 in 2008, 45 in 2010, 39 in 2010, and so far 15 in 2011. And these are according to their titles, at least, distinct papers. How can one do this? First McAleer has many co-authors, but he is no Paul Erdős, as his has a small set of regular collaborators. Second, many of the papers are about the same theme, with small variations: journal impact, with applications to neuroscience, tourism studies, econometrics, and economics in general, including one that I discussed. There is nothing wrong with this, except that entire sections are copy-and-pasted from one paper to the next. His other papers, for example on tourism demand in the Far East, are incredibly thin slices of research.

But these are all working papers, and he is free to write all this as long as he does not pretend this is all original and substantially new work when submitting to journals that have such requirements. McAleer is, however, also publishing avidly, although luckily few of the papers mentioned above get placed, and then only poorly. In terms of publishing, he has found another niche, the Journal of Economic Surveys:

2011, issue 2: 1 article
2011, issue 1: 2 articles
2010, issue 1: 2 articles
2009, issue 5: 2 articles
2007, issue 5: 1 article
2006, issue 4: 3 articles
2005, issue 5: 1 article

The journal has 5 issues a year, averaging 7 articles in each issue. That is a remarkable publishing success in a generalist journal. It turns out frequent co-author Les Oxley is the editor, who himself does not hesitate to frequently publish in his own journal. I counted 17 articles of non-editorial nature, several over 60 pages long, as well as 7 reports on conferences he attended.

A good number of those articles are titled "The Ten Commandments of ...", which I find rather pretentious. I was curious about The Ten Commandments for Academics, which could reveal some of the motivations of McAleer. They are:

choose intellectual reward over money;
seek wisdom over tenure;
protect freedom of speech and thought vigorously;
defend and respect intellectual quests passionately;
embrace the challenge of teaching undergraduate students;
acknowledge the enjoyment in supervising graduate students;
be generous with office hours;
use vacation time wisely;
attend excellent conferences at great locations;
age gracefully like great wine.

What I find interesting here is what was not considered. I think a better alternative, and one that would condemn much of what McAleer is doing, are due to Wesley Shrum:

Thou shalt not work for deadlines;
Thou shalt not accept prizes or awards;
Honor thy forebears and colleagues regardless of status;
Thou shalt not compete for recognition;
Thou shalt not concern thyself with money;
Thou shalt not seek to influence students but to convey your understandings and be honest about your ignorance;
Thou shalt not require class attendance or emphasize testing;
Thou shalt not worry about thy own intelligence or aspire to display it;
Thou shalt not condemn those with different perspectives;
SEEK TO UNDERSTAND THE WORLD.

These are principles about integrity, about changing the world and putting the scientific interest ahead of oneself. McAleer, rather, seems keen on clogging journals and working paper series with useless drivel, showing off and self-plagiarizing. At least for the latter part of his career, I do not see a positive externality from his efforts.

To come back to my initial question, to be prolific: find willing co-authors and editors, slice thinly, copy-and-paste, and do not think too hard what academia is about.

The Internet makes you happy

2011-09-23T07:43:00.000-07:00

We have previous established that the Internet, contrarily to conventional wisdom, makes people more social. Does this also mean that people with Internet access are happier? Of course, one should take into account that those without Internet, at least nowadays, are likely to face hardships like low income and education.

Thierry Pénard, Raphaël Suire and Nicolas Poussing do such an analysis for Luxembourg and find indeed that Internet users are happier, especially among those with lower incomes. This is also true when taking into account the intensity of Internet use. This implies that making the Internet accessible to lower socio-economic classes can improve welfare, possibly significantly. Of course, one has to take with a grain of salt studies of happiness based on surveys that ask for subjective self-evaluations. That grain of salt may be bigger when one considers who small Luxembourg is. The approach then becomes similar to the randomized experiments in the development literature where results for a small set of villages are difficult to apply to other contexts. Yet, Luxembourg is surprisingly diverse, so maybe these results are generalizable. Readers, you can now safely that you are now happier from being on the Internet and reading this.

One more perversion of employer-based heath insurance

2011-09-22T07:41:00.000-07:00

Whenever you see risk, you think insurance. And there are different ways to insure yourself. This may be by buying some contingent claims, often bundled into an insurance policy. Or this may be through self-insurance, whereby you build some assets for eventualities beyond savings needs. Formal insurance and self-insurance sure look like substitutes. For the case of health risk, this means that people with formal insurance should have less assets, other personal characteristics being controlled for. This statement is, however, factually wrong: insured people, ceteribus paribus, have more assets. That is difficult to square with standard theory.

Minchung Hsu makes a good attempts at solving this puzzle. The major assumption here is that health insurance is provided through employment (there is also private health insurance, but it is of minor importance, as in the data because it is crowded out by social programs). This means that the loss of employment bears a larger risk for someone who formally insures: one may loose income and insurance. Then, ironically, more self-insurance is needed than for someone who self-insures, but one has also to keep in mind that a self-insurer typically has lower income and is partially covered by social programs. Thus Hsu performs the same regressions as done in the literature and still finds the fact mentioned above. Interestingly, his regression also rejects the existence of precautionary savings, while it is the central element of the model. So much for the power of this test.

The fall of internal migration

2011-09-21T07:03:00.000-07:00

It is costly to move, and those costs vary by culture and economic circumstances. International migration is of course hampered by immigrations laws and cultural barriers. But in most countries, internal migration is free and only restrained by costs and some degree of local attachment. In this respect, Americans are considered to be the most mobile, as they are very willing to drop everything to pursue better opportunities while the housing market is, usually, very fluid. In fact, the perception is that this mobility has even increased in the US and that it has been hampered only in the last few years, due to the current difficulties in selling homes.

Raven Molloy, Christopher Smith and Abigail Wozniak take a close look at the data and dispel some of those perceptions as myths. In fact, US internal migration has been in a steady decline for thirty years, a decline that in apparent whichever way you look at the data: by socioeconomic household characteristics and distance moved. And this has change little with the current crisis, probably because the additional incentive to move (as there is substantial evidence that some structural mismatch, including a geographic mismatch, has increased the unemployment rate recently) has been roughly compensated by the poor saleability of homes. Still, internal migration rates are still higher than almost everywhere else.

Pricing Asian options

2011-09-20T07:02:00.000-07:00

Options are securities that are difficult to price. In particular American options, which can be exercised at any time posed a serious challenge that could only be solved in approximation with some Nobel Prize winning work. European options are simpler because they can only be exercised at maturity. Today, I learned there are also Asian options. Asia seem really to catch up in all aspects of economic life. Asian options are American options with the difference that the exercise price is some form of average of the underlying price.

Paolo Foschi, Stefano Pagliarini and Andrea Pascucci provide a way to price Asian options in a first approximation under local volatility, that is the price volatility depend on the current price level, and provide an algorithm for higher order approximations. As you may guess, it is not straightforward. Along the way, I also learned about the Greeks in option pricing. They measure various aspects of the sensitivity of option prices to underlying parameters, and they are usually represented by Greek letters. Now that I have learned that, I'll leave the actual pricing of Asian options to others.

Greening production through information

2011-09-19T07:04:00.000-07:00

People in general prefer green products, although they are not always ready to pay a significant markup for a greener product. If they know that a product has been manufactured using green procedures, there will attach more value to it if the claim is credible. Several green labels, supposed to certify such claims, have emerged, but none have much recognition, in fact one sometimes wonders whether some of them are really weak.

Another approach is voluntary disclose of pollution emissions and other environmental disclosures by the industry. This is reviewed by, take a deep breath, Venkatachalam Anbumozhi, Qwanruedee Chotichanathawewong and Thirumalainambi Murugesh with a focus on Asia. They highlight that the final consumer is not necessarily the one targeted by this information. For example, some investment funds, in particular sovereign wealth funds, are under pressure to invest in ethical firms. Or potential employees may avoid polluters, and local planning may benefit form the available information, thus encouraging local investment.

The authors argue that there is little environmental regulation in most of Asian, with makes the price of environmental benefits close to zero. If you want firms to start abating, you need regulation, and then they also be willing to should how well they abate, leading to more abatement. In some larger Asian countries, a few modest disclosure programs have started, and they have shown excellent prospect in increasing environmental compliance.

Economic freedom and prisons

2011-09-16T07:02:00.000-07:00

Americans are proud of their freedoms, political or economic ones. Yet, they are very trigger happy when it comes to takes one's freedoms, say by taking voting rights from felons, throwing people into prison or even executing them. How could such an apparent disconnect be explained? Why is the US different from Europe, where there is less economic freedom, but also much less punishment?

Rafael di Tella and Juan Dubra note that this apparent paradox does not only appear across countries, but also over time within the United States. For example, over the 30 years including the "Reagan Revolution" that considerably deregulated the economy, incarceration rates were multiplied by seven. They explain this with a theory that states the following. People view that when there are ample opportunities for legal activities in a system where there are many economic freedoms, people who still commit illegal acts must be "meaner" than the average criminal in a world with fewer economic freedoms. This can be supported with some limited empirics, but this is quite an appealing explanation. Indeed, Americans strongly believe that effort, not luck, is the root of success, and thus offer few excuses to those who become criminals out of necessity, an opinion that interestingly more and more African-Americans share.

More on institutions and growth

2011-09-15T07:41:00.000-07:00

There a large belief in the development community that institutions matter. This has emerging from a large number of cross-country regressions, regressions that one should always take with a grain of salt because of methodological issues and data quality. However, this result has emerged so frequently that it must indeed matter. But the precise mechanism through which institutions matter of the course of development is still rather unexplored.

Ines Lindner and Holger Strulik come up with an interesting theory. When the economy is fragmented into small regions, entrepreneurial behavior is governed by local and informal enforcement. But as economies become more integrated, through specialization and/or the reduction in transportation costs, "connectivities" go from local to global, and informal enforcement is not sufficient. Formal institutions need to arise, and if they are weak, entrepreneurship will be weak. I wonder, though, how such a theory of networks could be tested in the data.

Who spent the 2001 Bush tax rebate?

2011-09-14T07:37:00.000-07:00

Do tax rebate such as those implemented at various times by the Bush II administration work? Measuring this is not obvious. Previous studies have typically exploited the timing of the receipt of the rebate checks to see how expenses have changed. But most people have anticipated these payments, thus the marginal propensity to consume is mismeasured: it measures the propensity to consume due to short-term liquidity considerations beyond the consumption response from the announcement of the program.

Greg Kaplan and Giovanni Violante go a step further in this analysis and build a model that replicates the measurements found in the literature and the large share of hand-to-mouth households using an economy of liquid and illiquid assets with transaction costs. They define hand-to-mouth households as those who hold less that half their periodic pay in liquid assets. That seems very shaky to measure, as the timing of the relevant survey matters a lot here. But assuming there is no systematic error, they then extrapolate through the model what the response from the announcement of the rebate should have been. This adds 7-8% to the marginal propensity to consume. Interestingly, this come in large part form rich household who have only little liquid wealth because their assets are mostly in real estate and retirements funds. An important consequence of this is that larger tax rebates would have little impact, as they would make it more interesting to bear the costs of putting them into illiquid wealth. In fact, the marginal propensity to consume could even turn negative.

Why is blackmail costly?

2011-09-13T07:55:00.000-07:00

Blackmail is a strange concept. Threatening to reveal information is legal. Asking money for a service is legal. But doing both at the same time is illegal. Even stranger, when the transaction is initiated by the one who could be harmed by the revelation, this is technically a bribery, it is legal. So why this difference? The conventional answer is that blackmail is about rent-seeking. But if the damaging information is freely available, there is no welfare loss justifying the criminalization of blackmail.

Oleg Yerokhin claims the justification can lie within the bargaining power structure between the two parties. Indeed, when the information holder is a monopolist, he will have more power than socially optimal, and should thus be punished to internalize this cost. But when the target is a monopolist, then the outcome reverses, and the blackmailer should be subsidized rather than punished. Yet, I hardly find this argument convincing on the grounds that blackmailers are certainly less likely to be monopolists than victims. Indeed, information is duplication at zero or close to zero cost, making it difficult for a monopoly to arise in such a situation. But this information can easily be about one particular person only.

Near rational agents and house price booms

2011-09-12T07:17:00.000-07:00

House price run-ups, especially when they appear excessive, are difficult to explain. It is it even more difficult to explain how they are not coordinated across countries in a globalized world. Indeed, right now house prices are severely depressed in the United States, while you can have strong suspicions of bubbles in China, Norway and Switzerland. Bubbles are substantial deviations from fundamentals that could be due to some deviations from rationality or herd behavior, or both. But "rationalizing" this is a major challenge because of the apparent randomness of the occurrence of such house price booms.

Klaus Adam, Pei Kuang and Albert Marcet think they have a way to explain this using the concept of internally rationally agent. Such a agent, like the economist, does not know the true process of prices but tries to infer it from past observation using Bayes' rule. The belief about prices then becomes part of the state space and leads to some sort of path dependence. With shocks that are not perfectly correlated, it is then possible for different countries to experience different paths for house prices.

Why September 11 is remarkable

2011-09-11T10:59:00.000-07:00

Amid the commemoration of the 10th anniversary of the terrorist attacks of September 11, 2001, I cannot help thinking how successful theses attacks have been. For an organization that wanted the United States to pay for sending troops to Saudi Arabia during the first Gulf war, a relatively little investment paid huge dividends. Indeed the cost of the operation, including training, must have cost only something to be measured in millions of dollars and the lives of 19 volunteers. The return was getting the United States involved in two wars that have costs amounting to trillions, brought the federal government in major financial difficulties, have lead authorities to neglect essential infrastructure investment for a decade, has kept the population in a nevrotic state for a decade, has given us higher oil prices (with revenue going you-know-where) and has lead to major setbacks in civil liberties. And that is just for the United States, as Europe has also been affected. And the costs will continue to mount, as the US is none the wiser and will have to face in addition the costs of care for veterans.

The impact of fiscal uncertainty

2011-09-09T07:07:00.000-07:00

Current US fiscal policy is absolutely frustrating. There does seem to be a clear direction, in particular because policy making is rather irrational due to a set of unduly influential and crazy lawmakers. In the end, this means considerable uncertainty about future fiscal policy, in particular because it may not react to economic events in ways that make economic or historic sense. What is the impact of such uncertainty?

Jesús Fernández-Villaverde, Pablo Guerrón-Quintana, Keith Kuester and Juan Rubio-Ramirez address this with a New Keynesian business cycle model that feature variable volatility in fiscal policy. Their conclusion is that the current uncertainty lowers activity and has the policy equivalent of a 25 basis point increase in the federal funds rate, which I find rather minor. The model rightfully yields that the main mechanism is through investment and the uncertainty on capital return taxation. I find it interesting that it leads to stagflation, as firm opt for higher prices to reduce miss-pricing costs. In the end, the authors show that if one removes the usual automatic stabilizers and assume very persistent fiscal shocks, which may be a good characterization of the current situation, the prediction is a 0.5% reduction in output, which I am ready to believe.

The polygyny-slave trade connection

2011-09-08T07:54:00.000-07:00

Polygyny, a male marrying several females, is now rare except for Africa and especially Western Africa. Why would it be so prevalent in West Africa? To sustain polygyny, one needs an unbalanced sex-ratio, which is not the case there.

John Dalton and Tin Cheuk Leung claim that this is just a matter of very persistent institutions. Indeed, the sex-ratio used to be unbalanced for extensive periods in West Africa, and in a more pronounced and persistent way than anywhere else, due to the slave trade. Indeed, it took away many males from the region through the actual forced emigration, but also because of the many tribal wars associated with slave capture raids (which Dalton and Leung do not take into account).

Econophysics: an introduction

2011-09-07T07:53:00.000-07:00

I have criticized a number of times Econophysics as a rather naive venture of physicists into Economics, where there is too much focus on "automatic" data exploration and too little use of theory and understanding of what the data measure. But may it is just my prejudice against and my ignorance of Econophysics.

B. G. Sharma, Sadhana Agrawal, Malti Sharma, D. P. Bisen and Ravi Sharma offer in six pages an account of what Econophysics is, what its goals are, what it can contribute and where it is headed. The basic idea is that economic agents are like particles in that they are in large numbers and interact in complex ways. The dynamics of such complex processes are studied with powerful statistical tools in Physics, and physicists think that this should also apply to Economics. The focus is very much on the stock market, probably because physicists have realized where money can be made. There is no sense that there would be an attempt to improve welfare. They are also much more likely to completely discard a model in one set of observations does not corroborate it. Physicists are especially critical of how economists stick to rejected dogmas and of their inability to explain how small shocks can pan out into large crises.

The focus is really on the description of data process and documenting there statistical properties. In particular, econophysicists want to find ways to exploit even the smallest opportunities for arbitrage by finding, often through obscure and complex black box processes, the right price of an asset at any moment in time. However, there is no attempt at understanding why these arbitrage opportunities arise, say because of some form of irrationality, asymmetric information or perverse interactions in the price mechanism. From this I conclude that Econophysics can be interesting to make money on the stock market, but at least at this point, does not help us in any way in understanding why the world is like it is. Which I find rather ironic for Physics.

Progesa: a success story thanks to academics

2011-09-06T07:50:00.000-07:00

I have written a few times about the frustration when policy makers ignore the advice of economists. Yet, there are a few cases where economists were given free reign over the design of policy interventions, which not only allowed to obtain positive outcomes but also useful information for further study.

Nora Lustig reports about Progresa, the Mexican cash transfers program designed to elicit parents to send their kids to school and make sure necessary health check-ups were attended. From the start, the program was designed and administrated by people with an academic background. Progresa has worked remarkably well, to the point that it was not only not scrapped, as is usual, with presidential changes, its coverage also kept increasing. The only setback was a name change to Oportunidades. The critical ingredient to this success was the scholarly involvement, that not only designed it for success, but also provided the tools to measure this. And along with that a wealth of data that has allowed to understand even better what makes good intervention in practice.

Emotions in economic interactions

2011-09-05T08:21:00.000-07:00

How do you get people to cooperate. By increasing utility, of course, but that is difficult to measure, obviously, and there may some components beyond rationality in emotional contexts. However, we have some interesting ways to get some neurological hints about positive and negative emotions by measuring the conductance of skin. This may help to explain why people are sometimes willing to hurt themselves in order to punish others.

Mateus Joffily, David Masclet, Charles Noussair and Marie-Claire Villeval conduct an experiment where cooperation, free-riding and punishment can happen. They measure skin conductance to reveal the intensity of emotions and let players reveal whether their emotions are positive or negative. Cooperation and punishment of free-riding elicit positive emotions, the latter indicating that emotions can override self-interest. That is also because punishment relieves some of the negative emotions from observing free-riding. And one does not like being punished, which lends one to cooperate more in the future. Finally, people like being in a set-up where sanctions are possible, in particular because it allows a virtuous circle of emotions that reinforce each other and lead to more cooperation.

The Bruno Frey Bubble

2011-09-03T07:01:00.000-07:00

About four months ago, I reported about the apparent self-plagiarism by Bruno Frey, David Savage and Benno Torgler. I found the case particularly ironic, as Bruno Frey repeatedly wrote about the fact that the pressure to publish to get tenure can lead to scholar to unethical behavior, and about the lack of space in journals for young scholars to publish the articles needed for tenure.

The case has taken a much larger dimension now, as many more cases of self-plagiarism by Bruno Frey and his students have appeared (see many links in the comments on the post mentioned above). This raises two very important questions: 1) how could such a culture of self-plagiarism arise? 2) How could they get away with it for so long?

To answer the first question, I think we need to put Bruno Frey is the context of the German(-speaking) academic environment. At least in Economics and Business, the typical German professor publishes a lot of rather insignificant articles, in particular book chapters and "Festschrifts." These works are rarely original, and are not expected to be so. There is also a tradition of writing "educational" pieces that explain economic concepts, say the Edgeworth box or voluntary export restraints, for journals targeted towards professionals in industry and government (as well as students). Again, there is nothing original in there, except maybe the way something is explained.

Bruno Frey works within this paradigm. His work lacks creativity in the sense that he recycles a lot of his ideas for multiple publications, often copying extensively his own words. The differences is that he does that at a higher level than his German colleagues, in international journals that are actually read. And many of his original papers are in fact not that original it appears. If we take the Titanic paper as an example, the empirical exercise he performs is routinely done in undergraduate statistics classes with the same dataset. His contribution is pedagogical, he found a good and interesting way to explain something already present in the body of knowledge.

Like a bubble that keeps getting fed by self-fulfilling expectations, Bruno Frey built on his initial success and continued with this strategy and encouraged his students to do the same. And several of them have assembled remarkable portfolios that way. I mentioned that of Benno Torgler in my original post, but there are several others who got into positions that seem beyond the usual reach of a Swiss doctoral program.

There is another way in which this resembles a bubble. The Economics department at the University of Zurich has made considerable efforts over the past decade or so to become a program that can compete with the better departments in the world. It is certainly among the best in Europe. It did so by americanizing itself: dropping to a large extend the rigid chair structure so prevalent in German speaking universities, hiring internationally respect scholars and creating a proper PhD program with courses and exams. Bruno Frey has not followed this trend at all. In fact, he insisted on exempting his students from the course and exam requirements. The Frey group lives in a cocoon apart from the rest of the department, and lives entirely following the role model of Bruno Frey. Call this living in a bubble.

Or a cult. The interaction of Bruno Frey and his students is reminiscent of a prophet and his disciples who follow him everywhere and write down every word he utters. Well, I exaggerate somewhat, but this does definitely not look like a standard interaction between a mentor and his students. It looks like they follow him blindly, and with his everlasting confidence, he makes them follow his example in publishing.

But this bubble is now popping under the assault of widespread scrutiny from editors, the Economics community and an internal investigation at the University of Zurich. The second question of course is how it was possible for Bruno Frey to act so unethically for so long (he is 70). It appears that he has been caught in the past, but it never became public, or at least explicitly. For example, he has been booted out of an editorial board, but there was no mention of why, his name just disappeared from the list. Also, the journals he has been publishing in are often not prominent and thus not that well read. In fact, it looks like he targeted them so that the audience would not overlap, including editors and referees (the added bonus of this strategy that it satisfies the goal of increasing the pedagogical reach by reaching very different audiences).

Hiding this unethical may have been helped by the fact that Bruno Frey actually tried to present himself as an expert on publishing ethics in Economics. He has written about the perils of publication pressure and how this can lead to slicing papers into insignificant bits, to self-plagiarizing and other unethical behavior. He has complained loudly about the ranking craze which he has been so adept to exploit, both with his self-plagiarism and by requiring authors to cite other works in Kyklos to increase its impact factor. While he is certainly not the only editor to do so, it is ironic that he openly campaigned against such practices. Bruno Frey abused the moral high ground in which he pictured himself.

But as every lie that grows too big over time, this is unsustainable. And it will be less likely to happen in the future with initiatives like this one. Making this unethical behavior more visible will prevent it.

That said, self-plagiarism is not limited to the Bruno Frey group or German speaking economists. I will discuss soon another case that I find particularly enraging.

Taking peak oil seriously

2011-09-02T07:44:00.000-07:00

For about forty years now, individuals and organizations have warned of peak oil and predicted a particular date for this event, which is inevitably associated with some sort of impeding doom. Yet, their predictions have not come to fruition (yet). Indeed, there is very little economics in those predictions beyond extrapolating trends. Economics has much more to offer in this regard.

Indeed, theory would tell you that an exhaustible resources would be used up at a decreasing rate as long as there is a positive discount rate, thanks to increasing prices for this commodity. Yet we seem to observe increasing consumption. Stephen Holland offers several explanations why peak oil may arise as an equilibrium and optimal outcome. There are four ways that can lead to upward-trending oil production, at least for some time: increasing demand, increasing reserves, technological change and site development. Demand and reserves are easy to understand, the other two need explanations.

Technological change can lead to increasing production through a decrease in the cost of drilling. The end effect is similar to discovering accessible reserves. As for site development, the idea is that the most promising sites are developed first for extraction, and the next ones come online while the previous ones are not done yet, yielding a temporary increase in production. And I would add a fifth reason for a temporary increase in production: the introduction on alternative fuels. Overall, the general picture that emerges is that in the long run production decreases, but there may be bumps along the way. But if price play their role, their is nothing evil in peak oil.

Are income-contingent loans for higher education feasible?

2011-09-01T07:21:00.000-07:00

There is considerable discussion, in particular in the UK, about making education loans contingent on realized income after completion of education (and those who do not graduate have the loan paid by general taxes). On the face of it, it makes much sense as those who reap the most benefits from their education pay the most for it. But the bigger advantage is thought to come that such a scheme would help overcome risk-aversion, educational outcomes are risky after all, and thus help more people to get higher education. Also, because education then does not require upfront payments, it helps alleviate liquidity problems young people typically face.

Elena del Rey and María Racionero see that this is not that easy to implement. Indeed, some people would loose if such loans would be implemented, foremost those who do not need loans (but this can be reversed if they are very risk averse) and those who are little risk averse. Regarding education subsidized from general taxation, those who can afford private education are again opposed, as well as those who are less able to acquire higher education. If one were to choose between the two financing schemes, it would all depend on the political power. If we assume everyone has a vote of equal weight, then all boils down the level of risk aversion of the population, the distribution of which we know very little about, and the aptitude to education, which is rather uncertain at the individual level. So in the end, we are not much wiser.

Make social security contributions more visible

2011-08-31T07:02:00.000-07:00

Any tax on labor income reduces the labor supply depresses the labor supply, this is no secret. Theory also tells us that whether the employer or the employee pays any withheld tax does not matter. Contributions to pension plans, which are typically paid by both employers and employees, look like a tax on the pay stub and should thus obey the same principle. Well not quite.

Iñigo Iturbe-Ormaetxe argues that the size of the pension fund contribution says something about the future benefits. If the employer contribution remains hidden, the employee is not aware what great benefit he is getting. Were he to pay the whole contribution, after a corresponding pay rise that is revenue neutral to the employer, the employer would be happier about his pay and would increase his labor supply. It would work similarly if the employer would simply indicate on the pay stub her contribution. This assertion is backed with a crude cross-country regression of employment rates in the OECD which shows that at least male employment rates a negatively affected by employer contributions, but not by employee contributions.