Competitive behavior by gender: jumping to conclusions

Men are more competitive than women. Whether this is genetic or nurtured is much studied and occasionally discussed here (I, II, III). I do not think there are definitive answers because it is very difficult to find an environment where one can pursue a truly controlled experiment. If we keep adding varied studies, however, we could get to a clearer picture and finally understand whether girls are at a disadvantage in a competitive environment and need to be helped.

An interesting recent study is by René Böheim and Mario Lackner who study jumping competitions. In high jump and pole vault competitions, athletes fail out after three successive misses and need to choose heights strategically as the competition evolves. They do not want to jump too much, especially as they need to keep their best jumps for last. But it is also risky to skip many heights, as one may start with three misses on a bad day. Interestingly, the strategic choices of men and women differ. Men take more risky decisions despite the fact that the return to risk is lower. What is particularly interesting here is that men and women differ in a context where they do not interact. Were they to compete against each other (applying the appropriate handicap), women would appear to be less competitive.

So is this study compelling evidence of innate differences? No. First, the women competing in jumping competitions were still raised in an uncontrolled environment. Second, we are only looking at elite athletes here, and analyzing the extreme tail of an unknown distribution does not help in making conclusions about the general population. And third, I think even the membership in this distribution tail is not equivalent. It is well-known that much fewer women participate in competitive sports, and they likely face less competition. In a winner-takes-all context, as a consequence you do not need to be that risk-taking.

The President's Latest Bad Idea

Apparently, President Obama's budget is going to include some kind of penalty for people who have accumulated more than $3 million in retirement accounts.  The details are not yet known, but I think we know enough to say that this is a terrible idea.

A sizable body of work in public finance suggests that consumption taxes are preferable to income taxes.  Completely replacing our tax system with a better one is, however, hard.  Retirement accounts, such as IRAs and 401k plans, are one way our tax code has gradually evolved from an income tax toward a consumption tax.  The use of these accounts should be encouraged, not discouraged.

By the way, exceeding $3 million in such accounts is not very difficult for an individual who is financially successful and frugal.  Under current law, a self-employed person can put about $50,000 a year in a SEP-IRA.  If he does that every year for 40 years, and his savings earn a return of 5 percent per year, he will retire with about $6 million.

So, yes, President Obama's $3 million constraint would be a significant disincentive for saving.  It would move the tax code in the wrong direction.

A Hyperinflation Vacation

From The Atlantic.

Loser's Lament: Delta Air Sues US Ex-Im Bank

The hapless and pathetic US carrier Delta Airlines seems less interested nowadays in running a viable business than in taking on quixotic wild goose chases. A few months ago it made the headlines by buying an oil refinery to help bring its costs under control. Nevermind that it's the cost of crude oil that's particularly high and not that of refining it, but hey, it made for a pretty good 5-minute publicity stunt if it did not neccessarily improve Delta's bottom line.

Now we have another act of desperation with virtually no chance of paying off: Delta has filed a case against the American Export-Import Bank for allegedly providing "subsidies" to foreign carriers it is in competition with by offering export finance to Boeing when it sells jetliners abroad. Aside from the sheer chutzpah of believing that the US government would prioritize the interests of a constant drag on its purse alike the airline industry at the expense of a viable export industry alike commercial jet exports, the term "subsidy" is arguably being abused here.

How does export finance effectively reduce the purchase price of aircraft to foreign carriers? That is the question Delta will have to build a case on. Export finance is exceedingly common especially in countries with sizeable exports. And, of course, the WTO would not entertain a case in which a domestic firm sued its own government--it's always a government taking a case against another country or countries on behalf of a firm domiciled in its boundaries. At any rate, here's to Delta for the comic relief in an otherwise bleak Stateside airline industry:

Delta Air Lines Inc has sued the Export-Import Bank of the United States over loan guarantees given to support purchases of Boeing Co's widebody planes by certain foreign airlines, according to a court filing. Delta said that Ex-Im bank's subsidies to foreign airlines, including Emirates Airlines, Etihad Airways and Korean Air Co Ltd, to help them buy Boeing planes would cause adverse economic effects on airlines and their employees.

Delta said in the filing that the bank did not properly analyze the adverse economic impact and has requested the district court in Washington D.C. block any loan guarantees...In a complaint filed in federal court in Washington D.C. late on Wednesday, Delta said one of the types of exports that Ex-Im Bank subsidizes is the export of aircraft by U.S. manufacturers, especially ones made by Boeing.

"In 2012, the bank's total exposure to outstanding financial commitments was $106.6 billion. About 46 percent of this amount was for air transportation loans and loan guarantees, more than the three next largest industrial sectors combined," Delta said in the filing.

Delta said the Ex-Im Bank loan guarantees help lower the cost of capital for foreign airline companies. "These foreign airlines will recoup their investment in their new aircraft faster or reduce ticket prices on competing routes without adversely impacting their relative rate of return on those investments," Delta said in the filing. Delta argued that unsubsidized U.S. airlines will be forced to respond by "reducing their prices and reducing or altogether eliminating their capacity to serve those routes where they compete with bank-subsidized foreign airlines."

The whole point of trade finance is to make goods alike American-made jetliners available for purchase in LDCs where commercial finance is not sophisticated enough. To brand this kind of activity "illegal" would hurt any number of American exporting industries by precedent.

Why would the US sacrifice substantial exports to satisfy the (protectionist) interests of an utterly substandard airline like Delta? Even in present-day America, rewarding mediocrity has its limits.

Who cares about the median voter? Not the politicians, maybe

Most implementations of political economy in economic modeling assume that the median voter is the determinant voter. Some studies may take into account that the likelihood of voting is not the same for everyone, but the basic principle is that politicians adjust their proposals according to some sort of median in a universe where every man and woman has roughly equal weight.

Pablo Torija tests this by looking at which parties were in power in OECD countries. Assuming that voter preferences are quadratic in income and depend on the distance of the individual's policy preference to the one of the party in power, one can then determine for which household this policy would be optimal, and then see where this household is in the empirical income distribution. The actual implementation is a bit more involved than that, as parties' ideology is coded on a linear scale, and this is interacted with income. All this is then regressed on happiness indicators from surveys to proxy for utility.

The results are striking. Right-wing parties' median voter is at the 99th percentile. For left-wing parties, it is at the 95th percentile. That is for 2009. Extrapolating the empirical model, it is much closer to the median in the 1970s. But are these results believable? For one, the policy preferences of the individual somehow vanish between the simple theoretical model and the empirical implementation. And more generally, static preferences that only depend on income and ideology seem rather crude. Is this income before or after taxes? That can have a tremendous impact. And people may care about other things, see for example the recent debate about the importance of leisure and working conditions in US and French tire plants. I suspect that results are biased upwards by all this.

A Nice Example of Technological Progress

Is kidnap insurance a good thing?

In some countries, kidnapping for ransom has become a common and profitable business. It does not strike as an added-value generating activity, but one has to live with it. One way in which markets have responded to this is that it is now possible to by kidnap insurance that pays ransoms. Is this a good thing? Indeed, kidnapping frequency may increase if there is a higher likelihood that a ransom is going to be paid. That is not unlike US colleges that charge higher tuitions because they can, as public funds for students grants and loans have been ramped up. But let us keep talking about criminal kidnapping.

Alexander Fink and Mark Pingle look into this issued. The first question one may ask is whether this kind on insurance is sustainable in the first place. Indeed, many insurance markets fail due to adverse selection or moral hazard issues. In this case, risk aversion on the insureds is high enough that they are willing to pay premiums sufficiently above what would be actuarially fair. Indeed, there is a risk of getting somebody killed, and optimal kidnappers would want to randomize over this just to make sure that they can extract the most. The presence of insurance will increase the number of kidnapings, but if it does not do this too much, one should see a reduction in killings. We can thus not unambiguously say that kidnap insurance should be allowed.