Economists lie more

Economists have a bad reputation, and this does not date from the recent crisis. This comes largely from those willing to prostitute themselves for various think tanks, lobby groups or trade group, or their employer, acting like a spokesperson than a critically-thinking and independent economist. Any many of those call themselves economists without actually being one (hence my earlier call for a certification). In the end, the general public thinks we are lying, mostly. Is there any truth to this?

Raúl López-Pérez and Eli Spiegelman performed some experiments where lying could be a winning strategy. While religiosity or gender does not impact the propensity of lying, one's undergraduate major matters, and the Business and Economics students fare the worst. And this does not come from selection into the major, it is acquired. So economists do lie more, because they see incentives to do so. Hence journalists should learn to interview economists that have no incentives to lie.

Somewhat relatedly, economists are also less generous, but in that case it is not acquired, but rather stemming from selection. But in both cases, it shows economists conform more to homo oeconomicus,

Nation building and economic growth

A major component of US foreign policy has been "nation building" through military and economic aid. This policy is of course not disinterested, and the ultimate goal is to secure commercial outlets for American businesses, and over some decades, to prevent the spread of the red menace, which is in fact related to the first goal. In terms of resources, this policy has been tremendously expensive, as the latest episode in Iraq has demonstrated. Is it worth it? That is difficult to measure, but if you think that what the us cares for is access to larger markets, then GDP growth should be a good metric for nation building success.

Ellyn Creasey, Ahmed Rahman and Katherine Smith find that nation building is moderately good for growth during a conflict, but quite bad thereafter. The latter result is not inconsistent with quite a bit of literature that shows that economic aid is not particularly useful, also absent nation building. What is new here is the stark contrast during and after the conflict. And if you wondered how they could measure a nation building effort: they look at economic aid conditional on military aid and the existence of a conflict currently or within the past seven years.

Incidentally, check out this promising new book and new blog about failed nations.

Ctrl-C Ctrl-V papers

The is a cottage industry that produces papers about rankings in the profession, rankings about journal, departments, or people in various subfields. These papers are mostly unimaginative and uninteresting, yet they find refuge in obscure field journals in the hope that this will attract a few readers and especially mentions in the honored departments. Why mention this literature? Once you have gathered the data for such a study, it is easy to slice the dataset up to produce rankings for a myriad of subfields. Thus a multiplication of papers. We could just ignore those papers, but I cannot. Indeed, there seems to be a tendency for the authors of these studies to just copy-and-paste from one paper to the author. I reported earlier about a case (who also was writing about professional rankings), and here is another one.

The duplicating fellows are George Halkos and Nickolaos Tzeremes. This tandem is incredibly productive, producing new papers by the shovel. And they got the work flow optimized. Produce a study and then replicate it on a slightly different topic. Do not bother with changing the text, simply substitute the numbers, put a paragraphs here and there for the specifics of the particular slice of the data, and done. Oh, and do not forget to change fonts and margins so that the copy job is not too obvious. Take as an example their line of work on ranking journals. First, there is a paper on journals in Economics, then mainstream journals in Economics, then Accounting, Banking and Finance, then agricultural, environmental and natural resource Economics, then socio-demographic journals. We are waiting with a bated breath for future developments.

Country size and the unemployment rate

When firms merge, they mention economies of scale and sharing of fix costs. They also sometimes imply increased market power. When firms shed business lines to shrink, they put forward concentrating on core business. From this, it is not very clear where it is an advantage to have a large or small firm. What about countries? Are large countries more successful? One way to look at it, is to compare the unemployment rate to country size. Why not.

Norbert Berthold and Klaus Gründler did that and find that small is beautiful. Indeed they find a positive correlation of the unemployment rate with population and with area, looking at subcontinents, countries and regions within countries. How could that be? They first offer a bizarre explanation, using a Cobb-Douglas production function where they substitute labor by population times the employment rate, then isolating the unemployment rate. Of course, if you leave the other factors constant, increasing population will increase the unemployment rate. The problem is that the other factors are not constant. The paper later ties the correlations in a parabolic way to collective bargaining and the size of the government, the reasoning being rather obscure.

What bugs me more about the paper, though, is first the underlying assumption that each data point (a region) is treated like a closed economy. Regions trade with each other, and this implies that labor markets are linked. This is especially the case when you look at Europe today where borders have much less significance than just ten years ago. Second, the analysis is performed for 2010, not long term averages. All what is said is thus valid for a particular point in the business cycle. Finally, nowhere in the text it is mentioned that populous regions may have different characteristics that could matter for unemployment, say they are more urban, have more manufacturing, are more diversified. After all, these regions are accidents of geography and history, and both lend some economic characteristics to them. And these are the ones that matter. Otherwise, you would get the idea that you just need to administratively split up countries, and immediately a labor market miracle happens.

Divorce risk is good for the savings rate

Savings rates have declined over the last decades in developed economies. Many explanations have been offered for this, including the availability of better insurance that allows to smooth out better potential risks. One other that was suggested was that the higher divorce rates and the larger number of out-of-wedlock children would lead to lower savings because economies of scale in consumption do not kick in. An old paper by Luis Cubeddu and José-Víctor Ríos-Rull dispelled this idea, showing in a model economy that the higher risk of divorce actually increases the savings rate, as people foresee the risk and accumulate precautionary savings.

You may dismiss this theoretical result on the grounds that there is no way that freshly married people foresee increased divorce risk and react by saving more. And that may be why this paper was never published. But they there is now evidence from Italy that there is some truth to this result.
Filippo Pericoli and Luigi Ventura, who do not quote the above study, find that this precautionary saving is actually quite substantial at 11% of overall savings. So there, Italians are more rational than we thought.

The housing bubble: fooled by efficiency

In retrospect, the large rise in housing prices before 2007 looks suspect, many would even call this a bubble. But when you observe it in real time, it is much more difficult to judge whether house price inflation is excessive, although economists have been calling for it. A characteristic of many bubbles is that expect prices to increases forever, while it clearly cannot be true, at least in this magnitude. So somehow people are fooled.

Brian Peterson rationalizes this in a search model where the search frictions allow prices to deviate from their fundamental. The innovation of this model is that people are assumed to believe that price are not affected by the search frictions: they think markets are fully efficient.This means that instead of bargaining over the house price level, buyers and sellers bargain over house price increases. One interesting consequence of this is that turn-over volume and price inflation are then positively correlated. And once you quantify the model, about 70% of he price run-up can be explained by this "foolish" behavior.

Risk preferences are heterogeneous across countries

In any international economic model I can think of, or any study comparing countries using economic models with utility maximizing utility, it is never considered that the preferences of households may differ. In closed economy models, some heterogeneity in preferences may be considered, but it is generally avoided because it is difficult to measure and in most cases would not make much a different anyway. But if we are thinking about some international imbalances, why not think about differences in aggregate preferences?

Marc Oliver Rieger, Mei Wang and Thorsten Hens look at the results of a survey administered across 45 countries that tries to elicit measurements about risk aversion, loss aversion and subjective probabilities. Too bad they did not consider discounting and the intertemporal elasticity of substitution. Anyway, they find that there are actually large differences across countries, differences that they attribute partially to economic conditions and "culture." For the former, the authors looks a GDP per capita and the human development index. I would also have looked at a measure of financial development. It seems to me that people become financially more sophisticated and thus willing to take risks if they are more exposed to financial markets. But I can be proven wrong.