Research Paper

Category: Research Paper

The New Economics of Religion

That’s the title of a June 2016 Journal of Economic Literature piece, available at a website near you.   Typically, this wouldn’t warrant a response from the Lawrence Economics Blog, but typically you don’t see accolades like this directed towards one of our own:

One of the classic papers written on the economics of religion, Azzi and Ehrenberg (1975), summarized the literature on what the empirical correlates of religiosity had discovered about the United States until then.

Wow, classic papers!  If you see Professor Azzi, be sure to ask him about the genesis of that paper.

  • Sriya Iyer. 2016. “The New Economics of Religion.” Journal of Economic Literature, 54(2): 395-441.
  • Corry Azzi and Ronald Ehrenberg. 1975. “Household Allocation of Time and Church Attendance.” Journal of Political Economy 83 (1): 27–56.

Giffen goods and characteristics

Professor Gerard has treated us again to some good, clean microeconomic fun. I think he is correct, and the bottom line is: if beer is a Giffen good, its consumption can fall as its price rises. His elaboration (and correction) of Yglesias is very nice, as is his translation of Yglesias’s argument into the neat graphical device of the iso-alcohol constraint. Yglesias’s original statement, however, that “…another possibility is that people hold total spending and total alcohol consumption [constant]…” strikes me as pretty sloppy, by Briggs 2nd floor standards. Why would one keep alcohol consumption constant, in the face of a price change? Changing circumstances leading to no change in a choice variable (alcohol consumption) is always suspicious, especially in a continuous model like this.

Yglesias seems to be groping (in the dark) for a characteristics model—in other words, a model where people care about characteristics (alcohol and taste) of goods, not the goods directly. This sort of model was thoroughly worked out in the 1970s, mainly by one famous Kelvin Lancaster. In this example, there are two goods, beer and bourbon, and they both have two characteristics (to various degrees), viz. alcohol and taste. The utility function is defined on alcohol and taste, and the quantities of characteristics consumed depend linearly on the quantities of beer and bourbon purchased. So, I thought, perhaps there is something interesting going on here. Maybe, just maybe, we could have a Giffen good even if the utility function (on characteristics) is perfectly normal, i.e., not Giffen. Luckily, before I got too absorbed in linear transformations, I took Google Scholar for a spin, and soon got to “A Contribution to the New Theory of Demand: A Rehabilitation of the Giffen Good” by Richard G. Lipsey and Gideon Rosenbluth, published in The Canadian Journal of Economics in 1971. Here is a  taste from the Introduction:

Three of the most commonly used illustrations of possible Giffen effects are: Bread and meat, beer and whiskey, and Marshall’s account of transportation. There is a common feature of these three examples which “common sense” suggests is an essential requirement for a Giffen good and indeed for an inferior good, of which the Giffen good is a special case: there must be a “superior” good which shares one or more of the characteristics of the inferior good. If, for example, meat is substituted for bread as income rises, this implies that there is a want-satisfying characteristic shared by the two goods, in respect of which the substitution takes place. Bread must be a cheaper source of supply of this characteristic than meat, else the substitution would not depend on a rise in income. The reader can satisfy himself that similar reasoning applies to the other two examples.

They then go on to explain very neatly how Giffen goods could easily arise even if we assume that the utility function (on characteristics) excludes the possibility of a Giffen characteristic. Basically, if the income elasticity for characteristic 1 is very high compared to the income elasticity for characteristic 2, then an increase in real income will push the consumer to want so much more of characteristic 1, that just consuming more of the good that is more characteristic 1 intensive won’t do—he will have to cut back consumption of the other good to consumer even more of the good that is more characteristic 1 intensive. In our example, the income elasticity for taste is so much higher, that an increase in real income will push the consumer to want so much more taste that just buying more bourbon won’t do—he’ll have to cut back on beer and buy even more bourbon. However, as he does so, total alcohol consumption will still increase! (Remember, we assumed that there are no Giffen characteristics.)

I must say that I am pretty satisfied with the Lipsey–Rosenbluth explanation of why beer might be a Giffen good in this case. If the name Lipsey sounds familiar, that’s probably because of his association with The Theory of the Second Best, which probably requires a post of its own. (See also here.) And I would be remiss if I did not mention that Lipsey was a recipient of the 2006 Schumpeter award for the book Economic Transformations (co-written with two of his students).

I hereby propose that Griff’s Grill be renamed “Griffin Good” for a week in honor of economic science.

Dispatch from Down Under

I am just returning from the 12th Conference of the Society for the Advancement of Economic Theory at the University of Queensland, which was very successful in that a great many economic theorists from all over the world got together and presented their work. I presented my recent work on falsifiability, complexity, and revealed preference in a session devoted to revealed preference theory.

One of the sessions was a panel discussion on the question “What Can Theory Tell Us About the Financial Crisis?” (My comments below may reflect my (mis)interpretations.) The moderator, Rohan Pitchford (Australian National University) foreshadowed some of the comments to come by stating at the outset that the panelists should feel free to turn that question around, asking what the financial crisis can tell us about economic theory. Some of the comments made were expected—for example, that theory has, of course had everything about the crisis figured out, just take a look at (Name, Year), and (Name, Year), and (Name, Year)… you get the picture. Even granting that (Name, Year) were all brilliant, this is hardly answering the question in a satisfactory way. Another point, often said, but not without reason, is that one should not expect economic theorists to be able to predict when a crisis would take place, and predicting that there would be one (some time) is hardly news. In fact, if the crisis could be predicted correctly, it is often repeated, it wouldn’t take place! And if it did, (some) economic theorists would be very rich.

But some of the panelists made some interesting points.  Continue reading Dispatch from Down Under

Anglo-Dutch Auctions 300 years ago

On May 22nd at 4:30 in Steitz 102, Dan Quint will speak on the subject in the title, closing this year’s inaugural Economics Colloquium series with a bang. He is Assistant Professor of Economics at the University of Wisconsin – Madison. His work on auctions and bargaining has appeared in leading economic theory journals.His undergraduate degree is from Harvard University (Mathematics), and he received his PhD in Economics from Stanford University. Professor Quint will present his work on an interesting auction format used in eighteenth-century Amsterdam. He will focus both on the historical facts and the auction theoretic analysis. Abstract for his paper is below the fold.   Continue reading Anglo-Dutch Auctions 300 years ago

The New EPA Carbon Rule and New Coal-Fired Power Plants

This past week the EPA finally proposed a rule that would limit carbon emissions from new electricity generation.  The rule is the second of a double whammy for coal producers, who are already under intense competitive pressures from the rapid expansion and steep price decreases from domestic natural gas.

According the the Washington Post:

The proposed rule … will require any new power plant to emit no more than 1,000 pounds of carbon dioxide per megawatt hour of electricity produced. The average U.S. natural gas plant, which emits 800 to 850 pounds of CO2 per megawatt hour, meets that standard; coal plants emit an average of 1,768 pounds of carbon dioxide per megawatt hour.

What this effectively means is that any new coal plant construction would have to be built with carbon capture and sequestration technology, or CCS, (see here for details), making it extremely unlikely that the private sector will finance new coal-fired electricity production any time soon.

What will be the effect of this policy on new plant construction? I recently co-authored a paper* that looked at the new electricity plant construction decision as a function of natural gas and carbon prices, including an analysis of what would happen if there was a requirement that new coal plants have carbon capture technology, and we conclude that building CCS plants with private money is very unlikely.  Here is some background of our analysis from our abstract:

Our objective is to assess the commercial viability of CCS given pervasive future uncertainties, particularly uncertainties about future natural gas and CO2 prices. Using data from the Integrated Environmental Control Model (IECM), we develop an interactive Excel-based spreadsheet tool to compare levelized-average costs of four different new-construction 500 MW power plants: natural gas combined cycle (NGCC) with CCS, NCGG without CCS, supercritical coal with CCS, and supercritical coal without CCS. With low natural gas prices, the NGCC without the sequestration option is the dominant technology. Overall, CCS projects for either natural gas or coal projects are unlikely to be the lowest-cost option for CO2 prices less than $50 per ton.

Continue reading The New EPA Carbon Rule and New Coal-Fired Power Plants

Tweakers, not Inventors

A recent New Yorker piece by Malcolm Gladwell argues that Steve Jobs was a tweaker, not an inventor. He quotes a paper in which Meisenzahl and Mokyr make the argument that England took the lead during the industrial revolution partly because it had more “tweakers.” In explaining England’s success, they say people “who had the dexterity and competence to tweak, adapt, combine, improve, and debug existing ideas, build them according to specifications, but with the knowledge to add in what the blueprints left out were critical to the story.”

HT: Cheap Talk

A Question of Consumption? An Analysis of the Relative Effectiveness of Multilateral and Bilateral Aid Receipts

Our recent graduate, Oliver Zornow, has just published his paper entitled “A Question of Consumption? An Analysis of the Relative Effectiveness of Multilateral and Bilateral Aid Receipts” in the Undergraduate Economic Review. Here is the abstract of his paper:

“The literature focusing on the effects of foreign aid on economic growth contains a wide range of conclusions. Despite this lack of consensus, policy makers have been strongly influenced by the work of Burnside and Dollar (2000) (B&D). In addition to their primary conclusion that total aid is linked with growth in a good policy environment, B&D make a claim which is not directly supported by their results. My research is motivated by their claim that multilateral aid is the most effective form of aid. This paper demonstrates that B&D’s data does not support this claim.”

If you’re interested, you can download and read the paper from the journal website:

http://digitalcommons.iwu.edu/uer/vol7/iss1/12/

Congratulations, Oliver!

Is it Time for Efficient Markets?

Estrada in a Nutshell

The Wall Street Journal has a piece on whether it is possible to time the market, or whether one should stay in to make sure they are in when the big, tasty gains come along.  The story goes that investors should stay in the market because the lion’s share of gains accrue on only a few days.  If you missed the ten best days over the past 40 years, for instance, you would miss out on half the total gains during that period (yes, you read that correctly).  With that in mind, you’d better be sure to have your stakes on the table when they spin the wheel.

But, there’s a catch.  What if you managed to be out of the market on the ten worst days?  Well, it turns out that missing the ten worst days would have been even better for your portfolio than being in on the ten best days.  Yowza!

This is pretty interesting and all, but the real reason I bring it up is that the hero of the WSJ piece is my graduate school colleague, Javier Estrada.   Professor Estrada is the head of the Department of Financial Management at the International School of Management at  la Universidad de Navarra (that’s in Pamplona, Spain), a widely published scholar in investment and finance, and the author of a couple of popular finance books. Anyone that finds themselves in Spain should stop in and see him, as he is a genuinely friendly and engaging character.  And I never knew he was so well read.

Political Scientists Eat Their Own

Here’s an interesting fact — a legislator with a degree in political science is more likely to vote to cut research funding for, wait for it, political science. Perhaps they know something?

Here’s from Uscinski and Klofstad.

In October 2009, political scientists learned of a Senate amendment sponsored by Tom Coburn (R-OK) that would eliminate political science funding from the National Science Foundation budget. The American Political Science Association condemned the proposed amendment, and concerned political scientists contacted their senators to urge the amendment’s defeat. On November 5, 2009, the amendment was defeated 36-62 after little debate. This article examines the vote on the Coburn Amendment to understand the role that senators’ personal, constituency, and institutional characteristics played in their votes. Logit analysis reveals that even after controlling for party, several factors significantly predict the vote, including the number of top-tier political science Ph.D. programs in the senator’s state and whether the senator graduated with a bachelor’s degree in political science.

Zing!

Joseph Uscinski and Casey A. Klofstad. 2010. “Who Likes Political Science?: Determinants of Senators’ Votes on the Coburn Amendment”. PS: Political Science and Politics October: 701-706.

Interdependent Utility Functions

Does knowing what your peers make matter to how happy you are?  Certainly, the utility functions that I sketch in Econ 300 say no.  As Ray Fisman puts it in a recent piece at Slate, “Why do we care what those around us make? It doesn’t affect the real estate or furniture or sushi dinners we can afford.”

On the other hand, of course it matters. And Fisman continues:

[I]n recent years, economics has become both more social and behavioral, borrowing evidence and ideas from elsewhere in the social sciences. Economists now acknowledge that we constantly judge our own accomplishments in comparison to others, and salaries serve as one ready benchmark. People (and perhaps monkeys, too) are also averse to inequality—unequal pay for equal work just isn’t fair (especially if you’re the one who drew the short straw).

Monkeys? Wow.

Fisman talks about an ingenious study by group of economists, including David Card and MacArthur genius grant winner Emmanuel Saez, that investigated how differences in pay affect variables like job satisfaction.  If you are interested in how economists think about these things and how they evaluate them empirically, this paper is worth checking out.  The abstract is below the fold: Continue reading Interdependent Utility Functions

Regime Uncertainty: Did the New Deal End the Great Depression?

There is a continuing debate, as you must know by now, as to whether Keynesian fiscal stimulus is an effective macroeconomic policy tool, especially with the US economy stuck in its current doldrums.  There is probably no bigger detractor to this idea than Robert Higgs of the Independent Institute.  Many on the Keynesian side say the $750 billion fiscal stimulus wasn’t big enough.

Robert Higgs says phooey.

Higgs argues that the whole Keynesian paradigm is out of whack, that, in fact, more robust governmental involvement in times of a crisis creates pervasive uncertainties for the private sector.  This “regime uncertainty,” whether it be from potential tax increases or other regulatory hurdles, shakes investor confidence and stifles capital formation.  Who is going to play a game when the rules of the game are subject to potentially radical change?

Those of you who have taken Economics 240 might recall Higgs’ “ratchet effect,” but he is perhaps better know for this regime uncertainty idea.  Higgs forwarded some of these arguments in the Journal of Economic History, and has recently bolstered it both in the Independent Review. He doesn’t see this as a unifying macro theory, but more as an element that is generally ignored (or ridiculed) by many macro theorists.

You can also catch Higgs talking about these issues with Russ Roberts on EconTalk.

Late Summer Chocolate Fix

Craig Pirrong, the Streetwise Professor, believes cocoa prices are fixed.   Why does he believe this?  The data, of course.

Here’s the scoop:

The basic result is that the July, 2010 price rose about 6 percent more than one would have predicted, given the movements in the September, November, and July ICE prices…  This rise in the relative price of July cocoa is exactly what you would expect to observe during a corner, and given the typical co-movements of all these prices, are highly unlikely to have occurred by chance in a competitive market.

If you read his post, which I recommend you do, you can see he developed a fairly straightforward methodology for inferring some sort of market manipulation in an earlier paper on soybeans.

Of course, I learned about price fixing from the frozen orange juice pits in Trading Places.

Juice-y Empirical Analysis

Not terribly long ago we linked to an Art Devany article where he claimed that the steroid era had no statistically discernible effects on home run production. Eric Gould and Todd Kaplan look carefully at the numbers and determine that Jose Canseco had a big influence on his peers’ performance numbers.

From the abstract:

[W]e estimate whether Jose Canseco, one of the best baseball players in the last few decades, affected the performance of his teammates. In his autobiography, Canseco claims that he improved the productivity of his teammates by introducing them to steroids. Using panel data on baseball players, we show that a player’s performance increases significantly after they played with Jose Canseco. After checking 30 comparable players from the same era, we find that no other baseball player produced a similar effect.  Clearly, Jose Canseco had an unusual influence on the productivity of his peers.

If you are a baseball fan, this is a nice research paper to take a look at.  The problem identification is clear, the statistical analysis is straightforward, and the interpretation of the coefficients is central to the analysis. In other words, it isn’t enough to be statistically significant, it also must be “economically” meaningful.

Doink!

Here, the evidence shows that power hitters substantially boosted their home run production after playing with Canseco, to the tune of almost three dingers per yer.  That’s both statistically significant and has “baseball” meaning. (Similar results did not hold for fielding prowess). The more convincing piece is that there are no other sluggers where this result holds.  That is, if the Canseco result was some statistical fluke, you would expect a similar result in at least one other player.

Still, I am going to talk to Prof. Finkler, because I don’t think the numbers are quite consistent.

Here’s a nice summary at Slate.

And here’s Mr. Canseco’s tell-all, Juiced.  When this came out, it was scandalous and the denials were ubiquitous.  But, as time marches on, several allegations have come to pass, and few have been discarded.  By the way, that’s the famous “ball bouncing off Canseco’s head and over the fence for a home run” picture, run ad nauseum on sports bloopers back in the day.

Don’t Feel Like You *Have* To Become a CEO

News from the research front that (some) economics majors are going places. To wit, “the share of graduates who were Economics majors who were CEOs in 2004 was greater than that for any other major, including Business Administration and Engineering.”

Here’s the paper, appropriately titled “Economics: A Good Choice of Major for Future CEOs,” and here’s from the abstract:

We find evidence that Economics is a good choice of major for those aspiring to become a CEO. Economics ranked third with 9% of the CEOs of the S&P 500 companies in 2004 being undergraduate Economics majors, behind Business Administration and Engineering majors, each of which accounted for 20% of the CEOs. When adjusting for size of the pool of graduates, those with undergraduate degrees in Economics are shown to have had a greater likelihood of becoming an S&P 500 CEO than any other major. That is, the share of graduates who were Economics majors who were CEOs in 2004 was greater than that for any other major, including Business Administration and Engineering. The findings also show that a higher percentage of CEOs who were Economics majors subsequently completed a graduate degree – often an MBA – than did their counterparts with Business Administration and Engineering degrees.

I nicked that from Marginal Revolution, and I’m certain there will be plenty of snarky commentary over there about it.

Some other interesting data over there. For example, the total number of business majors is split pretty evenly between males and females, but economics is 70% male. Of course, females now make up 60% of the undergraduate population.

Weber Grilled

A Ph.D. student at Harvard is taking on Max Weber (pronounced VAY – burr) over the whole Protestant work ethic thing. Davide Cantoni uses several hundred years worth of German data and finds no effects on economic growth. Here, I’ll let him tell it:

grillbabygrillMany theories, most famously Max Weber’s essay on the ‘Protestant ethic,’ have hypothesized that Protestantism should have favored economic development. With their considerable religious heterogeneity and stability of denominational affiliations until the 19th century, the German Lands of the Holy Roman Empire present an ideal testing ground for this hypothesis. Using population figures in a dataset comprising 276 cities in the years 1300-1900, I find no effects of Protestantism on economic growth. The finding is robust to the inclusion of a variety of controls, and does not appear to depend on data selection or small sample size. In addition, Protestantism has no effect when interacted with other likely determinants of economic development. I also analyze the endogeneity of religious choice; instrumental variables estimates of the effects of Protestantism are similar to the OLS results.

So, for the econometrically challenged amongst you, that means he ran a lot of regressions a lot of different ways, and the religion variables don’t ever seem to matter.

Scratch that one off the Freshman Studies reading list.

Of course, we here at LU know a thing or two about the economics of religion.  Just come by for TeaBA some time and we’ll tell you all about it.

How did Copenhagen Fail Thee? Let Me Count the Degrees…

Bad news on the climate front according to Joeri Rogel and colleagues in their pessimistic new article in Nature, “Copenhagen Accord pledges are paltry.”  Their bottom line is that even if we were to gird up our loins and somehow comply with the agreements of the recent Copenhagen accord, we’re still looking at 2C+ increases in global mean temperature.  (And for those of you who think those accords will actually be met probably could stand a splash of cold water in the face).

Taking a look at the figure on the right, you can see that the authors have done a probabilistic analysis of likely scenarios, with the 50% percentile being the “expected” or “best guess” case. As you can see, that is somewhere north of 2C, with 3C not being out of the question within 90 years.

If you have been paying attention I doubt you will find this all that novel of a conclusion.  In the recent Povolny lecture, Yoram Bauman expressed pessimism on the climate front.  The emerging tigers like China and India aren’t going to curb emissions and potentially hamstring economic growth.  Rich countries are rich and can afford to take adaptive steps.  Poor countries can’t adapt, but also are too poor to do anything but see how the experiment plays out.

That seems about right to me.

Lake Woebegone Goes to College

Have you ever wondered why your grade point average is so high?   Is it because you close The Mudd every night? Your raw intelligence?  Your unusually good problem-solving skills?  Your avoidance of my classes?

Or maybe it’s because it’s 2010 and Lawrence is a private university.  It seems that the average college GPA has been going up at the rate of about 0.1 per year for the past 50 years, with private schools leading the charge.  Here’s Exhibit A:

That’s from the NYT‘s Economix column.  The green series is the GPA for private schools over time, which appears to have started at about 2.3 in 1930 and increased to right around 3.3 today.  That’s right, the average student at a private college has a 3.3. GPA.   The grey dots show the data points surrounding the series, so this is no selection bias problem.  In fact, the lowest average GPA in the sample (about 2.7) is higher than virtually every single recorded data point prior to 1950.

The big question, of course, is why?  The answer to that is probably not so simple.  We have seen one of the consequences, however — students really do work less these days.  Recent scholarship documents an inverse relationship between the expected average class grade and the amount that students work.  To wit: average study time would be about 50% lower in a class in which the average expected grade was an “A” than in the same course taught by the same instructor in which students expected a “C.” In other words, students are working less and getting higher grades.

One point of interest is that science classes have traditionally graded much more harshly than the humanities.

[S]cience departments today grade on average 0.4 points lower than humanities departments, and 0.2 points lower than social science departments. Such harsher grading for the sciences appears to have existed for at least 40 years, and perhaps much longer…  Relatively lower grades in the sciences discourage American students from studying such disciplines, the authors argue.

So does that account for the dearth of American-born scientists — the fear of getting a B?

How do you suppose a maximizing professor should think about these issues?  If I want to push my students, do I have to be a tough grader? Or do I just end up with fewer students grouching about how much work I give them?

Click on the “making the grade” tag for more on grade inflation.

The Long Ball

So, did Major League Baseball’s steroid craze lead to the decimation of the baseball record book?  The argument is straight forward enough, with the help of performance-enhancing drugs, hitters got bigger and stronger and started knocking the tater out of the park with alarming frequency.   The extra-ordinary seasons from the likes of Mark McGwire, Sammy Sosa, and Barry Bonds are the proof in the steroid pudding.

But Art De Vany at UC-Irvine says it just isn’t so, and he just published a paper in Economic Inquiry making his case. The paper is appropriately titled “Steroids and Home Runs,” and it has a very direct and confident abstract:

There has been no change in Major League Baseball home run hitting for 45 yr, in spite of the new records. Players hit with no more power now than before. Records are the result of chance variations in at bats, home runs per hit, and other factors. The clustering of records is implied by the intermittency of the law of home runs. Home runs follow a stable Paretian distribution with infinite variance. The shape and scale of the distribution have not changed over the years. The greatest home run hitters are as rare as great scientists, artists, or composers.

Ah, where would we be without the Paretian distribution?   If you don’t feel like plowing through the paper, you can hear him chat with Russ Roberts at EconTalk.

De Vany is quite a character.  In addition to his academic prowess, he is a former professional athlete and a bona fide fitness and diet guru.   He looks pretty good for a 50-year old… and he’s 70.

A Pigou and a Smile?

Would a tax on the sugary, em, I mean the corn syrupy sweet taste of soft drinks reduce consumption?  And would that in turn cause young people to drink less and possibly curb the tide of childhood obesity?  An article in Health Affairs suggests the tax would have to be pretty darn steep to do much good:

[T]here was no significant relationship between differential soda taxes and overall soda consumption for the whole population. This means that, within the limitations of our analysis, increasing the differential tax on soda doesn’t affect total soda consumption. We found a significant relationship between differential soda taxes and BMI change from third to fifth grades. But this finding does not hold up under different statistical analysis, and the effect may be attributable to children who are already at risk for being overweight.

The tax rates for the study ran up to $0.07 on the dollar, with an average of about $0.04.   The calculations suggest that it would take more than double the highest rate, about $0.18, to have substantial impacts. In other words, if you want to change people’s behavior in this case, a small tax isn’t going to do the trick.

What is the rationale for government intervention here? Is this a Pigouvian tax — that is, do soft drinks cause obesity and does obesity cause impose “external” costs on the rest of the population?   Or is it a “protect the children from their parents” rationale?

Let me know what you decide!

Paying for “Quality”, SAT Scores Version

What accounts for the differences in prices of yogurt?  Well, there’s different size cups, different ingredients, different quality ingredients, some have nuts, brand name recognition, seems like a lot of things could drive price differences.

What accounts for differences in prices of female eggs on college campuses?  SAT scores.

“Holding all else equal, an increase of one hundred SAT points in the score of a typical incoming student increased the compensation offered to oocyte donors at that college or university by $2,350,” Levine reports. When the ad was placed for a specific couple, the premium was higher: $3,130 per 100 SAT points. And when an egg donor agency placed the ad on behalf of the couple, the bonus per 100 points rose to $5,780.

Here’s the report.