Designing matching mechanisms in medieval times

There is a remarkable diversity in economic institutions across the world, and it is always interesting to understand why and how they developed differently. Think for example of the large variety of ways tariffs and taxation are implemented. It is of special interest to do so for economies a few centuries ago because institutions evolved then much more isolated from each other and with little guidance from pure theory.

Lars Boerner and Daniel Quint study how brokerage rules have been established in 42 European merchant towns between the 13th and 17th century. Brokers are important because they facilitate the market clearing process, but they may also abuse their power and need to be regulated. Sometimes these rules are seller-friendly, and sometimes they are buyer-friendly. Seller-friendly rules attract foreign merchants by giving them more surplus. It is not obvious whether this is welfare improving for the local population. The paper tries to show what made the towns go one way or the other. Part of the answer come from town effects, but what type of good is exchanged matters a lot as well. For example, food market usually have buyer friendly rules, as this benefits the most the local population which is often also the final consumer. For textile and leather markets, rules are more seller friendly, probably because the buyer is more likely to be from outside town. There is much more in the paper.

The smart children of vengeance

As someone who has been raised in a non-violent environment, I am often surprised how people in some circles easily resort to vengeance and violence while a conciliatory attitude could have resolved "issues" quickly and efficiently. There is certainly a good deal of learned behavior that determines whether you are of a conflicting or conciliatory type, and this learning comes from example, in the family, among peers and in society. Society is important (say, compare Scandinavia to the Balkans) but there are also striking differences within societies. That is where parents may come in.

Ruby Henry studies how the use of retaliation is transmitted to children, first using a model of education effort by parents, and then using UK National Childhood Development Survey. The theoretical prediction is confirmed that high-cognitive parents are better able to transmit their values and override the peer culture, as long as the parents are retaliators. Indeed, if a child is told to retaliate and meet a forgiver, he wins and his values are reinforced. If he is a forgiver and meets a retaliator, he looses and is upset by the teachings of his parents. It the long run, this means that humankind will settle on a retaliating culture. But I do not think this is what we observe. In fact, there are less wars, people abide more to contracts and, I think, respect more the rule of law over time. Correct me if I am wrong.

Another French experiment with work hours going bad

The French have a special knack in messing with labor markets. The last spectacular failure was the law that limited almost everyone's workweek to 35 hours in the hope this would spread the total hours to more people, lead to more employment and solve a chronic unemployment problem. Well, it did not and lead to loss of productivity and ridiculed controls. And I doubt many economists were surprised. With the election of Sarkozy, this law was quickly scraped and an equally ridiculous law from the other end of the spectrum was introduced.

Pierre Cahuc and Stéphane Carcillo discuss the French policy of making overtime work tax exempt. One can really question what Sarkozy had in mind with this policy, as the adverse consequences are all too obvious. First what is overtime is easily manipulated, and suddenly many regular hours became overtime hours. Second, if the intend was to increase the total hours of work, it was bound to fail if most of the overtime is coming from workalcoholics who would work no matter what the wage is. This is why you need to tax them instead of subsidizing them. And Cahuc and Carcillo find that indeed total hours hardly changed. So what all this amounted to is a generous lump-sum subsidy to highly-skilled workalcoholics. Great.

Seasonal adjustment is difficult

As undergraduates, we are taught to make sure the macroeconomic data we are dealing with is seasonally adjusted. We are explained that statistical offices remove the seasonal factors is a way that is close to regressing the data on seasonal dummies and taking moving averages. If you really look into this, as so often, it turns out things are much more complex than that, and subtleties matter.

Stephen Pollock and Emi Mise do a technical review of the various methods and look at some alternatives. Broadly speaking, there are three strands of techniques. The first is based on ARIMA, the second removes seasonal frequencies found in a periodogram, and the third relies on clear distinctions between fundamental and seasonal components in spectral analysis. The difficulties are compounded by the fact that data usually has a trend, which may not be loglinear, and data thus requires pre- and post-treating. And as Pollock and Mise show, each of these methods matter, even for dating turning points. I can imagine this can become even more important when one throws data into a regression, especially if the series have been detrended in different ways. And it is rare to see statistical offices declare what method was used for that.

Does it make sense to open new universities?

That question may not make sense in the US or the UK, or some other European countries that face very serious public budget constraints. It also does not make much sense given the peak in student attendance in many OECD countries. But where student numbers will keep increasing, it is a good question whether one should increase the size of universities or their numbers.

Berardino Cesi and Dimitri Paolini consider the question from the angle of the students' mobility constraints. Suppose students differ by ability and by location, and mobility is costly. A monopolistic university will only attract the ablest. Adding a new, local university is then welfare improving. Suppose now the mobility costs are rather low. Adding a second university is now welfare decreasing because of a peer effect. Indeed, high ability students now get pooled with low ability ones, and they suffer through adverse peer effects. And given that some students simply do not belong in a university, we are better off with fewer universities and fewer college students.

Latin American home owners are happier, unlike US ones

There is a myth saying that owning a home makes people happier and leads them to contribute more to their community. In an earlier report, I pointed out that this idea is a myth for the US homeowner. What about elsewhere?

Inder Ruprah finds that Latin American house owners are indeed happier. This is obtained from a survey where people declare how happy they are, the reliance of which many researchers have called into question. But happiness studies slowly get more acceptance, especially when results are clear cut, like here. Of course, homeownership could be correlated with some unobservables that matter a lot for happiness, for example economic and social standing. There is a variable that could capture this in the regression, "Interviewer assessment of economic situation of the household," but I have no idea how reliable it is.

PS: The pdf file is 7.3MB large. It took me five attempts to download it. There are a few very simple graphs and histograms in the paper, in other words no reason to have such a large file, but for unnecessary front and back covers. But if the IADB is willing to waste bandwidth that way, especially as its target audience in Latin America may not necessarily enjoy fast internet.

Affirmative action and stereotypes

The ghetto culture is a very strong absorbing point. Once you are there, it is very difficult to get out, and your children will also have a very hard time. The problem with the ghetto culture is that is harbors values that a very different from mainstream culture, in particular regarding work habits. Those values are instilled by your environment (family, neighbors, community) and when you grow up around peers with poor work habits, it is difficult to acquire better habits.

Maria Sáez-Martí and Yves Zenou make this point and add that even when parents are forward-looking and care about their offspring, they will not make the investment to teach their children good habits if employers take the cultural environment of a potential employee as a signal of work habits. They discriminate, and because they discriminate they turn out to be correct. That is a vicious circle that is difficult to beat, but initiatives like affirmative action can overcome this. The condition is that quotas be high enough.

Affirmative action can be implemented in two ways, imposing quotas on good jobs, and imposing quotas in the majority group (putting some of the ghetto in the mainstream group of applicants). Low quotas are also improving work habits in the ghetto in the second case, but are detrimental in the first case. This is because the advantage of better work habits is absent, wages of good workers are lower and parents put less effort in educating their kids. With the second case, wages of good workers remain high, and parents will help their kids who have then a chance to prove themselves. An alternative policy, integration is only beneficial to the ghetto, and obviously the others will resist integration because it hurts their work habit.