Mission drift in microfinance?

Microfinance is based on a very simple principle. The poorest can only improve if they invest, and very small loans may be sufficient to get them started. But conventional banks do not bother with such loans, and informal money-lenders charge horrendous rates. Microfinance step in and lend small amounts, often without collateral in a community-based scheme where one's reputation is sufficient to obtain somewhat reasonable repayment rates. I am not totally convinced this scheme would work without subsidies, but it obviously serves a useful purpose, as long as it does not crowd out the regular financial system.

Beatriz Armendáriz and Ariane Szafarz point out that the latter can become a problem because of mission drift: as microfinance institutions grow, they gradually target larger loans, neglecting their original mission and becoming more like regular banks. This is like car models that grow in size through the years to follow the life-cycle of their drivers. But Armendáriz and Szafarz think that what looks like mission drift could very well be cross-subsidization, and larger and more profitable loans are made to help continue giving small and less profitable ones. The distinction is important, as donors could be put off by mission drift.

Socialist economies smooth better the cycle

Capitalism is often presented as a wild economic system where conditions are harsh as everyone fights for his survival. The fact that economic agents are not sheltered against shocks leads them to be more efficient and possibly protect themselves better against events. Incentives are not as well aligned in a socialist economy, as free-riding is more prevalent and weaker agents may be more likely to survive in such a sheltered system. The endless discussions on which system is better ultimately boil down to preferences about risk tolerance and fairness, and on which system offers higher welfare.

Bruno Amable and Karim Azizi point out that more socialist economies appear to be better at smoothing out business cycles in the aggregate. Indeed, they tend to adopt more readily Keynesian policies, which do smooth somewhat economic fluctuations, France being the prime example. But that does not yet mean these economies are better: while fluctuations are lesser, the average level may also be lower. And fluctuations may be optimal, as we have learned from the real business cycle literature. So the jury is still out.

The daycare assignment problem

Assigning people with heterogeneous preference to medical residency, schools, job candidates or marital partners is a difficult problem, and with the help of the work of Al Roth, we have made much progress in finding optimal systems. More and more situations are uncovered that required a special analysis because some feature requires rethinking the whole process.

John Kennes, Daniel Monte and Norovsambuu Tumennasan study assignments of toddlers in daycares as applied in Denmark. It is special because if the overlapping generation nature of daycares, and the fact that some children get preferential treatment (like previous attendees and siblings). The usual Gale-Shapley algorithm appears to be Pareto-optimal, at least among stable matching algorithms, as in simpler setups, but it is unfortunately not strategy proof and does not Pareto dominate all strongly stable algorithms. For once, another assignment mechanism seems to perform better. But I wonder what would happen when there is rationing in daycares, as is typically the case.

The economic behavior of bees

I find it fascinating that there is also plenty of Economics in the animal kingdom. Two recent papers about bees just caught my attention.

Antoine Champetier studies the interaction of bees and farmers, as bees play an important role in pollination and are thought to be subject to a mysterious decline in numbers. He takes California almonds as an example and builds a model of pollination supply with hive owners and bees that forage. One aspect appears to be rather important: economies of scale in the hive, as larger hives have an easier time regulating the temperature and can devote more time to more aggressive foraging. Champetier formulates a spatial model of foraging and coordination in the bee colony, where energy used and gained by foraging is assessed, as well as time costs in each step of pollen acquisition and storage.

Noam Bar-Shai, Tamar Keasar and Avi Shmida study what makes that a bee departs early or stays longer in a flower patch. Looking at videos, they concluded that bees cannot count, but are rather governed by clues left by odor marks (to prevent revisiting the same flowers) and current foraging success.

Economic education and opinions about free markets

Public opinion about economic policy in France and the United States are very contrasted. In France, free markets are viewed very suspiciously and government intervention is required left and right. In the US, it is about the opposite, the government should stay out of any business and no tax can be justified. I find it very frustrating to talk to people (not economists) from both countries as they seem conditioned to believe steadfastly in their view. In the case of France, I was nice shocked to hear an elected politician claim that social security could easily be fixed by taking the money that "lies" in the banks.

Radu Vranceanu and Jerome Barthelemy try to relate beliefs in economic paradigms and economic education. Through a survey, they asked French Internet users about their knowledge of basic economic principles, their views on pro-market reforms, along with various demographic and education indicators. The survey was linked from a business school's website, so answers come from a population likely to be more interested than average in economic issue, and probably more likely to be open to pro-business reforms than the average French citizen. Still, it is clear that economic literacy is a god predictor of open-mindedness towards free markets. I bet it is just the opposite in the US.

The pitfalls of $1 CEO salaries

CEO how agree to be paid no salary, or a minimal one, are viewed as heroes in media and the public. But in all the cases I know off, they are of course also compensated with stock options and other deferred pay schemes. So does it really make a difference to being paid a substantial salary?

Gilberto Loureiro, Anil Makhija and Dan Zhang find that not everything is rosy abut these $1 CEOs: They tend to be overconfident and thus expect to have very high compensation in the future. As a consequence, they try to deflect future criticism about their earnings by putting on an angel face now. Also, their overconfidence implies that shareholders do not fare well with them, probably the reason institutional investors avoid them. In other words, be wart of $1 CEOs!

What is the value of research?

What is the value of the research we do? The typical way we have to evaluate the impact of research is to count citations, and possibly weigh them in some way, in Economics and any other sciences (except maybe where patents are relevant). But this only evaluates how the research output is viewed within a narrowly defined scientific community. The contribution to social welfare is an entirely different beast to evaluate.

Robert Hofmeister tries to give research some value. The approach is to consider the scientific process through cohorts, where each wave provides fundamental research as well as end-applications based on previous fundamental research. A particular research results thus can have a return over many generations. It is an interesting way to properly attribute the intellectual source of a new product or process, but the exercise is of little value if it is not possible to quantify the social value of the end-application. Indeed, Hofmeister goes back to using citations in Economics for a data application, which is equivalent to evaluate research only within the scientific community. In terms of the stated goal of the paper, we are back to square one. In terms of getting a better measure of citation impact, this is an interesting application of an old idea. And the resulting rankings of journals and articles look very much like those that are already available.