This year’s nobel prize in economics was awarded to Thomas Shelling and Robert Aumann. This is a very powerful pair of game theorists. Interestingly enough, you can see that a lot of Schelling’s most intriguing work is not very mathematical–although later on, other people provided mathy models of his ideas–and yet, he takes you from very reasonable premises to really counter-intuitive results. Aumamn’s work, on the other side, is very mathematically sophisticated… and yet, full of philosophical implications.

Which goes to show you that you can make valuable contributions in social science with or without mathematical sophistication… but you have to be just as smart as Schelling.

Marginal Revolution provides valuable info:

Thomas Schelling

But beware of other psychological heuristics:

Well-known:

• Anchoring and adjustment
• Availability heuristic
• Representativeness heuristic

Lesser-known:

• Affect heuristic
• Contagion heuristic
• Effort heuristic
• Familiarity heuristic
• Fluency heuristic
• Peak-end rule
• Recognition heuristic
• Scarcity heuristic
• Similarity heuristic
• Simulation heuristic
• Social proof
• Take-the-best heuristic

Via Brad DeLong, some words of wisdom (ok, sort of, depending on how though you are with the biases of the author of this op-ed) from Leszek Balcerowicz (of Poland’s central bank) on “the Polish escape route from Really Existing Socialism”:

The Wealth of Nations: [I]t is so important to analyze which policies work and which ones fail, to generate lasting convergence — and to bring poor countries out of poverty…. Communism, an extreme form of statism, went farthest to suppress markets and criminalize entrepreneurship. The opportunity costs of this organized folly were enormous: relative per-capita income in Poland, for example, declined from about 100% of that in Spain in 1950 to only 40% in 1990. And with the collapse of the communist system, a great natural experiment began. Looking at its results, one is struck by the huge differences among countries of the former Soviet bloc:

• In 2004, GDP had increased, relative to 1989, by 42% in Poland, 26% in Slovenia, and 20% in Slovakia and Hungary. In contrast, it declined by 57% in Moldova and 45% in Ukraine. If the shadow economy were included in the calculations, the differences in output would be smaller, but they would still be large.
• All transition economies have made considerable progress in lowering inflation, yet better long-run growth performance went hand in hand with lower inflation. This confirms that in countries that inherit high inflation, successful disinflation is conducive to long-term economic growth.
• Foreign direct investment usually follows past economic success and strengthens future economic success. Between 1989-2003, the Czech Republic attracted $3,700 per capita in FDI, Hungary $3,400, the three Baltic countries $1,000-$2,400 and Poland $1,300. FDI inflows per capita to Ukraine and Moldova were only $128 and $210, respectively.

Countries with better economic outcomes tend to achieve better non-economic results as well… energy efficiency… life expectancy… infant mortality….

In terms of GDP growth, it is tempting to look at differences in the initial conditions…. [D]ifferences in initial conditions, however, can explain only a part of the difference…. [D]ifferences in longer-run growth are largely due to more extensive market-oriented reforms and more successful macroeconomic stabilization….

Postcommunist countries that moved more toward a market economy achieved better economic (and non-economic) results than those that implemented fewer market-oriented reforms or none at all…. [N]o poor country has achieved lasting convergence under any of the statist or failed-state systems…. [T]he acceleration of growth does not have to wait until “good” institutions emerge… growth may accelerate during the reform process… [if] reforms increase output and productivity in previously repressed sectors (agriculture in China or the service sector in the Soviet system), or because the previous incentive structure encouraged massive waste (command socialism)….

The common features of the “miracle countries” include low tax-to-GDP ratios due to a lack of extensive welfare states. This tends to increase labor supply and promote private savings…. An extensive welfare state crowds out the voluntary forms of human solidarity, and — especially in poorer economies — can obstruct economic growth. This is a warning to those poorer economies which have now much higher public-spending-to-GDP ratios than Sweden, Germany or France did when they had similar income per capita….

Reforms are frequently announced, but not implemented, or they may be implemented initially but then reversed or seriously amended. In such cases, criticizing the failure of market reforms is misplaced. Market-oriented reforms may well fail — if they are incomplete in critical ways. One example would be introducing a fixed exchange rate regime without fiscal discipline. Argentina’s recent collapse reminds us that fiscally irresponsible politics may undermine the results of genuine market reforms. Market-oriented reforms may also fail to generate lasting convergence if some of their crucial elements are badly structured, e.g. a serious miscalculation of the initial level of a fixed exchange peg or a bad incentive structure in the bankruptcy law. None of these problems validate the search for a “Third Way” solution…. They are merely hurdles to be overcome on the path to a full-fledged market economy

Columbia se puso a contratar new faculty al mayoreo este año:

http://www.columbia.edu/cu/economics/

New Faculty 2005-2006
		Arriving From
Senior
Patrick Bolton (joint with Business School)		Princeton
Yeon-Koo Che		Wisconsin
Pierre-André Chiappori		Chicago
Janet Currie		UCLA
W. Bentley MacLeod (joint with SIPA)		USC
Bernard Salanié		Ecole Polytechnique
Edward Vytlacil		Stanford
Junior
Stefania Albanesi		Duke Fuqua Business School
Kate Ho		Harvard
Wolfram Schlenker (joint with SIPA)		UCSD

——————————————

Aquí está el chisme con más detalle:

Freakonomizing
To cash in on the hottest academic trend, Columbia bought in bulk.
Who They Hired
Columbia added seven renowned scholars to its economics department in just one year.
Who They Might Hire
The buying spree’s not over.
A Closer Look at Sunspot Theory
How it could rewrite the rules of recruiting.

This is Robert Frank on having his students look for interesting questions and stories and then write about them, like:

“Why do brides often spend thousands of dollars on wedding dresses they will never wear again, while grooms often rent cheap tuxedos, even though they will attend many formal social events in the future?”

(…) there is no better way to master an idea than to write about it. Although the human brain is remarkably flexible, learning theorists now recognize that it is far better able to absorb information in some forms than others. Thus, according to the psychologist Jerome Bruner, children “turn things into stories, and when they try to make sense of their life they use the storied version of their experience as the basis for further reflection.” He went on, “If they don’t catch something in a narrative structure, it doesn’t get remembered very well, and it doesn’t seem to be accessible for further kinds of mulling over.” Even well into adulthood, we find it easier to process information in narrative form than in more abstract forms like equations and graphs. Most effective of all are narratives that we construct ourselves.

The economic-naturalist writing assignment plays to this strength. Learning economics is like learning a language. Real progress in both cases comes only from speaking. The economic-naturalist papers induce students to search out interesting economic stories in the world around them. When they find one, their first impulse is to tell others about it. They are also quick to recount interesting economic stories they hear from classmates. And with each retelling, they become more fluent in the underlying ideas.

Many students struggle to come up with an interesting question for their first paper. But by the time the second paper comes due, the more common difficulty is choosing which of several interesting questions to pursue.

(…) Daniel Boorstin, the former librarian of Congress, used to rise at 5 each morning and write for two hours before going into the office. “I write to discover what I think,” he explained. “After all, the bars aren’t open that early.” Mr. Boorstin’s morning sessions were even more valuable than he realized. Writing not only clarifies what you already know; it is also an astonishingly effective way to learn something new.

I agree, a most good economics boils down to good story-telling–but you have to understand the underlying model, btw. Unfortunately, many economists focus more on the size of their toolbox than in the power of the stories they can tell with even the most basic tools.

These links come from Sandra Peart’s new blog: Adam Smith Lives!

• Searchable, extensive database of works in the History of Econ Ideas (ECONLIB)
• History of Economic Thought Website (New School)
• History Of Economics Society
• McMaster University Archive for the History of Economic Thought
• Summer Institute for the HET
• ANU – History of Economic Thought Society of Australia
• ECHE – European Conferences on the History of Economics
• JSHET – Japanese Society for HET
• The Economists’ Papers Project at Duke University
• Economists’ Portraits

Two (unrelated?) papers on institutional choice… one with an innovative
methodology, the other with a cool history lesson.

“The Choice of Institutions: The Role of Risk and Risk-Aversion”
DIANA WEINHOLD
University of London
PAUL J. ZAK
Claremont Graduate University
http://papers.ssrn.com/paper.taf?abstract_id=784765

ABSTRACT:
Institutions can affect individual behavior both via their efficiency impact
and via their risk reducing mechanisms. However there has been little study
of the relative importance of these two channels in how individuals choose
between simultaneously extant institutions. This paper presents a simple
model of institutional choice in a labor market when there is a risk/reward
trade-off, and tests the predictions of the theory. Using a novel empirical
approach that adapts an ARCH-in-mean to cross-sectional survey data from
China, we find that risk and risk aversion are strongly related to the
choice of a labor market institution. Further, risk and risk aversion are
quantitatively more important than the sectoral wage differential in
explaining employment institution choices. Specifically, we find that wage
risk has two orders of magnitude greater impact on labor market
institutional choice than the wage difference, with a one standard deviation
increase in earnings risk reducing the number of workers choosing jobs in
the private (risky) sector by 22%.

JEL Classification: P3, J21, J40

“‘Rulers Ruled By Women’ An Economic Analysis of the Rise and Fall of
Women’s Rights in Ancient Sparta”
ROBERT K. FLECK
Montana State University – Bozeman
F. ANDREW HANSSEN
Montana State University – Bozeman
http://papers.ssrn.com/paper.taf?abstract_id=788106

ABSTRACT:
Throughout most of history, women as a class have possessed relatively few
formal rights. The women of ancient Sparta were a striking exception.
Although they could not vote, Spartan women reportedly owned 40 percent of
Sparta’s agricultural land and enjoyed other rights that were equally
extraordinary. We offer a simple economic explanation for the Spartan
anomaly. The defining moment for Sparta was its conquest of a neighboring
land and people, which fundamentally changed the marginal products of
Spartan men’s and Spartan women’s labor. To exploit the potential gains from
a reallocation of labor – specifically, to provide the appropriate
incentives and the proper human capital formation – men granted women
property (and other) rights. Consistent with our explanation for the rise of
women’s rights, when Sparta lost the conquered land several centuries later,
the rights for women disappeared. Two conclusions emerge that may help
explain why women’s rights have been so rare for most of history. First, in
contrast to the rest of the world, the optimal (from the men’s perspective)
division of labor among Spartans involved women in work that was not easily
monitored by men. Second, the rights held by Spartan women may have been
part of an unstable equilibrium, which contained the seeds of its own
destruction.

JEL Classification: D23, D70, J16, J20, K11, N33, N43

This is Pete Boettke on the incoming class to my Ph.D. program at GMU:

“Our students are unusual for PhD students and many of them are more likely
to be weighing a PhD in another discipline rather than another economics
department when making their decision.”

In my case, that was true–during my first year I considered switching to Political Science in Rochester, of all places. And these are words of wisdom:

“For those entering the PhD program with the hope of pursuing an academic career, they need to start thinking about research papers right now. For students coming from an out of sync [that is, non-mainstream] department such as GMU the most important signal they can send is with published papers in refereed journals, and in particular published papers in mainstream journals. Failure to do so will result in a frustrating job search. I have been telling graduate students for a decade that the formula for success is:

PhD in hand + refereed publication(s) + strong teaching evaluations = tenure track job

The other factor in this equation is the ‘lunch tax’ that the individual represents. The more difficult the person is to take as a personality, the stronger publications they will have to have in order to signal that they are worth it.”

Did I land my first job with a publication in hand? No. And I don’t have my Ph.D. yet either, which tells you how lucky I was when CIDE bought my services–I guess I must have a big “lunch subsidy” somewhere :-). More seriously, notice the direction of causality: If you have all those observable ingredients, a good job is secured–if not, your job prospects are less certain and cling on other unobservable factors.

Bottomline: Make whatever you need so that your skills and potentials are observable.

Pessimister thinks all times past were better. But in case you haven’t noticed, these are clear long run trends in the U.S. economy–a successful market-oriented economy:

1. Working hours decrease while real salaries rise–the pie gets bigger and people have more time to spare.
2. Women labor force participacion has increased while household work decreases–given the payoffs, women are revealing their preferences towards non-household working hours.
3. The share of expenses in recreation goods increase while its price decreases–people are having fun!

There are no ifs or buts here: these are good news. So… how come? Jeremy Greenwood and Guillaume Vandenbroucke provide and answer in Hours Worked: Long-Run Trends:

For 200 years the average number of hours worked per worker declined, both in
the market place and at home. Technological progress is the engine of such
transformation. Three channels of effect will be stressed here.

First, technological progress increases wages. On the one hand, an increase in real wages should motivate more work e¤ort since the price of consumption goods in terms of forgone leisure has fallen. On the other hand, for a given level of work effort a rise in wages implies that individuals are wealthier. People may desire to use some of this increase in living standards to enjoy more leisure.

Second, the value of not working has also risen due to the advent of many new leisure goods. Leisure goods by their very nature are time using. Think about the impact of the following products: radio, 1919; television, 1947; monopoly, 1934; videocassette recorder, 1979; Nintendo and Trivial Pursuit, 1984.

Third, other types of new household goods have reduced the need for housework. These household goods are time saving. Examples are: electric stove, 1900; iron, 1908; frozen food, 1930; clothes dryer, 1937; Tupperware, 1947; dishwasher, 1959; disposable diaper (Pampers), 1961; microwave oven, 1971; food processor, 1975. Some goods can be both time using or time saving depending on the context: the telephone, 1876; IBM PC, 1984.

India seems to be a good testing ground for all kinds of things–which is a bit surprising since one would expect poor data availability in that country. You can also tell that Indian economists are the ones pushing this agenda (not that there’s anything wrong with that!). Bottomline: We should be able to do similar things based on Mexican data and advertise/sell them as successfully as these Indian studies do (a quick JSTOR search for “India” in title will show what I mean).

“Political Selection and the Quality of Government: Evidence from South India”
TIMOTHY J. BESLEY, London School of Economics & Political Science
ROHINI PANDE, Yale University
VIJAYENDRA RAO, World Bank
http://papers.ssrn.com/paper.taf?abstract_id=777507

ABSTRACT:
This paper uses household data from India to examine the
economic and social status of village politicians, and how individual and
village characteristics affect politician behavior while in office.

Education increases the chances of selection to public office and reduces
the odds that a politician
uses political power opportunistically. In contrast, land ownership and
political connections enable selection but do not affect politician opportunism.

At the village level, changes in the identity of the politically dominant
group alters the group allocation of resources but not politician opportunism.
Improved information flows in the village, however, reduce opportunism and
improve resource
allocation.

JEL Classification: O12, H11, H42, O20

“Dams”
ESTHER DUFLO, Massachusetts Institute of Technology (MIT)
ROHINI PANDE, Yale University
http://papers.ssrn.com/paper.taf?abstract_id=796170

ABSTRACT:
The construction of large dams is one of the most costly and controversial forms of public infrastructure investment in developing countries, but little is known about their impact. This paper studies the productivity and distributional effects of large dams in India. To account for endogenous placement of dams we use GIS data and the fact that river gradient affects a district’s suitability for dams to provide instrumental variable estimates of their impact.

We find that, in a district where a dam is built, agricultural production does not increase but poverty does. In contrast, districts located downstream from the dam benefit from increased irrigation and see agricultural production increase and poverty fall. Overall, our estimates suggest that large dam construction in India is a marginally cost-effective investment with significant distributional implications, and has, in aggregate, increased poverty.

JEL Classification: O21, O12, H43, H23

Robin Hanson, (former professor of mine–always smart, sometimes hard to read, and very hard to please in an exam) wrote an excellent short piece on “cynical beliefs” and “cynical moods”. IMHO, some cynics are very smart and they actually become successful, but it is the extreme cynics–those who deprecate not only everything they see but also everything they do–who end up looking like losers.

The scornful sneering contemptuous cynical mood is not particularly attractive. So why does anyone ever adopt it? And why is such a mood associated with the cynical belief that hypocrisy and low motives are widespread?

Let us first notice some patterns about cynical moods. It seems that the young tend to be more idealistic, while the old are more cynical. People can remain idealistic their entire lives about social institutions that they know little about, but those who know an institution well tend to be more cynical. Leaders and the successful in an area tend to be less cynical than underlings and failures in that area. Things said in public tend to be less cynical than things said in private. People seem to prefer the young to be idealistic, and to discourage the teaching of cynicism. Cynicism is not considered an attractive feature.

Now how can we explain cynical moods? I can see two main explanations, one idealistic and one cynical, varying the motives and abilities they posit for the cynic.

The idealistic explanation of cynical moods is that the cynic has unusually high motives or insight. He was better able to see behind false appearances, and he was more shocked and disapointed to discover the low motives of others. Because he is unwilling to be hypocritical, he is less popular and so he succeeds and leads less. People dislike cynics because cynics expose their hypocrisy.

The cynical explanation of cynical moods is that the cynic has unusually low motives or ability. He can better see low motives because he has them in spades, and the cynic complains to belittle the success of others. That is, if he cannot win in some area then he will complain that the game is unfair, or that those who succeed are not really very praiseworthy. People do not like cynics because cynics are losers.

The Economic Effects of Judicial Accountability. Some Preliminary Insights.
Stefan Voigt

http://d.repec.org/n?u=RePEc:icr:wpicer:19-2005&r=pol

Judicial independence is not only a necessary condition for the impartiality
of judges, it can also endanger it: judges that are independent could have
incentives to remain uninformed, become lazy or even corrupt. It is
therefore often argued that judicial independence and judicial
accountability are competing ends. In this paper, it is, however,
hypothesized that they are not necessarily competing ends but can be
complementary means towards achieving impartiality and, in turn, the rule of
law.

It is further argued that judicial accountability can increase per capita
income through various channels one of which is the reduction of corruption.
First tests concerning the economic effects of JA are carried out drawing on
the absence of corruption within the judiciary as well as data gathered by
the U.S. State Department as proxies. On the basis of 75 countries, these
proxies are highly significant for explaining diffe rences in per capita
income.

Keywords: Judicial Independence; judicial accountability; rule of law;
economic growth; corruption; constitutional political economy.

JEL:H11 K40 O40 P51

…so much for the wishful thinking of Art. 3 of the Mexican constitution…

“A cost-benefit analysis indicates that tuition reduction can be a socially efficient method for increasing college completion. However, even with the offer of free tuition, a large share of students continue to drop out, suggesting that the direct costs of school are not the only impediment to college completion.”

Building the Stock of College-Educated Labor
SUSAN M. DYNARSKI
Harvard University
John F. Kennedy School of Government
http://papers.ssrn.com/paper.taf?abstract_id=800124

ABSTRACT:
Half of college students drop out before completing a degree. These low rates of college completion among young people should be viewed in the context of slow future growth in the educated labor force, as the well-educated baby boomers retire and new workers are drawn from populations with historically low education levels. This paper establishes a causal link between college costs and the share of workers with a college education. I exploit the introduction of two large tuition subsidy programs, finding that they increase the share of the population that completes a college degree by three percentage points. The effects are strongest among women, with white women increasing degree receipt by 3.2 percentage points and the share of nonwhite women attempting or completing any years of college increasing by six and seven percentage points, respectively. A cost-benefit analysis indicates that tuition reduction can be a socially efficient method for increasing college completion. However, even with the offer of free tuition, a large share of students continue to drop out, suggesting that the direct costs of school are not the only impediment to college completion.