Specialization is for insects

Even less blogging!

Well, maybe not less total blogging, but probably (even) less blogging on this particular blog.  With the arrival of Kate Noto, I'm now blogging on our family blog: www.jennyandnoto.com.  In principle, I could cross-post, but I couldn't figure out how to set that up.

I will still be blogging here from time-to-time, especially on research I find which relates to the intersection of economics and child-rearing.

Cool music

Heard this on the TV this evening: "Globe Trekker Theme Song," by Ian Ritchie.

Use your influence

I want to see the "making of" version of this video.  (via Sam Reich's blog)

Fun facts: Sam Reich is a very funny actor/producer/director.  He is also the son of Robert Reich, Professor of Public Policy at Berkeley and former Secretary of Labor under Clinton.  Sam writes "I dropped out of high school. My parents are both professors, so I like to think I got my education genetically."

I guess that's a good way to avoid the pernicious student loans that Robert is always talking about.

[H]ere's my proposal: Any college student can get full funding from the government, with only one string attached. Once they've graduated and are in the work force, they pay 10 percent of their incomes for the first 10 years of full-time work into the same government fund they drew on to finance their college education.

SDU

I had never heard of this organization before:

In 1983, [he] sparked the 'Great Marriage Debate' when he encouraged ... men to choose highly-educated women as wives. He was concerned that a large number of graduate women were unmarried. Some sections of the population, including graduate women, were upset by his views. Nevertheless, a match-making agency Social Development Unit (SDU) was set up to promote socialising among men and women graduates.

Before clicking the link above, try to guess the country where this took place (and, for bonus points, the name of the politician behind this unusual agency).

I wonder if there are any economics papers studying the SDU.  One could imagine a simple "differences-in-differences" (DD) research design looking at match-making outcomes before and after the SDU was set up (comparing across highly-educated women and non-highly-educated women).  Of course, the marriage markets aren't completely segregated by skill, so there are probably spillover effects onto the non-highly-educated women, invalidating the simple DD.  I guess you'd have to estimate a structural matching model a la Ariely, Hitsch and Hortacsu (AER 2010).

Go Buckeyes!

College football kicks off tonight.  I will be rooting for The Ohio State University to win the national championship this year.

I'm also in a competitive betting pool with my brother and his friends for the first time.  This economics paper is guiding my strategy:

Efficient markets in college football are tested over a 25-year period, 1976-2000. The market in general is found to be efficient, but betting on underdogs of more than 28 points violates a fair bet. The strategy of betting home underdogs reveals stronger results. Home underdogs of more than seven points are found to reject the null hypotheses of a fair bet over the last 10 years of the sample, 1991-2000. Home underdogs of more than 28 points are found to reject the null of no profitability during the same time frame.

Hawaii is a 21-point underdog at home tonight (against USC).  Go Rainbows!

Conspicuous Consumption and Race

I was feeling down after my latest rejection at a journal.  To improve my spirits, I re-read a paper that makes me proud to call myself an economist ("Conspicuous Consumption and Race," by Charles, Hurst, and Roussanov). 

Here is the abstract:

Using nationally representative data on consumption, we show that Blacks and Hispanics devote larger shares of their expenditure bundles to visible goods (clothing, jewelry, and cars) than do comparable Whites. These differences exist among virtually all sub-populations, are relatively constant over time, and are economically large. While racial differences in utility preference parameters might account for a portion of these consumption differences, we emphasize instead a model of status seeking in which conspicuous consumption is used as a costly indicator of a household’s economic position. Using merged data on race and state-level income, we demonstrate that a key prediction of the status-signaling model -- that visible consumption should be declining in reference group income -- is strongly borne out in the data for each racial group.  Moreover, we show that accounting for differences in reference group income characteristics explains most of the racial difference in visible consumption.

I really like this paper.  I think it's a great example of how to successfully use simple economic theory to derive empirical predictions that can be readily tested in the data.  One additional result I would have liked to have seen is what happens using within-state variation in reference group income over time (rather than defining reference group income by averaging across years within states).

Cool music

Jurassic 5, "Canto De Ossanha"

Here is a cover by Paul Dateh on violin (start at 1:07)

Cool music

Pretty Lights, "Summer's Gone"

I heard this on the campus radio station, WCRX (88.1 FM, Chicago)

Intuitive Reasoning in an Electoral Campaign

Read this amusing story in a recent paper by Gennaioli and Shleifer (2010, forthcoming QJE):

In 1972, during New York primaries, Senator George McGovern of South Dakota was courting the Jewish vote, trying to demonstrate his sympathy for Israel. As Richard Reeves wrote for New York magazine in August, ‘During one of McGovern’s first trips into the city he was walked through Queens by city councilman Matthew Troy and one of their first stops was a hot dog stand. “Kosher?” said the guy behind the counter, and the prairie politician looked even blanker than he usually does in big cities. “Kosher!” Troy coached him in a husky whisper. “Kosher and a glass of milk,” said McGovern.'

The paper itself presents a model of heuristic judgment under uncertainty where agents depart from the fully-rational Bayesian benchmark.  Here is how the authors summarize the paper:

The central assumption of the model is that, in the first instance, information retrieval from memory is both limited and selective. Some, but not all, of the missing scenarios come to mind of the decision maker. Moreover, the hypothesis in question primes the selective retrieval of scenarios from memory, with those most predictive of the hypothesis itself relative to the other hypotheses – the representative scenarios -- being retrieved first. In many situations, such intuitive judgment works well, and does not lead to large biases in probability assessments. But in situations where the representativeness and likelihood of scenarios diverge, intuitive judgment becomes faulty.

Cool music

D Numbers, "Xylem Up"  (www.dnumbers.com)

But what about Dad-chosen tasks?!?

Read this on the Freakonomics blog:

What kid doesn’t hate it when Mom makes them put on a sweater?  Apparently, Anglo-American children hate it so much that they perform worse on any task they believe was chosen for them by their mothers. ... While Asian-American children perform best in mom-chosen tasks, Anglo-American children perform best when they choose their own tasks.

World Cup

The Simpsons take on soccer football:

Fast-kicking, low-scoring, and ties -- you got it!

...

This match will determine once and for all which nation is the greatest on Earth -- Mexico or Portugal?

I note that both matches today ended in draw.

(Full disclosure: I watched most of the RSA-MEX game and found it entertaining to watch, though the ESPN announcers didn't appear to understand the actual offside rules)

Unequal Bequests

From Light and McGarry (2004):

Parents often appear to "play favorites" when distributing financial resources among their adult children. Recent studies indicate that in any given year, approximately 75 percent of parents who make inter vivos transfers to their children give unequal amounts. Even when making bequests -- where equal division is the norm -- as many as 20 percent of parents treat their children unequal.

They uncover lots of interesting patterns in the data.  For example:

The probability that a mother intends unequal bequests is significantly higher if she is in poor health ..., if she has nonbiological children, and if her children's predicted incomes are especially different from each other.

Performance Art

Interesting commentary from the New York Times.  I found this part amusing:

I don’t really believe in miracles, but I do believe in courtesy.

If you're more specialized and only want to read about the economics, here is an interesting article (also from the New York Times) on how to sell performance art to museums:

And as the talk turned to money, the acid splashed back toward Mr. Sehgal, who in his brief career — he is just 34 — has started an approach to selling performance art that is both providing museums with a new way to take ownership of it and enriching himself. In the past, performance artists have often sold photographic or video documentation of performances, say, or props and other artifacts left over after the events. But Mr. Sehgal is believed to be the first to have sold the rights to the performance itself; MoMA, for one, recently spent a reported $70,000 for an edition of “Kiss” (2004), a living sculpture that was on loan to the Guggenheim for the recent show and that requires its performers to stay locked for hours in a continuous, balletic embrace.

Cool music

The band Klee is kind of like the German version of the band Metric.  Here are two catchy songs:

Klee, "Gold"  (Wir werden wie gold sein ...)

Klee, "2 Fragen"

Judicial restraint

If I was a member of the U.S. Senate, I would ask Kagan how she would have ruled on this extremely important consumer fraud case.

ESPN reports:

NFL fans miffed by the New England Patriots' secret videotaping of their opponents' signals can boycott games or team merchandise, but they can't seek legal damages for "Spygate," a U.S. appeals court ruled Wednesday.

I'm surprised this case even made it to oral argument.  The whole article is incredibly amusing.

Mayer and his lawyer, Bruce Afran, both worked for consumer advocate Ralph Nadar earlier in their careers and consider "Spygate" a consumer-fraud case.

...

Mayer could seek a rehearing before the full 3rd Circuit Court or appeal to the U.S. Supreme Court. He did not immediately return a message.

...

Lawyer Shepard Goldfein, representing the NFL, argued that fans likely would buy tickets even if they knew the Patriots were stealing signals.

Cool Music

The XX, "Intro"  (Sadly, I can't listen to this song without thinking of Apolo Anton Ohno in this AT&T commercial)

The XX, "Teardrops"

Not Just Your Regular Zombies

I'm surprised this hasn't yet inspired a full-length feature film.  Here is one account:

When I first read that there was a zombie level at the end of the new Call Of Duty I was a bit incredulous.  Why mess with such a highly respected franchise?  I was sure that COD had jumped the shark.  Until I played the zombie level. From the first attempt I was hooked!  My favorite thing about WAW is NAZI ZOMBIES!  Its Dawn of the Dead meets Quinton Taratino meets COD with that 70's style campiness that we all love so much.

The first few times I played the Zombie level it was quite creepy and made me very anxious.  My pulse went up and I was actually mortified when the zombies eventually caught me.  Not for the faint of heart (or small children).

I am happy to say that I have been playing for over a month and the game still makes my heart pound and I still freak out when zombies catch up to me. This game is very addictive and I for one would love to see a spin off game with more buildings to play in, downloadable maps, etc.  I hope Treyarch hears my call and starts working immediately on a stand-alone version of Nazi Zombies.

Nazi Zombies sound pretty cool.  And by cool, I mean totally sweet.

Cool Music

The album Kingdom of Rust by Doves was released a year ago, but it's new music to me.

Doves, "Jetstream"

Doves, "The Outsiders"

George P. Schultz

I don't understand how one person could possibly be the most-qualified individual at the time for all of the following jobs:

• President of Bechtel Corporation
• Secretary of Labor
• Secretary of Treasury
• Secretary of State
• MIT Economics Professor
• Dean of Chicago Business School
• Member of the Council of Economic Advisers

My current theory is that this is prima facie evidence of the "old boy network", which perhaps isn't quite as strong as it used to be.  Alternatively, there is Steve Levitt's (and Laura Beth Nielsen's) view of the world:

My friend Laura Beth Nielsen at the American Bar Foundation has a theory that people who are good at one thing are good at everything. Since she shared it with me, I have thought often about whether it is true. I tend to believe it, with the important qualification that the right kind of practice is critical to being good at anything. It may well be that people who are good at one thing have learned how to do the right kind of practice, not just for that task, but more generally.

Let Me Decide

Bill Simmons writes an insightful, funny piece about the recent Masters golf tournament.  He also perfectly sums up my generation (italics in original):

It's unbelievable that in this current era of sports -- when I can watch a mundane Red Sox-Royals game on my BlackBerry while sitting at a stoplight in Manhattan Beach -- I couldn't watch 60 percent of the holes played on Thursday and Friday by Tiger Woods. I should be able to see anything I want in 2010. Just name me a price and let me decide whether I want to pay it. Augusta doesn't care. I can go screw myself. That's their attitude.

You're lucky you get to watch this tournament at all.

A somewhat related story: there is a new song called "Beam of Light" by the band Ear Pwr, and I can't find the lyrics on-line anywhere.  I can't understand how someone (anyone!) hasn't already transcribed the song for me to read while clicking through a couple of pop-up ads.  I should be able to find the lyrics for any song I want in 2010!

The Composition-Adjusted Unemployment Rate

The Economix blog is quite good (and not just because it mentioned me recently).  Today they highlight an interesting recent paper from the Federal Reserve Bank of Richmond, which attempts to create a measure of the unemployment rate holding the demographic characteristics of the workforce constant.  This is an interesting exercise, since it suggests that the aging of the workforce has been mechanically reducing the unemployment rate. 

An interesting research question is why the unemployment rate varies so much across the age distribution.  One way to proceed is to first try to understand how much of the demographic variation in the unemployment rate is due to supply and how much is due to demand -- i.e., is the high unemployment rate of teenagers primarily due to low demand for teenage labor or low attachment of teenagers to the labor force?  I have no idea.

Bond girls

I found this via Marginal Revolution:

ABSTRACT

A quantitative content analysis of 20 James Bond films assessed portrayals of 195 female characters. Key findings include a trend of more sexual activity and greater harm to females over time, but few significant across-time differences in demographic characteristics of Bond women. Sexual activity is predicted by race, attractiveness, size of role, and aggressive behaviors. Being a target of weapons is predicted by size of role, sexual activity, and weapon use, while being harmed is predicted principally by role. End-of-film mortality is predicted by sexual activity, ethical status (good vs. bad), and attempting to kill Bond. This identification of a link between sexuality and violent behavior is noted as a contribution to the media and sex roles literatures.

Source: "Shaken and Stirred: A Content Analysis of Women’s Portrayals in James Bond Film" from the journal "Sex Roles", 2009

I originally thought that once they allowed for a time trend and a constant term, they were left with only 18 degrees of freedom.  But I misread the abstract; they analyzed 20 bond films, not 20 female characters.  I think the authors may have been defining "Bond women" too literally, though; I doubt that there are 9.75 Bond women per film on average. 

This is also a good place to mention the Bechdel Test, which I have always found intriguing.  While watching Northanger Abbey last night, I realized that it didn't pass the male version of this test.

Pete Holmes

Here is your study break (or work break) for the day.

Projection Bias

Freakonomics is alive and well!  I have a soft spot for papers with titles that are puns:

"WEATHER TO GO TO COLLEGE"
ABSTRACT
Does current utility bias predictions of future utility for high stakes decisions? Here I provide field evidence consistent with such Projection Bias in one of life’s most thought-about decisions: college enrolment. After arguing and documenting with survey evidence that cloudiness increases the appeal of academic activities, I analyse the enrolment decisions of 1,284 prospective students who visited a university known for its academic strengths and recreational weaknesses. Consistent with the notion that current weather conditions influence decisions about future academic activities, I find that an increase in cloudcover of one standard deviation on the day of the visit is associated with an increase in the probability of enrolment of 9 percentage points.

I already knew those crazy people across the pond spell analyze as "analyse."  I did not know, however, that they spell enrollment as enrolment.  That's crazy!

One thing I like about this paper is that it documents that there is a correlation between weather and willingness to study.  That makes the (otherwise "cute") findings more plausible.

Cool Music

Delorean, "Seasun"

Ear Pwr, "Beam of Light"

Intrinsic Motivation

I liked this paragraph:

There’s a difference between wanting to be the best and wanting to be known as the best, wanting to reap the rewards of renown. “The fruits of action,” as the Bhagavad Gita puts it, are ... not the point of action.

The (New) New Economics of scarcity

This video (~30 minutes) provides me with one of those "I'm so happy to be an economist moments" (link comes from Marginal Revolution).  The video is a short debate between Glenn Loury (at Brown) talking with Sendhil Mullainathan (at Harvard).  They discuss behavioral economics, payday loans, and also go over some fascinating new research.

These guys were two of the handful of economists who motivated me to get an economics PhD.  Coate and Loury AER 1993 on the self-fulfilling (dis)incentive effects of affirmative action and Bertrand and Mullainathan JPE 2003 and QJE 2001 on CEO compensation were all papers that made me excited to start my training as an academic economist.

Cool Music

Bjork, "Earth Intruders (Lexx Remix)"

Lacunae, "Stars Burn Out"

Junior Senior, "Move Your Feet"

CEO pay: Gabaix and Landier (QJE, 2008)

WHY HAS CEO PAY INCREASED SO MUCH?

XAVIER GABAIX AND AUGUSTIN LANDIER

ABSTRACT
This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO’s pay depends on both the size of his firm and the aggregate firm size. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance. We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences.  In recent decades at least, the size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries. In particular, in the baseline specification of the model’s parameters, the sixfold increase of U.S. CEO pay between 1980 and 2003 can be fully attributed to the sixfold increase in market capitalization of large companies during that period.

I finally got around to reading this paper carefully because I'm tentatively planning to go over it in class.  It's a great example of why a paper doesn't need to be true to be useful.  I forget the precise quote (or even the source), but one viewpoint is that economists are unlike other social scientists because "we'd rather have a theory be precise than vague."

Gabaix and Landier develop a simple supply-and-demand model of the CEO labor market where the returns to CEO "talent" (or "ability") increase with firm size.  Mathematically, this means CEO ability and firm size are complements in production, which implies that in a competitive equilibrium there will be "positive assortative matching."  This kind of "matching" is common in many economic models, and ability-size complementarity is an important explanation for why large firms higher more skilled workers and why large cities attract more skilled workers.

From this single assumption (complementarity between ability and firm size) and a bunch of technical mathematical conditions based on "extreme value theory" (which aren't that restrictive), you get two main results:

1. The elasticity of CEO pay with respect to firm size is g - b in the cross section (where g and b are parameters of their model)
2. The elasticity of CEO pay with respect to firm size is g in the time series (where g is same constant as above)

The paper then documents in the data that at any point in time (from 1970 forward), the cross-sectional elasticity between CEO pay and firm size is roughly 1/3 (so g - b = 1/3), while within the U.S. over time the elasticity of CEO pay with respect to firm size is 1 (so g = 1). 

In my opinion, what's so interesting about this paper is that it's actually somewhat difficult to write down a simple model which generates such different cross-sectional and time-series predictions.  For example, a "skimming" view of CEO pay which posits that CEOs capture a percentage of firm profits (or revenues) would give the same cross-sectional and time-series predictions.  You could enrich the "skimming" model so that the amount you can skim depends somehow on overall the size distribution of firms, but that certainly would not be the simplest "skimming" model you could write down, while (technical conditions aside), this is one of the simplest supply-demand models you could come up with.

So overall, while I think this model is quite clearly not a literal description of reality, it's a really simple way to capture the main features of the data.  I also give the authors credit for being extremely upfront about the fact that their model does a really poor job describing the data before 1970 (and they generously cite the recent work of Frydman and Saks, who take a longer-run, historical view of CEO compensation).

I should also be clear that I don't think it makes sense to think about CEO pay as being set purely in supply-demand equilibrium, even as an approximation.  I think that issues of corporate (mis)governance and social norms matter a lot in determining CEO pay.  But this paper is still very useful because it shows that any theory of CEO pay needs to be able to account for both facts above and have an additional prediction which would make it empirically distinguishable from this simple supply-demand theory.

UPDATE: The quote above isn't exactly what I meant; I meant to write something along the lines of "we'd rather have a theory be precisely false than vaguely true."