Saturday, 24 October 2020

What Zespri could learn from slave redemption

The National Business Review reported on Thursday (paywalled):

Zespri’s board has given the green flag to trial buying fruit grown illegally in China, alongside continuing legal action against one Chinese nursery.

The kiwifruit exporter cooperative has estimated that as much as 4000 hectares of its star cultivar SunGold has been planted illegally in China, mostly in the Sichuan and Shaanxi provinces. The most mature orchards (four-plus years old) are producing about 80,000 trays per hectare and some are producing fruit that is comparable with or exceeds the Zespri standard...

In its September Canopy newsletter, Zespri said that in discussions with the governments of the two countries, it had received “strong advice” to investigate a win-win solution to help mitigate further plantings and maintain the value, and one option was partnering with local Chinese growers.

Chair Bruce Cameron said that the limited trial would involve buying up to 200,000 trays of fruit from a small number of growers. The aim, he said, was to understand “the potential for future commercial arrangements in China, the extent to which cooperation may facilitate enforcement activities for plant variety rights, and the [associated] opportunities and challenges”.

This reminded me of the story of slave redemption in Sudan in the 1990s (which I blogged about here). When well-meaning charity organisations began buying slaves in order to free them, that had a number of unintended consequences. As shown in the diagram below, the addition of charities as a new buyer in the market increased the demand for slaves from from D0 to D1, increasing the price of slaves (from P0 to P1), and importantly it increased the quantity of slaves traded (from Q0 to Q1). So slave redemption actually increased the quantity of slaves traded - the opposite of what was intended.

Now, the case of Zespri is similar to this. If they start buying illegally-grown Chinese kiwifruit, this increases the demand for kiwifruit in China. This increases the profit opportunities for farmers for growing illegal kiwifruit, and so more illegal kiwifruit will be grown.

Admittedly, Zespri is in a tough position, because China isn't known for strong protection of intellectual property rights (which includes 'plant variety rights'). However, further stimulating the market for illegal kiwifruit seems to me like a losing proposition for Zespri.

Friday, 23 October 2020

The labour market returns to apprenticeships in England

One of the Labour Party's policies in the lead up to the New Zealand election was a shift to free apprenticeships. A reasonable question is whether apprenticeships pay off for students - are they better off doing an apprenticeship than not? A recent article by Chiara Cavaglia, Sandra McNally, and Guglielmo Ventura (all London School of Economics), published in the journal Oxford Bulletin of Economics and Statistics (open access), looked at the labour market returns to apprenticeships in England.

One of the challenges of this type of research is determining the counterfactual - what would have been the labour market outcomes for young people who completed an apprenticeship, if they hadn't complete the apprenticeship. Of course, we can't know for sure, so the empirical strategy is really important. Cavaglia et al. compare:

...people with the same highest level of vocational qualification (Level 2 or Level 3), some of whom started an apprenticeship (the treatment group) and others who did not (i.e. the comparison group achieved their vocational qualification only within a classroom setting).

Even with the right comparison group, a basic comparison between the groups in (for example) labour earnings, would not tell you whether it was the apprenticeship that caused the difference in earnings. To identify the causal impact of apprenticeships, Cavaglia et al. use an instrumental variables approach, using as an instrument the extent to which each young person's school peers undertook an apprenticeship. This approach also has the advantage of overcoming bias due to unobserved variables like each young person's non-cognitive ability or motivation. As they describe it:

One way to address causality is to make use of variation in the probability of starting an apprenticeship that is not otherwise correlated with earnings. A plausible source of variation is (within school) cohort-to-cohort variation in the extent to which peers take up apprenticeships between the age of 16 and 18. This variation might exist because of increased exposure to information about apprenticeships via peers in the same grade... In this context, having a friend who starts an apprenticeship might provide additional information on opportunities, the application process and on future prospects.

So, young people are more likely to undertake an apprenticeship if their peers do so, but their peers undertaking an apprenticeship shouldn't affect the young person's labour market outcomes directly. That makes it a suitable instrument. Using this strategy, and linked education and tax records data for all cohorts of students in England who left schooling (at age 16) between 2002/03 and 2007/08 (about 17 million observations), Cavaglia et al. find:

...a very strong relationship between starting an apprenticeship and log earnings at age 23. For men, apprenticeships raise earnings by 30% and 46% for those educated up to Levels 2 and 3 respectively. For women, they raise earnings by 10% to 20% for the respective groups.

However, they find that the earnings premium for an apprenticeship is much smaller (but still significant, especially for men) by age 28. Much of the gender difference in returns is due to differences in the industries in which men and women undertake apprenticeships. Specifically:

There is relatively little overlap in the most popular ten sectors for men and women. Where there is overlap, the earnings premium to having started an apprenticeship tends to be higher for men: at Level 2 - Administration (20% v 6%); Retailing and Wholesaling (12% v 9%), Sports, Leisure and Recreation (11% v 8%); at Level 3 – Administration (21% v 5%), Business Management (25% v 14%), Sport, Leisure and Recreation (24% v 11%). Since we observe a gender earnings gap within sectors that are popular both among men and women, the sector of vocational education cannot entirely explain why the earnings premium to having started an apprenticeship is higher for men than for women.

The gender gap in the returns to an apprenticeship persists after controlling for the industry that the apprenticeship was in, as well as employer characteristics. More research is clearly needed if we want to understand this gender gap.

Overall though, it is clear that the benefits of apprenticeships, in terms of labour market returns, are high, for both men and women. The paper doesn't evaluate whether those benefits outweigh the costs, but if the costs to students are zero (as they soon may be in New Zealand), you can be sure that the private benefits exceed the private costs.

Wednesday, 21 October 2020

Adam Smith on positivity bias

There's an inside joke among economists that there has been nothing new in economics since Adam Smith. Personally, I'm continually surprised at how many 'modern' economic concepts can be traced back to Smith.

Recently, I've been reading The Winner-Take-All Society by Robert Frank and Philip Cook (book review to come soon). They pointed me to this passage from Smith's 1776 book The Wealth of Nations, where Smith seems to anticipate the behavioural economics idea of positivity bias:

The over-weening conceit which the greater part of men have of their own abilities, is an ancient evil remarked by the philosophers and moralists of all ages. Their absurd presumption in their own good fortune, has been less taken notice of. It is, however, if possible, still more universal. There is no man living who when in tolerable health and sprits, has not some share of it. The chance of gain is by every man more or less over-valued, and the chance of loss is by most men under-valued, and by scarce any man, who is in tolerable health and spirits, valued more than it is worth.

Positivity bias (or optimism bias) occurs when we overestimate our own abilities. It occurs when we either overestimate the benefits of things that we do, or underestimate the costs (including opportunity costs) of things that we do, simply because we are the ones doing them. After all, we are awesome! Positivity bias leads us to invest in things we shouldn't invest in (i.e. by 'over-valuing the chance of gain), and to take risks that we shouldn't take (i.e. by 'under-valuing the chance of loss). Although the ideas of behavioural economics are relatively recent, this is at least one idea that can be traced all the way back to Adam Smith.

Tuesday, 20 October 2020

Economists don't believe in civic honesty, but they should

This article by Alain Cohn (University of Michigan), Michel André Maréchal (University of Zurich), David Tannenbaum (University of Utah), and Christian Lukas Zünd (University of Zurich), published in the journal Science (open access), caused a bit of a stir last year. I've only just had the chance to have a proper read of it.

Cohn et al. conducted a field experiment to test the level of civic honesty in 355 cities across 40 countries. Specifically, they:

...turned in “lost” wallets and experimentally varied the amount of money left in them, which allowed us to determine how monetary stakes affect return rates across a broad sample of societies and institutions...

Wallets were turned in to one of five types of societal institutions: (i) banks; (ii) theaters, museums, or other cultural establishments; (iii) post offices; (iv) hotels; and (v) police stations, courts of law, or other public offices...

Our key independent variable was whether the wallet contained money, which we randomly varied to hold either no money orUS$13.45 (“NoMoney” and “Money” conditions, respectively)... Each wallet also contained three identical business cards, a grocery list, and a key.

They found that:

...our cross-country experiments return a remarkably consistent result: citizens were overwhelmingly more likely to report lost wallets containing money than those without. We observed this pattern for 38 of our 40 countries, and in no country did we find a statistically significant decrease in reporting rates when the wallet contained money. On average, adding money to the wallet increased the likelihood of being reported from 40% in the NoMoney condition to 51% in the Money condition (P < 0.0001).

Here's the key result graphically (note that New Zealand is among the countries with the highest level of civic honesty):

Cohn et al. also tried leaving an even larger amount (US$94.15) in wallets in three countries (the U.S., the U.K., and Poland), and that increased civic honesty even more. They then conducted a survey in those three countries, asking people what they expected to happen. They found that:

Respondents predicted that rates of civic honesty would be highest when the wallet contained no money (mean predicted reporting rate M = 73%, SD = 29), lower when the wallet contained a modest amount of money (M= 65%, SD = 24), and lower still when the wallet contained a substantial amount of money (M= 55%, SD = 29).

So, clearly the average person on the street doesn't think that people are as honest as they actually are. And then comes the real 'gotcha' moment in this paper. Cohn et al. ran a similar survey with a sample of "279 top-performing economists", and found that:

...respondents on average predicted that rates of civic honesty would be higher in the NoMoney and Money conditions (M=69%, SD=25 and M=69%, SD=21, respectively) than in the BigMoney condition (M = 66%, SD = 23). These predictions were again significantly different from the actual changes we observe across conditions (P < 0.001 for all pairwise comparisons).

So, apparently economists don't believe in civic honesty. So, what explains this unanticipated (at least, by the public in general, and by academic economists) result? Cohn et al. create a narrative model to explain, where:

...civic honesty is determined by the interplay between four components: (i) the economic payoff of keeping the wallet, (ii) the fixed effort cost of contacting the wallet’s owner, (iii) an altruistic concern for the owner’s welfare, and (iv) the costs associated with negatively updating one’s self-image as a thief (what we call theft aversion).

It is likely to be (iii) and (iv) that explain the desire to return the wallet. In relation to (iv), Cohn et al. rely on their three-country survey, and find that:

Respondents reported that failing to return a wallet would feel more like stealing when the wallet contained a modest amount of money than when it contained no money and that such behavior would feel even more like stealing when the wallet contained a substantial amount of money (P ≤ 0.007 for all pairwise comparisons)...

It's not the most persuasive evidence, particularly since it doesn't preclude (iii) from having an even larger effect. Some further research will be needed to unpack which of those two effects is largest.

However, this paper has highlighted an important issue. As I noted when I reviewed George Akerlof and Rachel Kranton's excellent book Identity Economics, the omission of identity from economic models is a potentially important omission. If the surveyed economists had recognised that the way that people view themselves is an important component of their utility function, and that self-perception as a 'thief' reduces people's utility, then perhaps these results would have been better anticipated, and the surveyed economists wouldn't have looked quite as foolish. Would it be too much to hope for that economists have learned from this?

[HT: Marginal Revolution, last year]