Thursday, 28 March 2019

Killing crocodiles might save crocodiles, but only with closed access

I've written a few times about endangered species, and about how assigning private property rights (such as through farming) might be one way to save them (for example, see this 2015 post about lions). This article in The Conversation yesterday, by Daniel Natusch (Macquarie University), Grahame Webb (Charles Darwin University), and Rick Shine (University of Sydney), makes a similar point:
Banning the use of animal skins in the fashion industry sounds straightforward and may seem commendable – wild reptiles will be left in peace, instead of being killed for the luxury leather trade.
But decades of research show that by walking away from the commercial trade in reptile skins, Selfridges may well achieve the opposite to what it intends. Curtailing commercial trade will be a disaster for some wild populations of reptiles.
How can that be true? Surely commercial harvesting is a threat to the tropical reptiles that are collected and killed for their skins?
Actually, no. You have to look past the fate of the individual animal and consider the future of the species. Commercial harvesting gives local people – often very poor people – a direct financial incentive to conserve reptile populations and the habitats upon which they depend.
As Natusch et al. note, if people can earn income from harvesting and selling crocodiles (or crocodile eggs), then there is an incentive to keep crocodiles around. The most straightforward example of this is farming. People are allocated private property rights over crocodiles (they own them in the general sense), and that creates an incentive for each farmer to sustainably manage their crocodiles.

However, in their article Natusch et al. are essentially arguing that the incentives are the same if you are thinking about maintaining wild populations of crocodiles. That is, if people can harvest from the population of wild crocodiles, then there is an incentive for people to maintain the population. However, while the authors appeal to previous research that supports their argument, they ignore an equally large literature on the Tragedy of the Commons. A population of wild crocodiles is a common resource - it is rival and non-excludable. Rival goods are those where one person's use of the good reduces the amount available to everyone else, i.e. in this case killing one crocodile reduces the number of crocodiles available to everyone. Non-excludable goods are those where you cannot easily prevent a person from obtaining the benefit from them, i.e. in this case it would be difficult to stop people from killing crocodiles.

The Tragedy of the Commons arises because the private incentive (to harvest as many crocodiles as you can, in order to maximise the income for your family) is not aligned with the social incentive (to keep the population sustainable). It leads to over-harvesting, and threatens the crocodile population.

Farming solves this problem by assigning property rights - it makes crocodiles a private good - rival but excludable (because only the crocodile farmers can kill them). However, what Natusch et al. are suggesting would not work without some other controls in place.

As the Nobel Prize winner Elinor Ostrom noted, the problem with common resources arises when they are open access - when everyone can access them freely with no restrictions. Private property rights are one way to restrict access, but not the only way. Another way to manage a population of wild crocodiles would be to issue harvest permits, with only permit holders allowed to kill crocodiles. This would make crocodiles closed access, and is similar to how we manage fisheries with the Transferable Quota system. This essentially creates a property right - the right to kill crocodiles.

Provided only a few permits are issued, the permit holders would have an incentive not to take too many crocodiles, because that would limit their future livelihoods. The more permit holders there are, the more the solution starts to dissolve into the open access Tragedy of the Commons, so limiting their numbers is necessary for sustainability.

So, as Natusch et al. argue, prohibiting the killing of crocodiles is not a good way to save them. However, incentives alone are not the solution. Some form of property rights needs to be created to ensure the long-term sustainability of the crocodile population.

Monday, 25 March 2019

Registering guns vs. registering gun owners

Unsurprisingly, gun control is in the news, with the government having announced an impending ban on military-style semi-automatic (MSSA) weapons. That ban is long overdue, with the 1997 Thorp report noting that:
...the potential consequences of MSSA misuse clearly outweigh any benefit to society in permitting their ownership.
Any doubt as to how to measure the costs of allowing MSSA ownership was cruelly put to rest on Friday 15 March. Those costs clearly outweigh the benefits of farmers being able to rapidly exterminate rabbits without having to spend time re-loading their weapon.

However, this isn't a post about MSSAs. It is about another aspect of gun control - registration. New Zealand has a system where gun owners are registered, but individual firearms are not. In the U.S., individual firearms are registered, but for the most part gun owners are not (there are some differences in regulations between different states). What impact does the difference in registration systems make to the number of people with at least one gun, and the number of guns per gun owner?

Consider a system of gun registration. Every gun is registered. The cost of gun registration is included in the price of each gun that is sold (possibly the cost of registration is an explicit part of the price, or perhaps the costs of the registration system are borne by manufacturers or sellers, in which case they charge a higher price to compensate). [*]

We can think of this registration system as the base case, illustrated in the diagram below with the black lines. In this model, the gun consumer is choosing between buying guns (X, measured on the x-axis) or all other goods (AOG, measured on the y-axis). The straight black line is their budget constraint, which represents the most the consumer can afford to buy with their income, when there is a single price-per-unit for guns (including the cost of registration). The consumer purchases the bundle of goods E, which is on the highest indifference curve they can get to (I0). This bundle includes X0 guns, and A0 of All Other Goods.

Now consider what happens if guns are not registered, but owners are. This is an example of two-part pricing. Two-part pricing occurs when the price is split into two parts: (1) an up-front fee for the right to purchase; and (2) a price per unit. Here, the up-front fee is the cost of registering for a firearms licence. The price per unit is the cost of the gun. However, the cost of the gun is lower than it would be when guns are registered, because of the saving on the cost of gun registration.

Because of the up-front fee (firearms licence), the budget constraint starts at a lower point on the y-axis, since paying for the firearms licence is like giving up income for the consumer. Then, because there is a lower per-unit price, the budget constraint for licensing gun owners (the red budget constraint) is flatter than for licensing guns. Let's assume it passes through the point E (so the consumer could still purchase that bundle of goods if they wanted to). There is one other point that we need to recognise - if the consumer buys no guns, then they do not need to pay for a firearms licence. So Bundle C is also an option for the consumer.

When gun owners are licensed instead of guns, this consumer can now reach a higher indifference curve, by buying the bundle of goods D (their new best affordable choice). This bundle includes more guns (X1), and less of All Other Goods (A1). So, we would expect gun owners to own more guns if gun owners are registered, but guns are not.

Is there evidence to support this? Let's compare New Zealand and the U.S. In New Zealand, there are 245,000 firearms licences, and 1.2-1.5 million firearms (see the statistics at the bottom of this article). That accounts to a rate of about 5.5 firearms for each person with a licence. In the U.S., about 25% of adults own at least one firearm (see the statistics in this article), or about 60 million adults, and there are about 300 million firearms, or about five firearms for each gun owner. So, that provides some slight support for the model.

However, notice that the rate of gun ownership among New Zealand adults (245,000 out of roughly 3.5 million adults is roughly 7 percent) is substantially less than in the U.S. (25 percent). What accounts for this?

Consider consumers with low demand for gun ownership, as shown in the diagram below by the blue indifference curves (the red indifference curves show the preferences for high-demand consumers). With gun registration, the low demand consumer buys Bundle G, which includes X1 guns, and A1 of All Other Goods. When guns are registered, even many low-demand consumers prefer to own a gun.

However, if gun owners are registered instead of guns, the low demand consumer can no longer afford bundle G (it is outside the new budget constraint). The highest indifference curve they can get to is I0, where they buy Bundle C. This bundle includes no guns. These low demand consumers find themselves better off by not buying any guns at all, because then they don't have to pay for a firearms licence. [**]

So to summarise, licensing gun owners rather than guns leads many people not to want to own any guns at all. However, those who do own guns would tend to own more of them. And comparing U.S. and New Zealand data on gun ownership and the number of guns per gun owner seems to support this.

At this point, which system you prefer comes down to whether you want lots of people to have guns, or you want fewer people to have guns but each one of those gun owners to own many guns. Of course, registering both guns and gun owners would be preferable to either registration system in isolation, if your goal is simply to reduce the total number of available guns.


[*] Another alternative is that the gun registration system is funded by taxpayers. However, there will still be some additional time and effort required to purchase a gun that is registered, so the cost will be higher than with no registration system.

[**] The story for high-demand consumers is similar to that in the first diagram. Here, they move from consuming bundle J (if guns are registered but owners are not) to bundle K (if guns are not registered but owners are). So, high-demand consumers own more guns in the case where owners are registered but guns are not.

Thursday, 21 March 2019

When sports teams are businesses, they might not try to win

This week in my ECONS101 class, we covered firms with market power. Market power is the ability to have an influence over market prices. Usually, we discuss firms that are sellers with market power - their market power allows them (as sellers) to set the price that will maximise their profits. They do this by pushing the price upwards. If there is only one seller in the market, and there are few close substitutes, the seller is a monopoly. However, sometimes it is the buyer that has market power. If there is only one buyer, then that buyer is a monopsony, and they would use their market power to push the price downwards (since paying a lower price would increase their profits).

Unsurprisingly, there are fewer examples of monopsony than monopoly, and most of the time when monopsony is discussed it is in the context of labour markets. One potentially monopsonistic labour market situation that was in the news recently was Major League Baseball in the U.S. (which is not surprising, as the baseball season is about to begin). In MLB, the teams are the buyers of baseball players' services. Now, MLB isn't a monopsony in the sense that there is only one buyer. However, if all the baseball teams work together (that is, if they collude), then the result would be as if there is just one buyer. And we'd expect to see low player salaries. Which appears to be the case, as Deadspin reported back in January:
Certainly, there are reasons to be suspicious. MLB owners are rolling in dough—league-wide revenues hit a staggering $10.3 billion last year, nearly quintupling since 1992 even after accounting for inflation. Yet owners are not, by and large, spending that windfall on player salaries as you might expect: The average MLB salary actually dropped in 2018, for only the fourth time in 50 years.
And then, of course, it’s reasonable to assume collusion when this is a league whose owners have been caught colluding before. (One of those four years of falling average salaries, in fact, was 1987, the year that Expos outfielder Andre Dawson, frustrated at remaining unsigned through March, gave in and signed a blank contract with the Cubs, ultimately turning in an MVP season at the bargain price of $500,000.) So: Owners raking in tons of money, players getting lowballed on contract offers, a league with a history of illegal labor actions, and it all adds up to dirty business, right?
So the MLB teams are paying players lower salaries. It seems like a slam-dunk (oops, wrong sport!) that this is a case of collusion and monopsony power. However, maybe it isn't quite that simple.

You would think that sports teams are trying to win, and that to win you want to have the best players. They would then compete with other teams for those players by paying higher salaries. Player salaries would increase over time.

However, the Deadspin article goes on to note (correctly) that teams are not trying to maximise wins, they are trying to maximise their profits. Having more wins does not necessarily increase the team's profits. The main source of team revenue (television rights) are shared between all MLB teams, and don't vary depending on the number of wins. More wins does probably bring more fans into the stands and increase ticket revenue, and generate more merchandise sales, but then you have to subtract the higher player salaries that are necessary to generate those extra wins. So, in fact it is possible that teams that have more wins may receive lower profits.

A low number of wins is probably associated with low profits (because ticket sales and merchandise sales will be low). A high number of wins is probably associated with low profits (because player salaries will be high). There is some sweet spot in between, where the team is maximising its profits by not having too high a salary bill, and yet generating enough wins to keep the fans interested in showing up to the games and to keep the merchandise selling. And since a team in the sweet spot isn't interested in competing for the best players, those players' salaries will be lower.

The MLB teams don't need to collude in order to keep players' salaries low. They just need to be keeping an eye on their profits.

Tuesday, 19 March 2019

Alan Krueger, 1960-2019

I was very saddened to hear the news that Alan Krueger passed away over the weekend. The New York Time has a good article summarising his work. Krueger was one of the world's top labour economists, and possibly most famous for his early work on the minimum wage with David Card, which used data comparing fast food workers in Pennsylvania and New Jersey and showed that New Jersey's minimum wage increase had no impact on employment. He also worked on the economics of education and on inequality, and was chair of the White House Council of Economic Advisors for President Obama.

In less policy-oriented work, he wrote (with Marie Connolly) about the economics of popular music, in the appropriately-named paper Rockonomics (ungated earlier versions here and here), which I blogged about here in 2017 (a post that drew comment from the author himself on Twitter!). He also wrote a book, What Makes a Terrorist, which I've been meaning to read and which, sadly, seems very relevant in New Zealand this week.

Unfortunately, you can add Alan to the (growing) list of top economists who passed away before they could claim a deserved future Nobel Prize (probably shared with David Card).

[HT: Marginal Revolution]

Monday, 18 March 2019

Should economists be licensed?

Ross Guest (Griffith University) wrote a provocative piece in The Conversation last week about whether economists should be licensed:
The great British economist John Maynard Keynes said he longed for the day when economics could be thought of as a “matter for specialists - like dentistry”.
It’s easier to become an economist than a dentist, or a doctor or a lawyer. For those and other professions you need to be accredited - you need a licence to practice.
The economics profession requires nothing other than a university degree, and this month in its regular poll of 54 leading economists, the Economic Society of Australia asked whether it should set the bar higher.
The first question asked whether:
"…professional accreditation for the economics profession would attract more people to economics as a career."
This was rather timely, since this week in my ECONS101 class we were discussing market power. One source of market power occurs when the government gives you an exclusive right to operate. Occupational licensing is an example of this. It makes sense to licence some occupations, like doctors, dentists, or nurses, where the government wants to ensure certain safety standards are met. Other occupations are licensed because the government wants to ensure trust in the profession, like real estate agents or financial advisors. On one (or both) of those two grounds, you could (and many do) argue in favour of continued licensing of teachers, and taxi drivers. However, it's a little harder to argue in favour of some other licensed occupations in overseas jurisdictions, like beekeepersfortune tellers, dog groomers, and librarians. What about economists?

Guest's article quickly strays into talking about ensuring certain standards of education for economists, which is separate from the question of whether they should be licensed. He also points out the gender gap in economics (which has been a theme I have discussed many times on my blog - see here and here for my latest posts on that topic). However, it isn't clear how licensing would address the gender gap, or the number (or distribution) of students studying economics more generally.

One thing we do know about occupational licensing is that it restricts competition. Only people who are licensed are allowed to practice that profession. That gives the licensed practitioners some degree of market power - it allows them to command a higher price (or salary, in this case). The outcome of licensing economists would likely be higher salaries for economists. It seems somewhat self-serving for an economist to argue in favour of licensing economists, in the same way that social workers or sex workers who argue for licensing are being self-serving.

It isn't clear to me that higher salaries for economists would address the gender gap in economics. In fact, it might even make it worse, if the marginal student that is attracted to economics by higher salaries is male, rather than female (at the least, we know that female economics students are less likely to specialise in finance, which tends to pay more).

Probably the best argument against licensing economists is defining who they are. Most economics graduates don't get a job with the title of 'economist'. Instead, the majority would end up an 'analyst' of some description (market analyst, business analyst, price analyst, etc.). So, how would you even enforce licensing? This probably explains why Guest focused on certifying economics education, rather than licensing economists directly.

So, should economists be licensed? It seems to me that the only people who would benefit would be economists.

Sunday, 17 March 2019

Game theory failure in Come Dine With Me?

Last week in my ECONS101 class, we covered game theory. One of the starting points of understanding game theory is to recognise dominant strategies. A strategy is dominant for a player if it provides that player with a better payoff than any other strategy, regardless of what the other players do. A player should always choose to follow their dominant strategy - to do otherwise would simply make them worse off.

The real world is filled with examples of game theory. However, most games don't have strongly dominant strategies, and even when they do, people may choose not to follow them. Take the example of the cooking programme, Come Dine With Me. In the show, the five contestants take turns to cook a meal and prepare an evening's entertainment for the other players. At the end of the evening, each contestant (except for the host) rates the evening on a scale of 1-10. The winner is the contestant who receives the highest total score for their evening as host. Importantly, none of the scores is revealed until the show is aired on television (some weeks or months later). So, there is no effective way to reward or punish other players, or to ensure cooperation (like two players each making a deal to rate the other player's evening highly).

Can you see the dominant strategy in Come Dine With Me? If you guessed that the dominant strategy is to rate every one of the other players a zero, regardless of how good (or not) their hosted evening was, then give yourself a gold star. Of course, that isn't what happens. So, why not?

A 2014 article by David Schüller (University of Duisburg-Essen), Harald Tauchmann (Friedrich-Alexander-University Erlangen-Nürnberg), Thorsten Upmann, and Daniel Weimar (both University of Duisburg-Essen), published in the Journal of Economic Psychology (ungated earlier version here), provides a partial answer. Schüller et al. used data from the German version of the show over the period from 2006 to 2011. They wondered whether it was the potential loss of reputation (from their family, friends, and acquaintances) that prevented players from choosing the dominant strategy. Essentially, no one wants to look like a dick on national television, so while it was the best strategy for winning, it might not be the best strategy overall in the 'game of life'. Instead, they expected the contestants to follow the social norm established in early episodes of the show. However, the data didn't support this social norm explanation:
We measured the impact of reputation by the voting behavior observed in previous shows. This had no significant influence on voting behavior once we accounted for the impact of the objective sophistication of a dinner and personal traits. Therefore, reputational factors as measured by past voting behavior does not seem to play an important role in this setting.
Instead, dinners that used more ingredients (a measure of 'sophistication') scored higher, the contestants who hosted later in the week scored higher (probably because they could learn about the other contestants and what would appeal to them), and contestants scored the others lower after they themselves had hosted. The authors argue that:
...a contestant who has already cooked attaches a higher weight to his own performance once it has been carried out... termed the 'overestimations effect'.
However, I prefer their alternative explanation, which is that:
 ...a contestant that has performed is now free to be more critical of the performance of others since he no longer has to fear being evaluated. However, this effect should play no role because the evaluations remain concealed until the show is broadcast.
Even though it should play no role in their evaluations, the contestants might be concerned that their evaluations are known to the television production crew, who might accidentally (or purposely) reveal that information to the other contestants. If they were found to be scoring the others as zeroes, then they could be punished. However, there is no risk of punishment after they have hosted. Still, despite this, the contestants weren't fully choosing the dominant strategy after hosting.

Coming back to the original hypothesis about social factors affecting the contestants' choices though, I think the authors could have done a better job of measuring this. Deviation from the social norm is a pretty weak way of measuring how concerned the contestants were about what the television viewers would think of them after the show. However, using publicly available data, better measures could not be used and so we are left wondering to what extent this drives the results.

I guess the moral of this post is that I should probably never be invited to participate in Come Dine With Me (not least because of the quality of the meal that would be served!).

Saturday, 16 March 2019

Why study economics? Amazon edition...

I've written a number of posts about opportunities for economics graduates in tech companies (see the list at the end of this post). Earlier this week, a CNN article covered economists in Amazon:
The company has turned so many businesses, from retailing to cloud computing, inside out. Now Amazon is upending the traditional role of economists within companies, as well as the field of economics...
At other companies, economists are often clustered in a small team, but at Amazon, they are integrated into many teams across the company. In a glossy recruiting brochure, Amazon describes how its economists help build risk models for lending to third-party sellers, advise on product design and engagement tracking for devices like Alexa and Kindle, help target customers for its booming cloud services business, and forecast server capacity needs for the consumer website.
Among the 46 jobs and internships currently posted for economists on Amazon's hiring website, there are positions open for economists to help fine-tune seller pricing, figure out the best way to route trucks through Amazon's vast distribution network and identify the characteristics of top-performing talent in order to make the best hires.
For example, Amazon runs a program called Connections, which sends out small questionnaires to employees: Does your work provide you with opportunities to learn new things? Does your team always put the customer first? How often does bureaucracy get in the way of your ability to deliver results?
To improve that feedback, Amazon tries out interventions like training managers to interact better with their subordinates. Originally, the company brought on a team of psychologists, other scientists and product managers, but before long, it became apparent that they weren't well suited to achieving what Amazon was ultimately after: Better performance. Economists, by contrast, were able to analyze which interventions led to higher worker productivity.
"The psychologists had a really hard time at Amazon, because they weren't trained in what economists are trained in, which is how this relates to profitability," said one former Amazon economist who spoke on the condition of anonymity. "Amazon is a very data-driven place, and if you can't prove that your program is beneficial to customers, you're at risk of having your program defunded."
In an age where there is substantial anxiety over whether certain jobs will exist in the future due to automation, jobs that are complementary to data and algorithms are among the safest. Include economists in that. And increasingly, as the CNN article notes, the most exciting economist jobs are in the tech sector.

Although the article focuses on PhD economists, there's many opportunities for graduates with an undergraduate degree in economics as well. Economics isn't going away - an understanding of economics is arguably more important than ever, especially if you want to differentiate yourself from the average business or social science graduate (note the comment above about psychologists). That's why you should study economics.

[HT: Marginal Revolution]

Read more:

Tuesday, 12 March 2019

Book review: Whatever Happened to Penny Candy?

Readers of a certain vintage will remember a time when the cheapest lollies in the local dairy were one cent (in contrast, some younger readers probably never used a New Zealand one cent coin, which along with the two cent coin was demonetised in 1990, while the five cent coin was demonetised in 2006). Now the cheapest lollies are much more expensive (ok, I'll admit I have no idea how much more expensive they are, having long since stopped buying them). Anyway, that is a very long-winded introduction to my latest read, Whatever Happened to Penny Candy?, by Richard Maybury. Penny candy in New Zealand being, of course, the one-cent lolly.

I can't recall who recommended this book to me, but it wasn't quite what I expected. The cover suggests that it is "a fast, clear, and fun explanation of the economics you need for success in your career, business, and investments". That would be accurate, if the economics you needed for success was limited to a thinly-veiled rant against monetary policy and inflation, and in favour of small government.

The book was loaded with "what the f***?" moments, such as this:
Inflation is not the same thing as rising prices.
Actually, it is. The definition of inflation is literally "an increase in the general price level in the economy" (from my ECONS101 textbook, the excellent free e-book The Economy by Core). Or, if you prefer Mankiw (the most widely used introductory textbook), then inflation is defined as "an increase in the overall level of prices in the economy".

To be fair, Maybury does make clear that his definition of inflation is an increase in the number of dollars (that is, effectively an increase in the money supply). And to be fair, that was the original use of the word inflation by economists (for example, see this article by Michael Bryan of the Federal Reserve Bank of Cleveland). However, that is clearly not the current use of the term, and despite Maybury's protestations that governments "have redefined inflation to mean rising prices", it was actually economists that did so, and the change had happened by the 1930s according to Bryan's article. So, Maybury's terminology is at least 80 years out-of-date. The arguments against monetary policy decisions might be valid, but to couch them in outdated use of terminology against virtually all currently-understood use of those terms is a little odd.

Another WTF comes from this:
During a depression, businesses go broke and people lose their jobs. Many become poorer. It's all caused by the inflation.
The first two sentences are correct, and few would argue with them. However, to argue that depressions are caused by inflation not only rejects the idea of monetary neutrality, but is effectively diametrically opposed to it. While strict monetary neutrality is probably not a good description of the real world, there is little evidence to suggest, as Maybury does, that business cycles are caused by inflation (by which he means that they are caused by fluctuations in the money supply).

The book does have some highlights though, including interesting descriptions of Gresham's Law, and the origin of the name of the "dollar" (which dates to the "Joachimthaler" in Bohemia in the Middle Ages, later shortened to "thaler"). However, despite those few highlights, I really wouldn't recommend this book to anyone, least of all anyone who want "a fast, clear, and fun explanation of the economics you need for success in your career, business, and investments".

Monday, 11 March 2019

Are international trade and migration complements or substitutes?

As migrants move from their origin country to a destination country, does that result in increased trade as well as migration? Intuitively, it seems like it would. In the simplest sense, those migrants might send goods back to family and friends at home in the origin country, and they might import goods from the home country to their destination. Causality need not run from migration to trade though. People are more likely to migrate to places that they are more familiar with, and having experienced goods from a country might increase familiarity with it - a mechanism leading from trade to migration. Either way, those explanations would suggest that international trade and migration are complements - an increase in one is associated with an increase in the other. However, the international literature has been inconsistent in its findings. Some studies find that trade and migration are complements, while other studies find that they are substitutes - an increase in trade is associated with a decrease in migration, and vice versa.

In a new working paper, my PhD student Rosmaiza Abdul Ghani and I, along with Bill Cochrane (University of Waikato) and Matthew Roskruge (Massey University) use a newly available migration dataset, along with longstanding trade flows data, to investigate these relationships. Most studies of migration and trade limit themselves to a few countries, or use migrant stocks (the number of migrants living in a particular country) as a proxy for migration. However, this dataset by Nikola Sander and Guy Abel covers migration flows between over 240 countries. And it comes with cool graphics (try them at this link).

Anyway, that data allows us to investigate the relationships between trade and migration more thoroughly than previous studies. We make use of seemingly unrelated regression, which is a technique that allows us to simultaneously model the relationships that run in both directions. We found that: and migration have positive coefficients in all of the specifications except for the fixed effects model (where, as noted above, the interpretation of the coefficients is challenging). That is, trade and migration are complements. In our preferred PPML-SUR specification, an additional migrant from country i to country j is associated with 1.7 percent higher trade flows from country i to country j, while an additional USD1000 in trade flows from country i to country j is associated with 25.4 percent higher migration flows from country i to country j.
The second of those coefficients seems a little large, but it starts from a very low base - perhaps we should have re-centered the data. In any case, the results support the story I noted at the beginning of this post - international trade and migration are positively related, so they are complements. This analysis is correlational though - we haven't established any causality here. That is the subject of the second paper contributing to Rosmaiza's PhD, which I'll blog about in a future post.

Friday, 8 March 2019

Teaching evaluations and grade inflation

Teaching evaluations (or student evaluations of teaching, SETs) are the most common way in which university lecturers' teaching performance is measured. Students are asked, at the end of a course, to evaluate their lecturer against a bunch of criteria, and then those results are used to derive some summary statistic that is supposed to represent the quality of teaching for that semester. If students are genuinely rating their lecturers on teaching quality, then the summary statistic should reflect actual teaching quality.

There is some evidence for this. In a 2012 article (gated, sorry I don't see an ungated version anywhere online), by Trinidad Beleche (Food and Drug Administration), David Fairris and Mindy Marks (both University of California - Riverside), and published in the journal Economics of Education Review, the authors demonstrate that students do reward genuine learning with higher teaching evaluations. They used data from 1106 students attending a four-year public university in the U.S. over 2007-2009. Importantly, they had a pre-test and post-test evaluation of student learning, so they could measure (separately from grades) students' learning objectively. However, while they found support for evaluations being associated with greater (objectively measured) learning, they found that:
...the relationship between knowledge gain and evaluation scores is very small. A one standard deviation increase in learning (as measured by the post-test) is associated with a 0.05–0.065 increase in course evaluation scores on a five point scale.
So, when students learn more (on average), the teaching evaluations are slightly higher. However, despite the relationship being statistically significant, it is very small. So, that shouldn't fill us with confidence that teaching evaluations accurately capture teaching quality.

In fact, there is good reason to question whether teaching evaluations reflect teaching quality at all (many of the problems are summarised in this article by John Lawrence). For instance, students might rate lecturers based on how much they liked the course or lecturer, rather than the quality of teaching. For difficult courses, this could lead to a low rating even if the teacher is excellent. Similarly, students might not recognise the amount of genuine learning they have experienced during the semester, and so their rating does not reflect actual teaching quality. Perhaps they base their evaluation of their learning on the grade they receive in the course, or the grade they expect to receive at the end of the course (if the evaluation is done before final grades are available). If the student receives (or expects to receive) a higher grade, then they infer that they must have learned more, and so they reward the lecturer with a better teaching evaluation.

If this is what is happening, then that creates some interesting incentives for lecturers. Lecturers' teaching performance may affect their chance of promotion, their chance of tenure, or their future salary. So, there is an incentive to get better teaching evaluations. One way to achieve better teaching evaluations is to put more effort into teaching. However, that is costly to the lecturer, in terms of time and cognitive effort, as well as incurring an opportunity cost of time spent away from research.

However, maybe there is an easier way? If teaching evaluations were a function of grades, then a higher grade distribution would lead to a higher teaching evaluation, holding all else equal. So, if a lecturer ensures they give students higher grades, they can increase their teaching evaluation, without having to go to the effort of increasing their teaching quality. We would see grade inflation.

Is there any evidence for this? Over the summer, I read a couple of papers that suggest there is. First, this 2012 article (also no ungated version), published in the Economics of Education Review, by Andrew Ewing (Eckerd College), provides an initial answer. Ewing used data from the College of Arts and Sciences at the University of Washington, over the period 1996 to 2006, which included over 5400 lecturers, teaching over 53,000 courses. He found that: matter the estimation procedure, there is a significant positive effect of relative expected grades on evaluation scores. The magnitude of this impact ranges from a 0.167 point increase in SET score for every point increase on the relative expected grade scale for a particular sub-college to a 0.701 point increase for the Economics department.
So, when students are expecting higher grades (on average), they give higher teaching evaluations. It is interesting that this effect appears to be largest for economics. That suggests that economics lecturers were rewarded the most for inflated grade distributions. It's hard to see why that would be the case though. You might expect economists to be more likely to respond to incentives such as high grades leading to better teaching evaluations. However, that doesn't explain why they would be rewarded more for doing so (that might be interesting to reflect on later).

A more recent (2017) article also published in the Economics of Education Review (ungated earlier version here), by Devon Gorry (Utah State University), provides further evidence for the effect of grades on teaching evaluations. This paper is interesting because it evaluates what happens to grades (and teaching evaluations), when a policy regarding the recommended grade point average (GPA) for each course was changed. Specifically:
Starting in the spring of 2014, the business school implemented a policy that established a recommended average grade in required business courses... The policy states that grades in required business courses “typically should not exceed a class average of 2.8 in [introductory] courses and 3.2 in [intermediate] courses.”
Courses that typically had GPAs higher than those ceilings were impacted by the policy change, and Gorry used that to evaluate the impact of teaching evaluations. He found that:
...the policy did lead to a decrease in class GPA by 0.132 points for treated classes. When broken out by introductory and intermediate courses, the results are similar with a decrease in GPA of 0.155 points in introductory courses and 0.132 points in intermediate courses... professors gave significantly fewer As. There were insignificant increases in Bs, Cs, and Fs...
In introductory courses, professors met the ceiling of 2.8 by giving fewer As and Bs and substituting with significantly more Cs and a meaningful but insignificant increase in Fs... In intermediate courses, professors met the ceiling of 3.2 by giving fewer As and more Bs...
The overall results show that the grade ceiling policy is associated with a statistically significant decrease in teaching ratings by 0.150 points on a 5 point scale. This corresponds to about a quarter of a standard deviation on the teaching rating scale... 
In other words, the policy did reduce grades, and students responded by giving worse teaching evaluations. The implication is that lecturers could increase their teaching evaluations by giving higher grades. Teaching evaluations provide incentives for grade inflation.

[HT for the John Lawrence article: Tony Smith]

Tuesday, 5 March 2019

Would a universal basic income be eaten up by higher housing costs?

Earlier this week, I reviewed David Graeber's book Bullshit Jobs. In the conclusion to the book, Graeber discusses a universal basic income as a solution to the problem of bullshit jobs. However, one point in particular struck me:
One could make the argument UBI wouldn't work with a rent-based economy because, say, if most homes were rented, landlords would just double rents to grab the additional income.
That got me thinking back to the points raised in Robert Frank's book Falling Behind: How Rising Inequality Harms the Middle Class (which I have previously discussed here and here). I think Graeber has underestimated the importance of his point (which is buried in a footnote), and that it doesn't rely on a rent-based economy, since it would also apply to an economy where home ownership is more prevalent.

Frank argues that housing is a 'positional good', and that people are concerned about their relative status in terms of positional goods. For instance, a house in a good neighbourhood comes with low crime and access to better schools. People prefer to live in houses in the good neighbourhood rather than the worse neighbourhood, and so the value of houses in the good neighbourhood is bid upwards.

If you give one family a boost in income, they will use some of that extra income to buy or rent a house in a better neighbourhood. They will invest in the positional good in order to raise their relative status. However, if you give all families a boost to their incomes, all families would want to buy or rent a house in the better neighbourhood. Since there is a limited supply of such houses, all that would happen is that the rents (or house prices) in good neighbourhoods would be bid up to a higher level. There would be no change in relative status for any families, and the additional income would be captured by landlords in the form of higher rents, or by home sellers or developers in the form of higher house prices. Families that tried to opt out of this process would miss out on a house in a good neighbourhood and would end up living in a worse neighbourhood (so there is an incentive not to opt out).

It seems to me, then, that a large proportion (if not all) of a universal basic income would be eaten up by higher housing costs, with no net benefit to families. Aside from the general unaffordability of a universal basic income at a level that people could actually live on, this seems to be a very important problem with UBI proposals that I don't think has been addressed. At the least, it would be interesting to see whether some of the high-profile UBI pilot programmes in recent years have looked at housing costs.

Sunday, 3 March 2019

Book review: Bullshit Jobs

I just finished reading David Graeber's new book, Bullshit Jobs. I was quite looking forward to the book, because I am very sympathetic to the suggestion that an increasing number of jobs are essentially bullshit, and an increasing proportion of the remaining 'non-bullshit' jobs are filled with meaningless bullshit. And that is essentially the thesis of Graeber's book, or as he puts it in the preface:
Huge swathes of people, in Europe and North America in particular, spend their entire working lives performing tasks they secretly believe do not really need to be performed...
...we have seen the ballooning not even so much of the "service" sector as of the administrative sector, up to and including the creation of whole new industries like financial services or telemarketing, or the unprecedented expansion of sectors like corporate law, academic and health administration, human resources, and public relations. And these numbers do not even reflect all those people whose job is to provide administrative, technical, or security support for these industries, or, for that matter, the whole host of ancillary industries (dog washers, all-night pizza deliverymen) that only exist because everyone else is spending so much of their time working in all the other ones.
Graeber defines a bullshit job as:
...a form of paid employment that is so completely pointless, unnecessary, or pernicious that even the employee cannot justify its existence even though, as part of their conditions of employment, the employee feels obliged to pretend that this is not the case.
Much of the book is taken up with examples of bullshit jobs, which are categorised into five types:

  1. Flunkies - "those that exist only or primarily to make someone else look or feel important", which are jobs that were "created because those in powerful positions in an organization see underlings as badges of prestige";
  2. Goons - "people whose jobs have an aggressive element, but, crucially, who exist only because other people employ them", and are "hired due to a dynamic of one-upmanship (if our rivals employ a top law firm, then so, too, must we)";
  3. Duct tapers - "employees whose jobs exist only because of a glitch or fault in the organisation; who are there to solve a problem that ought not to exist", created because "sometimes organizations find it more difficult to fix a problem than to deal with its consequences";
  4. Box tickers - "employees who exist only or primarily to allow an organization to be able to claim it is doing something that, in fact, it is not doing", which exist because "within large organizations, paperwork attesting to the fact that certain actions have been taken often comes to be seen as more important than the actions themselves"; and
  5. Taskmasters - who are either "those whose role consists entirely of assigning work to others" or those where "all or most of what they do is create bullshit tasks for others", whose jobs exist "largely as side effects of various forms of impersonal authority".
Box-ticking, in particular, is a pet hate of mine; hence, my sympathy to Graeber's argument. And as if to highlight this, Graeber does single out academia as a particular example of an increasingly box-ticking culture. The personal quotes from people working in bullshit jobs are a highlight of the book, and demonstrate the perniciousness of these jobs and their negative personal impact on the people employed in them.

The second half of the book is devoted to advancing theories as to why bullshit jobs have become more prevalent in recent decades. In this section, Graeber distinguishes between a classic market-based capitalist approach, where you would not expect jobs to exist that didn't add value to the firm, and a 'feudalist' approach, where creating large empires of flunkies, goons, and taskmasters, in particular, makes perfect sense. This section was good, but I think it lacked a consideration of transaction costs (as I discussed yesterday in relation to this blog post by Taylor Pearson) - it may make sense to keep some people on staff even if they have nothing to do for much of their time, so that they are available when they are needed for non-bullshit tasks. However, transaction costs would not explain the massive proliferation of these types of jobs.

The book is short on policy prescription, and Graeber makes clear that this is intentional. The conclusion does discuss a universal basic income, which would seem an obvious way of under-cutting bullshit jobs. After all, why work in a bullshit job if you could earn nearly as much from a UBI while sitting at home, or doing something you consider more worthwhile?

I do recommend this as an excellent book to read, especially if you are interested in understanding the realities of work. However, if you need some further convincing, I recommend reading Graeber's essay that started it all, which you can find here. The book essentially builds on that essay, adding in a lot more detail and examples.

Saturday, 2 March 2019

Taylor Pearson on the history of transaction costs and industrial organisation

One of my favourite lectures to present in my ECONS102 class is where I cover 10,000 years of economic history, with a particular focus on the development of property rights. The key driver of changes in property rights over time has been the change in the size and nature of transaction costs. So, I was interested to read this new blog post by Taylor Pearson.

In the post, Pearson talks about how the size and nature of transaction costs have changed over time (up to the present day, whereas I stop my lecture at about the end of feudalism), and especially how those changes have affected the nature of markets, firms, and industrial organisation. The post is long, but there is lots of interest in there. It is hard to excerpt, but here is one bit comparing the impact of mechanical clocks to the impact of blockchains:
Mechanical time opened up entirely new categories of economic organization. It allowed for trade to be synchronized at great distances—without mechanical time, there would have been no railroads (how would you know when to go?) and no Industrial Revolution. Mechanical time allowed for new modes of employment that lifted people out of serfdom and slavery...
In the same way, it may be that public blockchains make it possible to have ledgers that are trustworthy without requiring a centralized firm to manage them. This would shift the line further in favor of “renting” over “buying” by reducing the transaction cost of trust.
An excellent read, especially for those interested in a bit of economic history. Pearson essentially argues that key technological revolutions (neolithic, industrial) initially led to increases in the size of firms, but more recent revolutions (computing, blockchain) have had the opposite effect, reducing firm sizes. However, I wish Pearson had better considered the role of the platform providing firms, since the nature of the transaction costs means that they will get larger while other firms get smaller. Despite this caveat, I strongly recommend reading the whole post.

Friday, 1 March 2019

Why students should run tutorials, not professors

Most universities make use of a mixture of lectures and tutorials in their teaching. In some universities, the tutorials are run by graduate students. In others, they are run by lecturing staff, including perhaps some professors. In others, including many of the tutorials in my ECONS101 and ECONS102 papers, the tutorials are run by senior undergraduate students. A relevant question then, is: Does it make a difference to student learning, whether their tutorial teacher is a fellow undergraduate student or a professor, or someone in-between?

A recent working paper by Jan Feld (Victoria University of Wellington), Nicolás Salamanca (University of Melbourne), and Ulf Zölitz (University of Zurich) provides an initial answer to this question (see also their article in The Conversation a couple of weeks ago, describing the research). They used data on over 12,000 students in a Dutch university where, importantly, students are randomly assigned to a tutorial teacher, who may be at any level between undergraduate student and professor. They then looked at whether it made a difference for student's grade in that course, their grade in subsequent courses, course evaluations, job satisfaction after graduation, and earnings after graduation. They found that:
Instructors’ academic rank is, overall, unrelated to students’ academic outcomes. The most effective instructors—postdocs—add less than 1 percent of a standard deviation more to students’ grades than student instructors. For all other instructor types, we can rule out differences between instructor types as small as 1 percent of a standard deviation in grades. Instructors’ academic rank is also unrelated to students’ grades in follow-on courses, where our results are also precisely estimated.
Looking at nonacademic outcomes, we find that instructors with higher academic rank add more value to students’ course evaluations. However, these differences are also small. Students taught by a full professor, for example, evaluate the course only 4 percent of a standard deviation more positively than students taught by a student instructor. Finally, using matched survey data on university graduates, we find no systematic relationship between instructor academic rank and students’ job satisfaction and earnings after graduation.
Where the effects are statistically significant, the size of the effects are tiny. In other words, it really makes no difference whether students are taught in tutorials by undergraduate students, professors, or someone in-between. At least, it doesn't make a difference to the outcomes they measure, which are arguably most of the outcomes that we would care about, starting with whether the students get better grades in that class.

Feld et al. then go on to argue that universities would be better off if they moved to using undergraduate students as tutorial teachers, because they are paid less and therefore it would be cheaper. I don't find that argument necessarily persuasive, since it requires that the marginal cost of a professor is more than the marginal cost of an undergraduate. You could argue that the marginal cost of a salaried staff member is zero, since you don't have to pay them any extra to stand in front of a class. However, that would ignore the real opportunity cost of having a professor teaching a tutorial group. That opportunity cost isn't the cost of the professor's salary, but the quality research time (and research outputs) they would give up by teaching the tutorial. Chances are that the value of more high-quality research to the university exceeds the professor's hourly salary by some margin, so Feld et al.'s argument that tutorials are better taught by undergraduates (or other students) is probably correct, but not quite in the way they argue.

Either way, it provides support for the approach we use in economics at Waikato, where we use senior undergraduates as tutors (at least in our first and second year classes).

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