CEOs playing games

Experimental economics is incredibly useful, because it allows economists to study decision-making in circumstances when basically all of the key parameters to the decision are controlled. However, one of the main problems with experimental economics is that the study population is often made up of students (see here and here for previous posts on this topic). So, it's particularly interesting when experimental economics makes us of samples made up of 'real people'.

For instance, in a new article (open access) published in the journal Experimental Economics, Håkan Holm (Lund University), Victor Nee (Cornell University), and Sonja Opper (Lund University), report on an experiment they conducted with Chinese CEOs and "comparable people in professional roles". Their sample size is quite large for this type of study - they have 200 CEOs and 200 other professionals.

Their experiment involves game theory - essentially, the research participants were asked to choose actions in three games: (1) the prisoners' dilemma (which I have written about before, most recently here); (2) a 'battle of the sexes' coordination game (I have written about coordination games too, see for example here); and (3) a chicken game (which I have also written about before, see here). They also asked the research participants about their beliefs about what the other research participants would choose.

Now, you might be thinking that CEOs have good strategic minds, and so they should be able to do well in game theoretic settings. You might also think that CEOs would be more selfish and more aggressive in these games. In those two hypotheses, you would only be partly correct. Holm et al. find that:

...substantial differences in behavior between the CEOs and the control group, but not in the way many would expect. The CEOs were not in general closer to the Nash equilibrium prediction (assuming selfish preferences). On the contrary, the average control group behavior was closer to the Nash equilibrium in the majority of the games and did not best respond less frequently to their beliefs. The most striking and consistent pattern was that the CEOs had higher expected earnings than the comparison group in all the games. The CEOs cooperated more and played less hawkishly compared to the control group, no matter how the game was framed (abstractly or with a narrative). Compared to the control group the CEOs’ also had significantly higher average beliefs that others would cooperate in the Prisoner’s Dilemma.

More specifically, the CEOs were between 13 and 25 percentage points more likely to choose the cooperative (prisoners' dilemma) or less aggressive (battle of the sexes, or chicken) option that the control group of professionals were. Because of (or perhaps in spite of) this, they earned more overall in the games. So, it appears that CEOs really do act differently than other (otherwise similar) people. Just not in the way that we might expect.

Holm et al. argue that this may be because less aggressive choices may be helpful because they allow the CEO "to mobilize support and loyalty from employees and business partners". I think we would need a lot more research before we can draw any conclusions about the mechanisms that explain these observed differences. Hopefully, there is more research on this to come.

[HT: Marginal Revolution, last year]

The disemployment effects of Canadian minimum wages

The minimum wage debate continues to rage on, despite the weight of recent evidence that supports the theory that minimum wages reduce employment (which is what we teach students in introductory economics) - see the bottom of this post for links to some of that latest research.

Much of the debate relates to methods of identifying the effects of minimum wages on employment. Case study methods (like those employed by David Card and the late Alan Krueger in their famous 1994 paper) tend to find that minimum wages have no effect, while panel studies (involving many minimum wage changes across many jurisdictions) tend to find negative effects of minimum wages on employment.

One of the latest studies using the panel method is described in this 2017 article by Kate Rybczynski and Anindya Sen (both University of Waterloo), published in the journal Contemporary Economic Policy (sorry, I don't see an ungated version online). Rybczynski and Sen use data from Canadian provinces that includes "185 minimum wage amendments enacted by 10 provinces over a 31-year time frame" (1981-2011), and look at how the real (adjusted for inflation) minimum wage affected the employment rate (the proportion of all people employed) in each province. They find that:

...amendments to the minimum wage result in lower employment rates for male and female teens, with an absence of statistically significant gender differences. Specifically, our estimates imply that a 10% increase in the minimum wage is significantly correlated with a 1%-4% drop in teen employment rates for both genders.

Their results are robust to various alternative specifications, and variations in the data, and they also get similar results using an instrumental variables (IV) analysis. Ordinarily, IV results would be presented as the preferred results. However, I don't find the IV results to be particularly convincing, because the instruments that they use are fairly weak (this has been a problem in most studies of the minimum wage thus far). Neither do Rybczynski and Sen put much stock in their IV results, because they relegate them to a later section and base most of their discussion on the results from the panel data model (as noted in the above quote). Overall, the results support a disemployment effect of the minimum wage.

Rybczynski and Sen also find that the minimum wage has no effect on prime-aged adults (to be expected as most prime-aged adults earn much more than the minimum wage), but the minimum wage does reduce employment among prime-aged immigrants (who tend to have less human and social capital, so might be expected to earn closer to the minimum wage).

Add this paper to the weight of evidence that the minimum wage reduces employment among vulnerable (young and immigrant) workers.

Read more:

• Jeffrey Clemens on the disemployment effects of the minimum wage
• The impact of an online minimum wage
• Seattle's minimum wage, revisited
• The latest evidence supports negative employment effects of the minimum wage

Book review: Globalization and Inequality

I just finished reading Elhanen Helpman's 2018 book Globalization and Inequality. The book is essentially a 175-page literature review on the topic. However, calling it a literature review is not an attempt to denigrate the book, which is excellent. Helpman does a great job of clearly outlining the evidence spanning over two decades of research on the relationship between trade and inequality. If I had one criticism, it is that narrowing of focus. As I note in my ECONS102 class, globalization is not synonymous with trade. To be fair though, Helpman makes this point himself in the first paragraph of the preface, saying:

...I will review the theoretical mechanisms through which foreign trade and offshoring affect earnings inequality and the evidence on their quantitative effects. Other aspects of globalization, such as international capital flows or migration, will be addressed only in passing.

I guess that addressing those other aspects would have led to a much longer book. If you are interested in the topic of trade and globalisation, and can handle the economic theory (since a lot of the trade literature is theory-heavy), then this book will be good for you. If you are interested but the theory is not for you, then the concluding chapter is essentially a condensed and non-technical review and will likely give you what you need.

So, what does the literature on foreign trade and offshoring, and their effects on earnings inequality, have to say? Helpman starts by outlining the recent experience of inequality over time - a topic which I have written about before (see here and here, and the links at the bottom of those posts, for examples). He then talks through the literature, more or less in chronological order. The ordering is for good reason. As he notes in the conclusion, the early studies (from the 1990s) set the scene, finding that:

...trade did not play a large role in altering inequality.

He then goes on to outline the many modelling and methodological extensions that have been subsequently added to those earlier studies. However, despite the innovations the conclusion has not really changed:

As is apparent from this short (and selective) review of the empirical findings, globalization in the form of foreign trade and offshoring has not been a large contributor to rising inequality. Multiple studies of different events around the world point to this conclusion.

This conclusion will not be palatable to all readers, of course. However, it is based on what I believe is a thorough and balanced review. I found it gratifying that the conclusion agrees with the findings of one of my PhD students, whose work used cross-country data on trade, migration, and inequality (more on that in a future post). Trade has an ambiguous effect on inequality - arguments can be made in both directions, increasing and decreasing. The theoretical and empirical studies that Helpman reviews in this book demonstrate clearly that the net effect of trade on inequality is only small.

Coronavirus contact tracing and conditional cooperation, Part 2

No sooner had I hit 'publish' on my post yesterday on coronavirus contact tracing, than I ran across this article in The Conversation by Richard Holden (University of New South Wales). I finished up my post by noting that enforcing contact tracing through punishment was unlikely to be effective (or at least, not as effective as enforcing a lockdown). Holden rightly points out that contact tracing can also be increased through positive incentives:

The obvious way to would be to mandate its use. That’s how compulsory voting works. But Morrison has ruled that out.

As an economist, I should observe that another obvious (if less effective) means would be to provide incentives.

Joshua Gans and I advocated such an approach earlier this week.

People who install and use the app could, for example, be given a A$10 rebate on their monthly phone bill (a carrot). People who do not could be denied access to public places such as shopping centres and parks (a stick)...

The prime minister has suggested relaxing containment measures might be conditional on a certain take-up rate, suggesting another, complementary, approach – group incentives.

Imagine that any relaxation of current containment measures required a 40% take-up rate. There would be peer pressure to “do the right thing” for the whole community.

The higher the take-up, the safer it would be to lift additional restrictions.

Maybe pubs could open, with four-square-metre social distancing rules in place, if the take-up was 60%.

Perhaps with evidence of the virus remaining under control for an extended period, social-distancing measures could be relaxed further at an 80% to 90% take-up rate.

Would positive incentives work better than punishment? It's difficult to say with any certainty. However, while I like the suggestion of group incentives that Holden makes, maybe that just doubles down on the problems of conditional cooperation - if you think that you will miss out on the group incentive because not enough of the rest of the population is complying, then you will be much less likely to comply as well (and peer pressure be damned!).

Perhaps most effective would be a combination of carrot and stick? China has been using various apps to control movement of people - the apps track each person's status as being green (uninfected and free to move around), yellow (possibly infected, and restricted to home), and red (infected, and restricted to home). The app status is checked every time a person goes into or out of a building, etc. Of course, the main problem with such a system is the potential for it to worsen the digital divide - those without a smartphone (and hence, no ability to have the contact tracing app) are essentially excluded from anything that requires a green status. Perhaps then, we need government-issued smartphones?

Read more:

• The prisoners' dilemma, and why we all have to be kept in lockdown
• Coronavirus contact tracing and conditional cooperation