Month: March 2006

Uri Gneezy and John List write:

Recent discoveries in behavioral economics have led scholars to question the underpinnings of neoclassical economics. We use insights gained from one of the most influential lines of behavioral research — gift exchange — in an attempt to maximize worker effort in two quite distinct tasks: data entry for a university library and door-to-door fundraising for a research center. In support of the received literature, our field evidence suggests that worker effort in the first few hours on the job is considerably higher in the "gift" treatment than in the "non-gift treatment." After the initial few hours, however, no difference in outcomes is observed, and overall the gift treatment yielded inferior aggregate outcomes for the employer: with the same budget we would have logged more data for our library and raised more money for our research center by using the market-clearing wage rather than by trying to induce greater effort with a gift of higher wages.

In other words, people in the real world show behavior much like that of traditional economic agents.  Here is the paper.  Have I mentioned that John List is one of the most important young economists?  He has jumped from a U. Wyoming Ph.d. to a U. Maryland job to the notoriously-stingy-to-tenure Department of Economics at the University of Chicago.  If you want to see a tough skeptic about many commonly accepted research results, especially in the realm of economic experiments, read some of John’s other papers.  John is developing more finely grained methods of discovering when we should believe laboratory experiments.  Are you surprised he puts greater trust in market data?

The NYTimes reports on an innovation in disaster aid, drought insurance taken out by relief agencies.

In a pilot project that could someday transform the world’s
approach to disaster emergencies, the World Food Program has taken out
an insurance policy that will pay it should Ethiopia’s notoriously
fickle rains fail this year…

The policy, which costs $930,000, was devised to create
a new way of financing natural disaster aid. Instead of waiting for
drought to hit, and people to suffer, and then pursuing money from
donors to be able to respond, the World Food Program has crunched the
numbers from past droughts and taken out insurance on the income losses
that Ethiopian farmers would face should the rains fail…

….If it works, the insurance will get emergency money flowing
faster, before the haunting images of dying babies reach television
sets. It would also shift the risk from farmers to financiers.

    Insurance like this could even have benefits in the United States.  Private firms, of course, often do buy disaster insurance but the United States government might want to do the same.  Hurricane insurance, for example, bought by the US government could better spread the costs of disasters to the well-diversified.  In theory, the government could duplicate any insurance program with a tax and spending program (give Bill Gates money now and tax him when the disaster occurs) but in practice it’s going to be much easier to commit to an insurance plan than to an equivalent tax and spend plan.   

More generally, drought insurance on this scale is part of the New Financial Order.  I refer to Robert Shiller’s work on using macro-markets to
offer large-scale insurance.  A market in GDP futures, for example,
could be used to hedge against declines in GDP such as have occured in
Argentina, South Korea or the future United States (yes Tyler, it could happen!). 
Markets in the income of professions as a whole, e.g. the the income of
dentists, could be used by dentists to hedge against the possibility of
a super anti-cavity sealant.  See Entrepreneurial Economics for more on macro markets.

Thanks to Alex Wolman for the pointer and Robin Hanson for discussion.

Why do some countries keep all their people in a small number of large cities?

A good example of the relationship between climate variability and human population size is provided by Australia.  It is unique among the larger nations in consisting of either very small settlements or large cities, for the middle-sized towns that predominate elsewhere in the world are almost entirely absent.  This is a consequence of the cycle of drought and flood that has characterized the land from first settlement.

Small regional population centers have survived because they can batten down the hatches and endure drought, and large cities have also survived because they are integrated into the global economy.  The resource networks of towns, however, are smaller than the region affected by climate variability, making them vulnerable to swings in income.  Typically, what happens is that, as a drought progresses, the farm machinery dealership and and automotive dealership close down…When the drought finally breaks, these businesses do not return…instead people travel to larger centers to buy what they need, and in time end up moving there.

The Australian example shows that climate variability has in fact encouraged the formation of cities: Today it is the most urbanized nation on Earth. 

That is from Tim Flannery’s The Weather Makers: How Man is Changing the Climate and What It Means for the Earth.  A few passages make me wince, such as the romanticization of 18th century Scottish highlanders, but mostly it is the best popular science book on its topic.

My IRT ("introspective regression techniques") support Flannery’s implicit prediction.  Think about all that empty desert in Saudi Arabia, although I wonder why the rather wet Uppsala is so dull.  Opinions?  Do we see concentrated population in major cities where it is driest and where the weather is most variable?  I don’t recall that Ades and Glaeser mention this factor, but surely it deserves more study.

Via Brad deLong is Paul Krugman’s introduction to the General Theory.  Point Three in Krugman’s stripped down version is:

3. Government policies to increase demand, by contrast, can reduce unemployment quickly.

Well, that would certainly explain why unemployment recovered so quickly during the Great Depression.  Or perhaps, despite the fact that "all it took to get the economy going again was a surprisingly narrow, technical fix,"  we just weren’t trying hard enough.  See also Tyler’s comments.

Louis Kaplow is smart, here is his 119-page overview of the topic.