Month: September 2010

The preference for low quality in Italian academia

There is a relatively new paper by Diego Gambetta and Gloria Origgi, here is the abstract:

We investigate a phenomenon which we have experienced as common when dealing with an assortment of Italian public and private institutions: people promise to exchange high quality goods and services (H), but then something goes wrong and the quality delivered is lower than promised (L). While this is perceived as ‘cheating’ by outsiders, insiders seem not only to adapt but to rely on this outcome. They do not resent low quality exchanges, in fact they seem to resent high quality ones, and are inclined to ostracise and avoid dealing with agents who deliver high quality. This equilibrium violates the standard preference ranking associated to the prisoner’s dilemma and similar games, whereby self-interested rational agents prefer to dish out low quality in exchange for high quality. While equally ‘lazy’, agents in our L-worlds are nonetheless oddly ‘pro-social’: to the advantage of maximizing their raw self-interest, they prefer to receive low quality provided that they too can in exchange deliver low quality without embarrassment. They develop a set of oblique social norms to sustain their preferred equilibrium when threatened by intrusions of high quality. We argue that cooperation is not always for the better: high quality collective outcomes are not only endangered by self-interested individual defectors, but by ‘cartels’ of mutually satisfied mediocrities.

It is common practice, for instance, that high quality providers are not trusted because they are not signaling the appropriate kind of loyalty.  Might this model also apply outside of Italian academia?

Hat tip goes to Seth Roberts.

No Checks, No Balances

From the NYTimes

The lead plaintiff is Binyam Mohamed, an Ethiopian citizen and legal resident of Britain who was arrested in Pakistan in 2002. He claimed he was turned over to the C.I.A., which flew him to Morocco and handed him off to its security service.

Moroccan interrogators, he said, held him for 18 months and subjected him to an array of tortures, including cutting his penis with a scalpel and then pouring a hot, stinging liquid on the open wounds.

Mr. Mohamed was later transferred back to the C.I.A., which he said flew him to its secret prison in Afghanistan. There, he said, he was held in continuous darkness, fed sparsely and subjected to loud noise – like the recorded screams of women and children – 24 hours a day.

He was later transferred again to the military prison at Guantánamo Bay, Cuba, where he was held for an additional five years. He was released and returned to Britain in early 2009 and is now free.

and from the court's response:

First, that the judicial branch may have deferred to the
executive branch’s claim of privilege in the interest of
national security does not preclude the government from honoring
the fundamental principles of justice.

Oh that's nice the U.S. government is not precluded from honoring the fundamental principles of justice. Tell me, what government ever was?

A new paper on high-frequency trading

The author is Jonathan Brogaard of Northwestern and here is the abstract:

This paper examines the impact of high frequency traders (HFTs) on equities markets. I analyze a unique data set to study the strategies utilized by HFTs, their profitability, and their relationship with characteristics of the overall market, including liquidity, price efficiency, and volatility. I find that in my sample HFTs participate in 77% of all trades and that they tend to engage in a price-reversal strategy. I find no evidence suggesting HFTs withdraw from markets in bad times or that they engage in abnormal front-running of large non-HFTs trades. The 26 high frequency trading (HFT) firms in the sample earn approximately $3 billion in profits annually. HFTs demand liquidity for 50.4% of all trades and supply liquidity for 51.4% of all trades. HFTs tend to demand liquidity in smaller amounts, and trades before and after a HFT demanded trade occur more quickly than other trades. HFTs provide the inside quotes approximately 50% of the time. In addition if HFTs were not part of the market, the average trade of 100 shares would result in a price movement of $.013 more than it currently does, while a trade of 1000 shares would cause the price to move an additional $.056. HFTs are an integral part of the price discovery process and price efficiency. Utilizing a variety of measures introduced by Hasbrouck (1991a, 1991b, 1995), I show that HFTs trades and quotes contribute more to price discovery than do non-HFTs activity. Finally, HFT reduces volatility. By constructing a hypothetical alternative price path that removes HFTs from the market, I show that the volatility of stocks is roughly unchanged when HFT initiated trades are eliminated and significantly higher when all types of HFT trades are removed.

The paper you can find here, and I thank a loyal MR reader for the pointer.

Why does a rise in imports lower gdp?

FYI, a loyal MR reader and commentator, writes to me:

I would like to suggest a topic for your blog: the way imports are used in the GDP calculation. To me it makes no sense that we would decrease our GDP every time something is imported. What is the rationale here? That we are sending 'gold overseas'? I mean, if one really believes that trade works by exchanging items of same perceived value (I give you $50 and you give me a $50 product) how can we ever explain this GDP deduction? Isn't this another mercantilist heritage that proves how not so free our trade system is?

The rationale is a) that is simply how the number is calculated, and b) a nation's capacity to produce goods and services determines its long-run standard of living.  On b), you might argue that the world's capacity to produce goods and services is what matters in a globalized setting, which returns us to FYI's question.

The comments of Angus are on the mark ("People, Accounting identities do not imply causation!"):

As a matter of accounting, the arithmetic is correct. But the suggestion that the trade deficit CAUSED growth to be lower by some measurable amount is completely unproven and just plain wrong.

The argument implies that there somehow would have been perfect substitutes for all imported goods being produced domestically and available for sale at the same price. Thus, if we could just keep out those damn imports, growth and jobs would soar.

Yet, this is far from true on the face of it, let alone considering if we banned all imports, we'd have a pretty hard time making any exports and that might create a "drag" on growth too, no?

Proposed markets in everything

In what Mr. DiSimone called his Free Limit Plan, he would give Nevadans and nonresidents the option to drive up to 90 miles an hour on state roads. The privilege would cost $25 a day and would conservatively generate more than $1 billion a year in new state revenue, he said.

DiSimone is an independent gubernatorial candidate, which I suppose means he is unlikely to win.  The article is here and here and I thank John Thorne and Ted Craig for the pointers.

The rule of law, or the rule of men (women)?

The Obama administration on Thursday told health insurers that it will track those who enact "unjustified" rate increases linked to the health overhaul and may block those companies from a new marketplace for insurance coverage.

Kathleen Sebelius, secretary of Health and Human Services, issued the warning in a letter to Karen Ignagni, the insurance industry's top lobbyist.

Ms. Sebelius said some insurers were notifying enrollees that their insurance premiums will increase next year as a result of the law's new benefits.

…"There will be zero tolerance for this type of misinformation and unjustified rate increases," Ms. Sebelius wrote. "We will not stand idly by as insurers blame their premium hikes and increased profits on the requirement that they provide consumers with basic protections."

Nowhere is it stated that these rate hikes are against the law (even if you think they should be), nor can this "misinformation" be against the law.  Here is further information, including a copy of the letter, which is worse than I had been expecting.

Are there advantages to prosopagnosia?

The artist Chuck Close, who is famous for his gigantic portraits of faces, has severe, lifelong prosopagnosia.  He believes it has played a crucial role in driving his unique artistic vision.  "I don't know who anyone is and essentially have no memory at all for people in real space," he says.  "But when I flatten them out in a photograph I can commit that image to memory."

That is from a recent NY article by Oliver Sacks, not on-line but gated here.  Sacks himself has this condition, as did Jane Goodall, including when she worked with chimpanzees.

Here is a new study on the neural basis of prosopagnosia.

What I’ve been reading

1. The Hunger Games, by Suzanne Collins.  It's derivative in its set-up, but still it has a splendid plot.  If you're looking to explore the new trend of adults reading works for "young adults," this is a good place to start.  The bottom line: I've just ordered volumes two and three, not just volume two.

2. W.G. Sebald, On the Natural History of Destruction.  Pitch perfect throughout, you can add Sebald to the list of authors with first-rate contributions to both fiction and non-fiction.

3. John W. Dower, Cultures of War: Pearl Harbor/Hiroshima/9-11.  Combines public choice and behavioral economics approaches to foreign policy, all through the lens of the events mentioned in the subtitle.  Consistently interesting, and it shows how the intelligence failures leading up to the second Iraq War had many precedents.  Dower is the same guy who wrote the excellent books on the Pacific War and Japanese postwar recovery; I recommend his work more generally.

4. Tom Segev, Simon Wiesenthal: The Life and Legends.  Many books on the Holocaust tread on well-tilled ground, but this was original and compelling throughout.  Here is a useful review, although I think it considerably exaggerates how critical the book is of Wiesenthal.  I also very much like Segev's The Seventh Million.

5. Michael Whinston, Lectures on Antitrust Economics.  A very good introduction to current thinking on antitrust policy, through the lens of theory and empirics.

My debate with Bryan Caplan on education

Bryan writes:

The other day, Tyler Cowen challenged me to name any country that I consider under-educated.  None came to mind.  While there may be a country on earth where government doesn't on net subsidize education, I don't know of any.

…This analysis holds in the Third World as well as the First.  The fact that Nigerians and Bolivians don't spend more of their hard-earned money on education is a solid free-market reason to conclude that additional education would be a waste of their money.

I would first note that many parts of many poor countries, today, receive de facto zero government subsidies for education.  Or put aside the issue of government provision and ask if you were a missionary and could inculcate a few norms what would they be?  Many regions – in particular Latin America — are undereducated for their levels of per capita income.  I view this as a serious cultural failing, most of all in terms of its collective social impact.  In contrast, Kerala, India is very intensely educated for its income level and that brings some well-known benefits in terms of social indicators and quality of life.

If I think of the Mexican village where I have done field work, the education sector "works" as follows.  No one in the village is capable of teaching writing, reading, and arithmetic.  A paid outsider is supposed to man the school, but very often that person never appears, even though he continues to be paid.  Children do have enough leisure time to take in schooling, when it is available.  I am told that most of the teachers are bad, when they do appear.  You can get your children (somewhat) educated by leaving the village altogether, and of course some people do this.  In the last ten years, satellite television suddenly has become the major educator in the village, helping the villagers learn Spanish (Nahuatl is the indigenous language), history, world affairs, some science from nature shows, and telenovela customs.  The villagers seem eager to learn, now that it is possible.

That scenario is only one data point but it is very different than the "demonstrated preference" model which Bryan is suggesting.  Bolivia and Nigeria are much poorer countries yet and they have dysfunctional educational sectors as well, especially in rural areas.  Bad roads are a major problem for "school choice" in these regions, just as they are a major problem for the importation of teachers. 

A simple model is that underinvestment in infrastructure results in a high shadow value for marginal increments of education.  Model = high fixed costs, liquidity constraints if you wish, high shadow values for lots of goods and services, toss in social externalities to raise the size of the distortion.  I read Bryan as focusing on "the fixity of the fixed costs" and claiming it is too costly to get the service through, relative to return. 

Of course Bryan favors rising wealth and falling fixed costs, as do I.  But in the meantime he also should admit that a) education "parachuted" in from outside can have a high marginal return, b) collectively stronger pro-education norms raise demand and can alleviate the high fixed costs problem, c) there are big external benefits, some operating through the education channel, to lowering the fixed costs, d) stronger pro-education norms put a region closer to a "big breakthrough" and weaker education norms do the opposite, and e) a-d still impliy "too little education" is the correct judgment.  On b), some evangelical groups in Latin America do seem to have stronger pro-education norms in their converts and it appears to be much better for the children of these families and no I'm not going to buy any response which ascribes the whole effect to selection.

I believe that Bryan's own work on voting suggests significant positive social external benefits from education, although he is not happy with how I characterize his view here.  I also believe his views on children suggest strong peer effects across children (parental effort doesn't matter so much in his model and the rest of the influence has to come from somewhere), though in conversation I am again not sure he accepts this characterization.

I consider most countries in today's world to be undereducated. 

Signaling models are important but they are not the only effect and of course a lot of signaling is welfare-improving for reasons of screening and sorting and character reenforcement.  The traditional story of high social returns to education is supported by evidence from a wide variety of different fields and methods, including cross-sectional growth models, labor economics, political science, public opinion research, anthropology, education research, and much more.  You can knock some of this down by stressing the endogeneity of education, but at the end of the day the pile of evidence, and the diversity of its directions, is simply too overwhelming.