Accounting for Carbon Offsets

by  Alex Tabarrok in

Highly complex, difficult to value assets are being evaluated by a handful of firms with strong ties to the financial corporations whose job it is to market those assets to investors around the world.  Sound familiar?

It's not mortgages but carbon offsets and not only are the issues related many of the same players are involved. Harpers has a good piece (subs, try also here (pdf)) with more details than I have seen elsewhere on how the market works.  It's not all bad, as the author, Mark Schapiro shows, the measurement infrastructure that has been created is actually quite impressive, but not enough effort has been put into monitoring.  Here's one good bit:

In this highly specialized new industry, perhaps
a thousand people really understand how
onsite measurement of CDM projects works,
and there is a serious potential for conflicts of
interest. It is not uncommon for validators and
verifiers to cross over to the far more lucrative
business of developing carbon projects themselves–
and then requesting audits from their
former colleagues. Schneider points out that
young university graduates entering the field
commonly spend several years learning the
ropes at DOEs and then “go to work for a carbon
project developer, where they make three
times the salary doing more interesting work.”

These developers–which partner with local
businesses and governments to set up offset projects–
are by and large funded or owned outright
by multinational firms, particularly financial
houses such as JP Morgan Chase, which owns
the biggest developer in the world, Eco-Securities; Goldman Sachs, which has a significant interest in the largest U.S.-based developer,
Blue Source; and Cantor Fitzgerald, which owns
CantorCO2e, another major player….

Not from the Onion: NYC to stop paying teachers to do nothing

by  Alex Tabarrok in

The city will end the practice of paying teachers to play Scrabble, read or surf the Internet in reassignment centers nicknamed "rubber rooms" as they await disciplinary hearings, Mayor Michael Bloomberg and the teachers union announced Thursday.

The deal will close the centers, where hundreds of educators spend months or years in bureauratic limbo, costing taxpayers tens of millions of dollars a year.

This part is so 'not making this stuff up':

The nickname refers to the padded cells of asylums, and teachers have said the name is fitting, since some of the inhabitants can become unstable.

"There are fights among teachers because some teachers are nuts," said Leonard Brown, a high school teacher who spent four years in a reassignment center in Queens. "They put crazy people in with very sane people."

More here.  Hat tip: Andrew.

Freak-onomics

by  Alex Tabarrok in

Here, courtesy of Adam Ozimek at Modeled Behavior, is a picture of Chauncy Morlan (1869-1906) who, because of his “freakish” weight, people once paid good money to see as he toured Europe and America with the Barnum & Bailey circus.  Although a tinge of freakishness still attaches to shows like The Biggest Loser the dominant theme is a feeling
of camaraderie and the hope that if the contestants can lose weight then so can anyone
with similar problem and goals.

What would the circus goers of 1890 have thought if they were told that in the America of 2010 Chauncy Morlan would be unremarkable?

Chauncy

Correlation-Seeking

by  Alex Tabarrok in

Richard Squire has an important new paper in the Harvard Law Review:

…This Article identifies a pervasive opportunism hazard created by
contingent debt that lawmakers and scholars have overlooked. If liability on a firm’s
contingent debt is especially likely to be triggered when the firm is insolvent, the
contract that creates the debt transfers wealth from the firm’s creditors to its
shareholders. A firm therefore has incentive to engage in correlation-seeking – that is,
to incur contingent debts that correlate, or that through asset purchases can be made to
correlate, with the firm’s insolvency risk. The consequence is an overuse of contingent
debt that destroys social wealth through overinvestment, higher borrowing costs,
financial distress, and potential systemic risk. Correlation-seeking is especially
pernicious because, unlike other forms of shareholder opportunism such as asset
substitution, it can reduce risk to shareholders even as it increases shareholder returns.

It's long been known that a firm close to bankruptcy has an
incentive to gamble because if the gamble pays off the
shareholders prosper and if the gamble fails then the shareholders are no worse off (since the firm was already close to bankruptcy). 
But gambles like this
add to shareholder value primarily by transferring wealth from
the creditors who bear the downside risk without any hope of upside gain.

Squire shows how this idea is magnified when we add
contingent debt and correlated asset returns.  A contingent debt is one that must
be paid only in certain states.  If the shareholders take on
contingent debt and at the same time buy assets with low or negative
payoffs in the same set of states then the shareholders can focus the downside risk into the states in which they are bankrupt anyway – thus focusing the downside risk onto unsecured creditors. 

Correlation seeking of this kind becomes easier with contingent
securities and more difficult to monitor.  As Squire points out even as AIG was writing credit default
swaps (a type of contingent debt) on MBS it was buying MBS for its own portfolio and of course the ultimate unsecured creditors, the taxpayers, paid the price. 

Extreme Foreclosure

by  Alex Tabarrok in

The house at 10512 Baldy Mountain Rd. in Sandpoint, Idaho, looks like just another vacant foreclosed home. Some appliances, a bathroom mirror and even the hot tub are missing. The dining room of the three-bedroom house has water damage.

But this isn't your run-of-the-mill problem house. Call it an Extreme Foreclosure. The 3,678-square-foot McMansion is a product of the popular "Extreme Makeover: Home Edition" reality television show. It isn't the only "Extreme" home to fall on hard times.

From the WSJ.

Does incarceration make people black?

by  Alex Tabarrok in

In a paper in Social Problems, Saperstein and Penner find that there is a surprising amount of variability in racial identification in the NLSY.  Some of this variation is due to error or other random factors but some of it also appears to be systematic.  In particular, the authors find that if someone has been incarcerated they are more likely to self-identify as black as well as to be independently identified as black.  As the authors put it

Results show that respondents who have been incarcerated are more
likely to identify and be seen as black, and less likely to identify
and be seen as white, regardless of how they were perceived or
identified previously. This suggests that race is not a fixed
characteristic of individuals but is flexible and continually negotiated
in everyday interactions.

Here is a key table.  In the first column is the respondent's self-identification, European or Black, in 1979.  Thus 95% of the people who identified as European in 1979 and who were not incarcerated between 1979 and 2002 identified themselves as White in 2002.  In other words, racial identification for the non-incarcerated was quite stable.  But only 80% of the people who identified as European in 1979 and who were incarcerated between 1979 and 2002 identified themselves as White in 2002.  Thus incarceration appears to affect how people identify themselves.

The result is surprising at first but makes sense once one sees it as a natural extension of Akerlof and Kranton's work on identity.

RaceID

Note that there are some issues with the data since the precise
questions asked and options given changed over time (hence the change
from "European descent" to "White")–nevertheless, the differences
conditioning on incarceration appear to be robust–but see the paper
for more.

Hat tip Gabriel Rossman.

April Speaking Events: Tyler Cowen, Alex Tabarrok

by  Alex Tabarrok in

Here is a list of events that Tyler and/or I will be speaking at in the near future.

  • Tyler and I will both be at the APEE conference in Las Vegas, April 11-13.
  • Tyler will be speaking on “The Economics of the Jobless Recovery” at Emory University on Thursday April 22, 4-5:15 pm.  More information here.
  • Tyler and I will both be speaking at the Fifteenth Annual University of Kentucky Teaching Workshop on Saturday April 24.  I will be talking about “Seeing the Invisible Hand” and Tyler will talk about the “Impact of the Financial Crisis on the Teaching of Macroeconomics.”  More information and registration here.

Attracted to Evil?

by  Alex Tabarrok in

In transcranial magnetic stimulation (“TMS”), a coil of wire is placed near the head. Alternating current flowing through the coil induces a magnetic field with a strength of up to 2.5 teslas (one tesla is 20,000 times the strength of the earth’s magnetic field). The field passes harmlessly through the skull and influences the electrical Brain_magnetsignals passing among neurons in the brain.

(Image and quote from Progress Daily.)

TMS has been used to stimulate or suppress different centers of the brain including those involved with attention, language and memory.   A new paper in PNAS used TMS to disrupt part of the brain involved in judging intention and morality.  Here is a summary:

Magnets can alter a person's sense of morality, according to a new report in the Proceedings of the National Academy of Sciences. 

Using a powerful magnetic field, scientists from MIT, Harvard University and Beth Israel Deaconess Medical Center are able to scramble the moral center of the brain, making it more difficult for people to separate innocent intentions from harmful outcomes….

Magnetic fields made people judge outcomes more than intentions.

The effect was small and temporary but no less disturbing especially if the effect could be made to operate at a distance.  Perhaps the tin-foil-hat-people have had it right all along.

One Game Machine Per Child

by  Alex Tabarrok in

Ofer Malamud and
Cristian Pop-Eleches look at the effects of a program that gave poor households a voucher to purchase a computer.  (The program was Romanian but the results may hold lessons for similar programs around the world.)  Households with incomes directly below a cutoff level were given a voucher while households with incomes directly above the cutoff were not.  Thus, households which were very similar were treated differently and this lets the authors use a regression discontinuity design that makes their results credible as representing a causal effect.  The results of a regression discontinuity design are also very easy to explain with figures. 

The income cutoff is shown by the red line.  Beginning at the top left we see that households with incomes just below the cutoff were much more likely to have a computer than households with incomes just above the cutoff – thus the voucher program has a big effect on computer ownership.  The top right figure shows similarly that the voucher program increased computer usage since computers were used much more often in households with incomes just below the cutoff than in the non-eligible-for-voucher households with incomes just above the cutoff. 

Computer1

Now take at look at the figures below.  The one on the left shows that the voucher program significantly increased the time spent playing computer games.  The one on the right which looks at the effect of the voucher program on the use of computers for homework – well, the punch line is clear. 

Time 

Not surprisingly, with all that game playing going on, the authors find that the voucher program actually resulted in a decline in grades although there was also some evidence for an increase in computer proficiency and perhaps some improvement in a cognitive test.

Hat tip to David Youngberg at the SeetheInvisibleHand.