Category: Economics

Lapses in insurance payments

Most individual life insurance policies lapse, with lapsers cross-subsidizing non-lapsers. We show that policies and lapse patterns predicted by standard rational expectations models are the opposite of those observed empirically. We propose two behavioral models consistent with the evidence: (i) consumers forget to pay premiums and (ii) consumers understate future liquidity needs. We conduct two surveys with a large insurer. New buyers believe that their own lapse probabilities are small compared to the insurer’s actual experience. For recent lapsers, forgetfulness accounts for 37.8 percent of lapses while unexpected liquidity accounts for 15.4 percent.

Here is the full AER article by Daniel Gottlieb and Kent Smetters.

Growing Oligopolies, Prices, Output, and Productivity

The real monopoly problems in our economy are not the firms that push up some very particular concentration indices, rather they are the small, local monopolies, hospitals, and the public education system.  Here is a new investigation (AEA gate) from Sharat Ganapati, you will note that the bold emphasis has been added by yours truly:

American industries have grown more concentrated over the last 40 years. In the absence of productivity innovation, this should lead to price hikes and output reductions, decreasing consumer welfare. With US census data from 1972 to 2012, I use price data to disentangle revenue from output. Industry-level estimates show that concentration increases are positively correlated to productivity and real output growth, uncorrelated with price changes and overall payroll, and negatively correlated with labor’s revenue share. I rationalize these results in a simple model of competition. Productive industries (with growing oligopolists) expand real output and hold down prices, raising consumer welfare, while maintaining or reducing their workforces, lowering labor’s share of output.

That is from the new issue of American Economic Journal: Microeconomics.  Rooftops!  Other research has pointed in the same direction.  Pennsylvania, Ave.: please do not split up America’s best and most productive firms.

Do looks matter for an academic career in economics?

It seems they do:

We document appearance effects in the economics profession. Using unique data on PhD graduates from ten of the top economics departments in the United States we test whether more attractive individuals are more likely to succeed. We find robust evidence that appearance has predictive power for job outcomes and research productivity. Attractive individuals are more likely to study at higher ranked PhD institutions and are more likely to be placed at higher-ranking academic institutions not only for their first job, but also for jobs as many as 15 years after their graduation, even when we control for the ranking of PhD institution and first job. Appearance also predicts the success of research output: while it does not predict the number of papers an individual writes, it predicts the number of citations for a given number of papers, again even when we control for the ranking of the PhD institution and first job. All these effects are robust, statistically significant, and substantial in magnitude.

That is from a recent paper by Galina Hale, Tali Regev, and Yona Rubinstein.  Via John Chilton.

The 1991 Project

In 1991 on the verge of bankruptcy, India abandoned the License-Raj and freed its economy from many socialist shackles. Prime Minister Narasimha Rao announced to the nation:

We believe that a bulk of government regulations and controls on economic activity have outlived their utility. They are stifling the creativity and innovativeness of our people. Excessive controls have also bred corruption. Indeed, they have come in the way of achieving our objectives of expanding employment opportunities, reducing rural-urban disparities and ensuring greater social justice.

And he was serious–in the plan, tariffs and controls were lifted, thousands of licenses eliminated, entire departments undone. A No Confidence motion was mounted in parliament but the opponents made a tactical error and walked out, leaving just enough votes for Rao’s government to survive and the plan to pass. The result was an economic revolution. Economic growth increased and millions were lifted out of poverty. Yet, the 1991 Project was incomplete and many young Indian’s today have little appreciation of the gains that have been made or why they happened.

The 1991 Project is about understanding the history of economic liberalization in order to better chart the future. It begins with a superb essay by Shruti Rajagopalan on living under India’s socialist system. Did you know that under the License-Raj you needed a government permit to own a bicycle in some parts of the country?

Bicycles saw increasing demand as urban populations increased. Steel was government controlled and, given the heavy demand from the construction industry, only limited allotments were made to bicycle manufacturers. To increase their allotment of steel and meet the increasing demand for bicycles, they needed an expansion permit, which was rarely approved by the government given the shortage of steel.

The license and permit system for steel also created a shortage in bicycles, which was followed by the inevitable price controls. To ensure that demand was legitimate and all available bicycles were used, owning and riding a bicycle required a government-issued token in some parts of the country. Inspectors thrived on the bribes paid when they caught anyone riding without the requisite permit.

The middle class didn’t escape the problem, either. Through a collaboration with Vespa, Bajaj manufactured scooters in India, and they became popular with the middle-class. Denied permission to expand to meet the rising demand, the waitlist for a Bajaj scooter was ten years by the late 1970s.

Even though dowry is not just illegal but is a crime in India, the entrenched dowry culture in the arranged marriage system enables grooms to make outrageous demands of the bride’s family. A Bajaj scooter became a top dowry ask. Given the decade-long waiting period, parents took to purchasing them on the black market, and by the late 1970s the price of a secondhand/used Bajaj scooter available immediately was much higher than that of a brand-new vehicle with a 5- to 10-year waiting period.

It got so bad that when a girl child was born, well-wishers would – only half in jest – suggest to the parents that they should immediately book a scooter so it would arrive in time for the wedding. This was reminiscent of the old Soviet Union joke about a man paying for an automobile. The clerk tells him it will be delivered in ten years. The man asks, “Morning or afternoon?” “What difference does it make?” responds the clerk. “Well, the plumber is coming in the morning.”

Check out The 1991 Project and Rajagopalan’s essay.

Photo Credit: Manmohan Singh with PM Narasimha Rao in 1994. Photo: Sanjay Sharma/Hindustan Times

They modeled this — why women might see fewer STEM ads

Women see fewer advertisements about entering into science and technology professions than men do. But it’s not because companies are preferentially targeting men—rather it appears to result from the economics of ad sales.

Surprisingly, when an advertiser pays for digital ads, including postings for jobs in science, technology, engineering and mathematics (STEM), it is more expensive to get female views than male ones. As a result, ad algorithms designed to get the most bang for one’s buck consequently go for the cheaper eyeballs—men’s. New work illustrating this gap is prompting questions about how that disparity may contribute to the gender gap in science jobs.

…As a result of that optimization, however, men saw the ad 20 percent more often than women did…

Tucker ran $181 worth of advertising via Google, for example, saying she was willing to pay as much as 50 cents per click. It ended up costing 19 cents to show the ad to a man versus 20 cents to show that same ad to a woman. These investments resulted in 38,000 “impressions”—industry-speak for ad views—among men, but only about 29,000 impressions among women.

Similarly, on Twitter it cost $31 to get about 52,000 impressions for men but roughly $46 to get 66,000 impressions for women. And on Instagram it cost $1.74 to get a woman’s eyeballs on the ad but only 95 cents to get a man’s.

Here is the full Scientific American article, via Luke Froeb, and do note those differentials may vary considerably over time.  Gender issues aside, I would say this reflects a broader problem with having a very high value of time — it becomes harder to maintain a relatively high proportion of people showing you valuable things you wish to see (as opposed to people bugging you, grifting you, etc.).

Swedish study will pay people to get vaccinated

Swedish volunteers will be paid £17 each to be immunised in Europe’s largest test of whether small cash incentives can improve vaccine uptake…

The Swedish study, led by Erik Wengstrom, an economics professor at Lund University, uses gentler methods.

Over the next few weeks 8,200 unvaccinated people under the age of 60 will be split into different groups. Some will be given a voucher worth 200 Swedish kronor (£17) that can be used in most shops if they are vaccinated.

The money is a fraction of the sums being discussed in other countries, but Wengstrom said there was evidence from the US that as little as $25 (£18) was enough to persuade people.

He said: “People might have the intention to get vaccinated, but maybe there’s a little bit of hassle involved and something always gets in the way, so a small incentive might help.”

Other participants will be subjected to “nudge” techniques — attempts to influence people’s behaviour by guiding them towards a particular choice.

Some will be given leaflets about the vaccines’ benefits and side effects; others will be asked to think of the best argument to persuade others to have the vaccine. A third group will be told to draw up a list of their loved ones. “That’s basically encouraging them to think about how the vaccination might protect others,” Wengstrom said.

Here is the full London Times story.  Here is further information from Sweden.

Why do they keep the books wrapped in Mexican bookstores?

Yes, wrapped in clear shrink wrap.  So you can’t page through them and see what the book might be like.  I can think of a few hypotheses:

1. They don’t want you standing in the bookstore reading the thing, rather than buying it.  A bit like some U.S. comics news stands in days past.  Yet this doesn’t seem so plausible for longer books or most novels.

2. They want the books to look nicer and less grimy.

3. How about price discrimination?

Imagine there are two classes of readers.  The first is poorer, and only buys books when he or she knows the book is truly desired.  Harry Potter might be an example of such a book.   You want to read what everyone else is reading, to talk about it at school, and you don’t need to scrutinize p.78 so closely before deciding to purchase.

The second class of buyer is wealthier and usually will be buying (and reading) more books, indeed for those people book-buying is a significant habit.  That buyer wants to be on top of current trends, wants to have read whichever book is “best” that year amongst the trendy set, and so on.  If book quality is uncertain, such individuals will end up paying a de facto, quality-adjusted higher per unit price per book.  If you can’t sample the books in advance, you will end up buying some lemons, and you can’t just pick out the cherries.

Wrapped books thus extract more surplus from the second class of buyer and do not much discourage the first class.  The general point is related to the economic analysis of bundling and also block-booking — you have to buy a whole bunch of items to get the things you want.

I wonder if they would mind if I removed the wrapping to take a look before purchasing?  Maybe the store employees would be indifferent, but how about the retail outlet CEO?  The publisher?  The author?  Model this!

Or maybe that is just the way they do things.

Why has the Indian diaspora been so successful?

Dwarkesh writes to me:

Why do you think the Indian diaspora has been so successful? Just selection of the best immigrants from a large pool of candidates or something else too?

Yes, there are plenty of Indians, and surely that matters, but I see several others factors at work:

1. The Indian diaspora itself is large, estimated at 18 million and the single largest diaspora in the world.

2. A significant portion of the better-educated Indians are hooked into English-language networks early on, including through the internet.  The value of this connection has been rising due to the rising value of the internet itself.  That is a big reason to be bullish on the Indian diaspora.

3. India has been growing rapidly enough so that people understand the nature and value of progress, yet the country remains poor enough that further progress seems urgent.

4. Many Indian parents seem intent on expecting a great deal from their children.  The value of this cannot be overemphasized.  This effect seems to be stronger in India than in say Indonesia.

5. There is especially positive selection for Indians coming to America.  You can’t just run across a border, instead many of the ways of getting here involve some specialization in education and also technical abilities.  Virtually all migrated in legal manners, and here is some interesting data on how the various cohorts of Indians arriving in America differed by wave.

6. More speculatively, I see a kind of conceptual emphasis and also a mental flexibility resulting from India’s past as a mixing ground for many cultures.  Perhaps some of this comes from the nature of Hinduism as well, even for non-Hindu Indians (just as American Jews are somewhat “Protestant”).  Indians who move into leadership roles in U.S. companies seem to do quite well making a very significant cultural leap.  I cannot think of any other emerging economy where the same is true to a comparable extent.  In any case, the intellectual capital embedded in Indian culture is immense.

7. Those Indians who leave seem to retain strong ties to the home country, which in turn helps others with their subsequent upward mobility, whether in India or abroad.  In contrast, Russians who leave Russia seem to cut their ties to a higher degree.

8. I feel one of the hypotheses should involve caste, but I don’t have a ready claim at hand.

Here is the take of Stephen Manallack.  Here is Times of India.  (And by the way, here is Shruti’s piece on India’s 1991 reforms, not irrelevant to the diaspora.)

What else?

Do honorifics pass a market test?

Following on my discussion from the other day, it is worth thinking about whether new institutions or sectors work very hard to set up a lot of honorific titles.  So many of our standard honorifics come from quite old sectors, such as the military or religion or the nobility.  Are the new sectors seeking to copy those practices?

The world of gaming is quite new, and I do not think it does much to award generalized honorific titles per se, noting that naming competition winners as victors is a fundamentally different practice.

The world of tech is (mostly) pretty new, and it too does not rely much on titles.  Stock options are more important!  Of course you might call someone “employee #37,” but do they go around referring to “Programmer Smith”?  Yes Smith deserves “respect,” but somehow they don’t take it in that direction.

If honorific titles are so wonderful, why do most new institutions seem to be honorific-shy?  Surely a lot of the benefit from such honorific titles ought to be internal to the organization.

(As an aside, I think of women as being treated much better in think tanks and research centers than in academia, and in relative terms having superior opportunities.  And yet there are no formal honorific titles such as “Professor” in the former institutions.  I am not suggesting causality here, but still it seems that the more informal systems are hardly a train wreck for women as a whole.)

Clearly, titles do benefit particular individuals, such as those who are currently not receiving enough respect in their jobs.  But for larger groups as a whole, does it make sense to double down on the honorifics strategy?  In a world where say YouTube stars have more and more influence each year?  Where actual performance in most sectors is easy to measure than ever before?  Is it really so great to so validate the notion of “having done all your homework”?  Honorifics impose lots of costs on the broader group by formalizing hierarchies and making them based on the achievement of arbitrary credentialized plateaus, such as receiving a Ph.D.  Would you really want to invest in the group that wanted to move in the honorifics direction?  Or would you instead think of them as fighting yesterday’s war of ideas?

Can you think of significant new sectors that are investing in honorific titles?  If not, what should you infer from that?  You might claim that titles in the military are tried, true, and tested, and you would be right.  But at the margin should we have greater or less emphasis on titled honorifics as the world changes moving forward?  What are the market data telling us right now?

You already know what I think.

Why the post-1960 divergence for Haiti and the Dominican Republic?

Here is a very good post from Noah Smith on that topic, opening excerpt:

As recently as 1960, the two countries had similar standards of living. Today, the D.R., by some measures, is eight times as rich as Haiti, while Haiti’s standard of living hasn’t advanced at all since 1950.

The D.R. has already surpassed Brazil and Colombia; if Covid doesn’t knock it off its growth trend, it’ll soon pass Mexico and Argentina.

A forensic exercise then follows, for instance:

When Haiti won its independence from France, France sent warships to demand reparations for Haitian expropriation of French property (i.e. slaves and land). Haiti agreed to pay a considerable sum, and to give France cheap exports as well. Some people blame this monumental act of extortion for Haiti’s poverty. It makes a simple, intuitive sort of sense — if someone takes your money, it’s hard to get rich right?

But there are some big problems with this thesis. First of all, Haiti finished paying back this debt (which France reduced) in 1947. That’s at least a decade before Haiti and the D.R. started to diverge economically, and four decades before the divergence became pronounced. Furthermore, Haiti’s total external debt in 2019 was only about 15% of GDP, while the D.R.’s was about 40%! The D.R. is far more indebted to foreign countries now than Haiti is.

I agree with the points made by Noah in the longer post, and would add a few factors.  First, Haiti’s moments of extreme political weakness happened to coincide with a major increase in drug trafficking in the region.  Second, the DR has done an especially good job of mobilizing Special Economic Zones to support its economic growth, at least relative to Haiti.  That in turn had broader feedback effects on subsequent political economy and thus economic growth.  Haiti, in contrast, ended driving out its MNEs — Disney manufacturing was once in the country, baseball production was once significant, and so on, but none of those gains have compounded and mostly they went away, due to bad governance and infrastructure.  (And the massive corruption at Haiti’s main port is a striking contrast with DR export procedures through the SEZs.)  Third, and this one may be as much symptom as cause, but the DR managed to decentralize its power structures somewhat through economic growth on its peripheries, through both tourism and SEZs.  In Haiti, the second- and third-tier cities have not developed, and have turned into backwaters, while centralization in Port-au-Prince has continued unabated, thereby intensifying the logic of Haitian rent-seeking.

Ray C. Fair on price inflation

This paper uses an econometric approach to examine the inflation consequences of the American Rescue Plan Act of 2021. Price equations are estimated and used to forecast future inflation. The main results are: (1) The data suggest that price equations should be specified in level form rather than in first or second difference form. (2) There is some slight evidence of nonlinear demand effects on prices. (3) There is no evidence that demand effects have gotten smaller over time. 4) The stimulus from the act combined with large wealth effects from past household saving, rising stock prices, and rising housing prices is large and is forecast to drive the unemployment rate down to below 3.5 percent by the middle of 2022. 5) Given this stimulus, the inflation rate is forecast to rise to slightly under 5 percent by the middle of 2022 and then comes down slowly. 6) There is considerable uncertainty in the point forecasts, especially two years out. The probability that inflation will be larger than 6 percent next year is estimated to be 31.6 percent. 7) If the Fed were behaving as historically estimated, it would raise the interest rate to about 3 percent by the end of 2021 and 3.5 percent by the end of 2022 according to the forecast. This would lower inflation, although slowly. By the middle of 2022 inflation would be about 1 percentage point lower. The unemployment rate would be 0.5 percentage points higher.

As I do not think the correct answers here are close to certain, I am happy to continue to survey a broad range of opinion.  Stay tuned…

Here is the link, via the excellent Kevin Lewis.  As for the markets, here is yesterday’s report from Neil Irwin:

“So we’re at 1.2% 10-year Treasury yields with 5.4% year-over-year inflation. Very normal very cool.”

As I interpret those numbers, the market expects inflationary pressures, the Fed to respond, but that response will induce a recession.  Stay tuned…

A Regression Puzzle

Here’s a regression puzzle courtesy of Advanced NFL Stats from a few years ago and pointed to recently by Holden Karnofsky from his interesting new blog, ColdTakes. The nominal issue is how to figure our whether Aaron Rodgers is underpaid or overpaid given data on salaries and expected points added per game. Assume that these are the right stats and correctly calculated. The real issue is which is the best graph to answer this question:

Brian 1: …just look at this super scatterplot I made of all veteran/free-agent QBs. The chart plots Expected Points Added (EPA) per Game versus adjusted salary cap hit. Both measures are averaged over the veteran periods of each player’s contracts. I added an Ordinary Least Squares (OLS) best-fit regression line to illustrate my point (r=0.46, p=0.002).

Rodgers’ production, measured by his career average Expected Points Added (EPA) per game is far higher than the trend line says would be worth his $21M/yr cost. The vertical distance between his new contract numbers, $21M/yr and about 11 EPA/G illustrates the surplus performance the Packers will likely get from Rodgers.

https://web.archive.org/web/20210701003025if_/http://1.bp.blogspot.com/-9-P3K8HQvGk/UYcWeZaliqI/AAAAAAAAK0c/O6dacdopocI/s1600/rodgers+epa+vs+cap.png

According to this analysis, Rodgers would be worth something like $25M or more per season. If we extend  his 11 EPA/G number horizontally to the right, it would intercept the trend line at $25M. He’s literally off the chart.

Brian 2: Brian, you ignorant slut. Aaron Rodgers can’t possibly be worth that much money….I’ve made my own scatterplot and regression. Using the exact same methodology and exact same data, I’ve plotted average adjusted cap hit versus EPA/G. The only difference from your chart above is that I swapped the vertical and horizontal axes. Even the correlation and significance are exactly the same.

As you can see, you idiot, Rodgers’ new contract is about twice as expensive as it should be. The value of an 11 EPA/yr QB should be about $10M.

Ok, so which is the best graph for answering this question? Show your work. Bonus points: What is the other graph useful for? Holden points to Phil Birnbaum’s helpful analysis in the comments.

More puzzles at cold-takes.

Why did Portugal decline?

Davis Kedrosky and Nuno Palma blame Brazil:

As late as 1750, Portugal had an output per head considerably higher than those of France or Spain. Yet just a century later, Portugal was Western Europe’s poorest country. In this paper we show that the discovery of massive quantities of gold in Brazil over the eighteenth century played a key role for the long-run development of Portugal’s economy. We focus on the economic resource curse: the loss of competitiveness of the tradables sector manifested in the rise of the price of non-traded goods relative to traded imports. Using original price data from archives for four Portuguese regions between 1650 and 1800, we show that a real exchange rate appreciation of about 30 percent occurred during the eighteenth century, which led to a loss of the competitiveness of national industry from which the country did not recover until considerably later.

Via Ilya Novak.  Oh Thiago!

Self Recommending Links

1. I had a fun and wide-ranging conversation with Jonah Goldberg on the Remnant. We covered the economy, immigration, cyborgs and the Baumol effect among other topics.

2. Tim Harford covers fractional dosing at the FT:

The concept of a standard or full dose is fuzzier than one might imagine. These vaccines were developed at great speed, with a focus on effectiveness that meant erring towards high doses. Melissa Moore, a chief scientific officer at Moderna, has acknowledged this. It is plausible that we will come to regard the current doses as needlessly high.

3. The Brunswick Group interviews me:

Act like you’re in a crisis. That has been economist Alex Tabarrok’s advice since the start of the COVID-19 pandemic. Tabarrok was among the earliest and loudest voices arguing for urgency and risk-taking when it came to increasing rapid testing, investing in vaccine capacity, and employing flexible vaccine dosing. In hindsight, he has been proven regularly right when most health experts were wrong.