Category: Economics

Superstar firms and market concentration

A new paper by Autor, Dorn, Katz, Patterson and Van Reenen (some real heavyweights) rebuts the notion that market concentration is rising because of inadequate antitrust concentration:

The fall of labor’s share of GDP in the United States and many other countries in recent decades is we ll documented but its causes remain uncertain. Existing empirical assessments typically rely on industry or macro data obscuring heterogeneity among firms. In this paper, we analyze micro panel data from the U.S. Economic Census since 1982 and document empirical patterns to assess a new interpretation of the fall in the labor share based on the rise of “superstar firms.” If globalization or technological changes push sales towards the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms, which have high markups and a low labor share of value-added. We empirically assess seven predictions of this hypothesis: (i) industry sales will increasingly concentrate in a small number of firms; (ii) industries where concentration rises most will have the largest declines in the labor share; (iii) the fall in the labor share will be driven largely by reallocation rather than a fall in the unweighted mean labor share across all firms; (iv) the between-firm reallocation component of the fall in the labor share will be greatest in the sectors with the largest increases in market concentration; (v) the industries that are becoming more concentrated will exhibit faster growth of productivity; (vi) the aggregate markup will rise more than the typical firm’s markup; and (vii) these patterns should be observed not only in U.S. firms, but also internationally. We find support for all of these predictions.

Here is coverage from Peter Orszag.  As I’ve said before, people are opting for Philippon’s Great Reversal story because of ideology and convenience and mood affiliation, but it is not supported by the facts.

Income Share Agreements

Mitch Daniels, former Governor of Indiana and now President of Purdue University, writes about income share agreements in the Washington Post:

In an ISA, a student borrows nothing but rather has his or her education supported by an investor, in return for a contract to pay a specified percentage of income for a fixed number of years after graduation. Rates and time vary with the discipline of the degree achieved and the amount of tuition assistance the student obtained.

An ISA is dramatically more student-friendly than a loan. All the risk shifts from the student to the investing entity; if a career starts slowly, or not at all, the student’s obligation drops or goes to zero. Think of an ISA as equity instead of debt, or as working one’s way through college — after college.

An excellent point. If you watch Shark Tank the entrepreneurs are always wary about debt because debt puts all the risk on them and requires fixed payments regardless. Yet when it comes to financing the venture of one’s own life suddenly equity becomes akin to slavery and debt bondage becomes freedom! It’s very peculiar.

Another advantage of ISAs is that they provide feedback. Is the university willing to educate you for free in return for a share of future earnings? That’s a good signal!

ISAs have emerged principally in response to the wreckage of the federal student debt system but they also represent an opportunity for higher education to address another legitimate criticism: that it accepts no accountability for its results. As the lead investor of the two funds Purdue has raised to date, our university is expressing confidence that its graduates are ready for the world of work.

Check out Lambda School. “We invest in you. Pay nothing until you get a job making over $50,000.”

At Purdue, the university I lead, hundreds of students have such contracts in place, and other colleges large and small are joining the ISA movement. Beyond traditional higher education, coding academies and other skill-specific schools are making the same offer: Study for free, and pay us back after you get the good job we are confident you’ll land.

Although the very nature of ISAs protects the participant, early adopters such as Purdue have built in safeguards. A user-friendly computer simulator provides quick, transparent comparisons with various public and private loan options. No investee pays anything for the first six months after graduation or until annual income exceeds $20,000. For those graduates who get off to fast career starts, a ceiling of 250 percent of the dollars that purchased their education limits total repayment.

I’ve been writing about income-contingent loans for years. Milton Friedman was an early advocate. It’s good to see forward movement.

*Towards an Economics of Natural Equals*

The authors are David M. Levy and Sandra J. Peart, and the subtitle is A Documentary History of the Early Virginia School.  This is the true history, told by people who know, and with extensive citations from correspondence and primary documentation.


Beginning quite early and throughout his long career, Buchanan studied, endorsed, and extended the Smithian economics of natural equals.

You will find the correspondence of Buchanan and Rawls, the dealings of Buchanan with a skeptical Ford Foundation, the real story behind the Buchanan and G. Warren Nutter “Universal Education” voucher plan, what actually happened in Buchanan’s Chile visit, Chicago vs. Virginia disputes, the anti-democratic views of Murray Rothbard, and the contested history of neoliberalism.  And much correspondence from Ronald Coase.


David Levy worked with Buchanan and Tullock from the late 1970s through their deaths, and he and Peart are extremely careful in their sourcing and quotation practices — get the picture?

Due out Februrary, leap year day, you can pre-order here.

Nonbank lending

We provide novel systematic evidence on the extent and terms of direct lending by nonbank financial institutions, and explore whether banks are still special in lending to informationally opaque firms. Analyzing hand-collected data for a random sample of publicly-traded middle-market firms during the 2010-2015 period, we show that nonbank lending is widespread, with 32% of all loans being extended by nonbanks. Nonbank borrowers are less profitable, more levered, and more volatile than bank borrowers. Firms with a small negative EBITDA are 34% more likely to borrow from a nonbank than firms with a small positive EBITDA. While nonbank lenders are less likely to monitor by including financial covenants, they are more likely to align incentives through the use of warrants. Controlling for firm and loan characteristics, nonbank loans carry 190 basis points higher interest rates. Overall, our results provide evidence of market segmentation in the commercial loan market, where bank and nonbank lenders utilize different lending techniques and cater to different types of borrowers.

That is from a new NBER working paper by Sergey Chernenko, Isil Erel, and Robert Prilmeier.

The one-child policy and Chinese child trafficking

In the past 40 years, a large number of children have been abandoned by their families or have been abducted in China. We argue that the implementation of the one-child policy has significantly increased both child abandonment and child abduction and that, furthermore, the cultural preference for sons in China has shaped unique gender-based patterns whereby a majority of the children who are abandoned are girls and a majority of the children who are abducted are boys. We provide empirical evidence for the following findings: (1) Stricter one-child policy implementation leads to more child abandonment locally and more child abduction in neighboring regions; (2) A stronger son-preference bias in a given region intensifies both the local effects and spatial spillover effects of the region’s one-child policy on child abandonment and abduction; and (3) With the gradual relaxation of the one-child policy after 2002, both child abandonment and child abduction have dropped significantly. This paper is the first to provide empirical evidence on the unintended consequences of the one-child policy in terms of child trafficking in China.

That is the abstract of a new paper by Xiaojia Bao, Sebastian Galiani, Kai Li, and Cheryl Xiaoning Long.

William Shatner on mortgages


I am once again reminded how expected returns is a critical concept in macroeconomics.  Circa 1985, you could expect to earn much higher returns putting money in a certificate of deposit, thus increasing the opportunity of buying a house back then.  No, you would not earn 12% on your money, but still we need to reckon with the higher opportunity cost of funds to calculate the true home purchase/mortgage cost at that time.

Wealth by Generation and Age

Kurt Andersen made the following arresting tweet

Fraction of all US wealth owned by Boomers & Gen-Xers when the average member of each was age 35:

Boomers, 1989 21%
GenX, 2008 8%
The average Millennial turns 35 in 2023. Right now they own 3%.

There will surely be political implications.

Definitions: Baby Boomer=born 1946-1964, Gen X=born 1965-1980, and Millennial=born 1981-1996.

You can’t take it with you, so this will change eventually but perhaps too late. Think of this as the Prince Charles effect. Prince Charles hasn’t offed his mother and led a revolution yet but in an earlier age he probably would have and surely he has thought about it. Similarly, perhaps the demand among some Gen-Xers and Millennials for wealth redistribution can be understood as a demand to get their share of the pot before they are old and tired.

The data, which are from the Federal Reserve are here.

NIMBY build for the homeless solve for the equilibrium

At an average cost of $531,373 per unit – with many apartments costing more than $600,000 each –  building costs of many of the homeless units will exceed the median sale price of a market-rate condominium. In the city of Los Angeles, the median price for a condo is $546,000, and a single-family home in Los Angeles County has a median price of $627,690, the study states.

Here is further information, via Rob Moore.

Medicare for all is not entirely efficient

There is increasing interest in expanding Medicare health insurance coverage in the U.S., but it is not clear whether the current program is the right foundation on which to build. Traditional Medicare covers a uniform set of benefits for all income groups and provides more generous access to providers and new treatments than public programs in other developed countries. We develop an economic framework to assess the efficiency and equity tradeoffs involved with reforming this generous, uniform structure.We argue that three major shifts make a uniform design less efficient today than when Medicare began in 1965. First, rising income inequality makes it more difficult to design a single plan that serves the needs of both higher- and lower-income people. Second, the dramatic expansion of expensive medical technology means that a generous program increasingly crowds out other public programs valued by the poor and middle class. Finally, as medical spending rises, the tax-financing of the system creates mounting economic costs and increasingly untenable policy constraints. These forces motivate reforms that shift towards a more basic public benefit that individuals can “top-up” with private spending.If combined with an increase in other progressive transfers, such a reform could improve efficiency and reduce public spending while benefiting low income populations.

That is from a new NBER working paper by Mark Shepard, Katherine Baicker, and Jonathan S. Skinner.

My Conversation with Mark Zuckerberg and Patrick Collison

Facebook tweets:.

@patrickc, CEO of Stripe, and @tylercowen, economist at George Mason University, sit down with our CEO, Mark Zuckerberg to discuss how to accelerate progress.

Video, audio, and transcript here, part of Mark’s personal challenge for the year, an excellent event all around.  This will also end up as part of CWT.

Why is labor mobility slowing in America?

There is a new and quite interesting paper on this topic, by Kyle Mangum and Patrick Coate:

This paper offers an explanation for declining internal migration in the United States motivated by a new empirical fact: the mobility decline is driven by locations with typically high rates of population turnover. These “fast” locations were the Sunbelt centers of population growth during the twentieth century. The paper presents evidence that as spatial population growth converged, residents of fast locations were subject to rising levels of preference for home. Using a novel measure of home attachment, the paper develops and estimates a structural model of migration that distinguishes moving frictions from home utility. Simulations quantify the role of multiple explanations of the mobility decline. Rising home attachment accounts for nearly half of the decline, roughly as large as the effect of an aging population, and is consistent with the spatial pattern. The implication is recent declining migration is a long run result of population shifts of the twentieth century.

For the pointer I thank the excellent Tyler Ransom.

Learning about the Roots of Progress from the History of Smallpox Eradication

The excellent Jason Crawford at the Roots of Progress has a long-form read on the history of smallpox eradication. It’s an important and insightful piece especially because Jason is interested not just in what happened but why it happened when and where it did and what the lessons are for today:

In 1720, inoculation had been a folk practice in many parts of the world for hundreds of years, but smallpox was still endemic almost everywhere. The disease had existed for at least 1,400 and probably over 3,000 years. Just over 250 years later—it was gone.

Why did it take so long, and how did it then happen so fast? Why wasn’t inoculation practiced more widely in China, India, or the Middle East, when it had been known there for centuries? Why, when it reached the West, did it spread faster and wider than ever before—enough to significantly reduce and ultimately eliminate the disease?

The same questions apply to many other technologies. China famously had the compass, gunpowder, and cast iron all before the West, but it was Europe that charted the oceans, blasted tunnels through mountains, and created the Industrial Revolution. In smallpox we see the same pattern. [Why?]

  • The idea of progress. In Europe by 1700 there was a widespread belief, the legacy of Bacon, that useful knowledge could be discovered that would lead to improvements in life. People were on the lookout for such knowledge and improvements and were eager to discover and communicate them. Those who advocated for inoculation in 1720s England did so in part on the grounds of a general idea of progress in medicine, and they pointed to recent advances, such as using Cinchona bark (quinine) to treat malaria, as evidence that such progress was possible. The idea of medical progress drove the Suttons to make incremental improvements to inoculation, Watson to run his clinical trial, and Jenner to perfect his vaccine.
  • Secularism/humanism. To believe in progress requires believing in human agency and caring about human life (in this world, not the next). Although England learned about inoculation from the Ottoman Empire, it was reported that Muslims there avoided the practice because it interfered with divine providence—the same argument Reverend Massey used. In that sermon, Massey said in his conclusion, “Let them Inoculate, and be Inoculated, whose Hope is only in, and for this Life!” A primary concern with salvation of the immortal soul precludes concerns of the flesh. Fortunately, Christianity had by then absorbed enough of the Enlightenment that other moral leaders, such as Cotton Mather, could give a humanistic opinion on inoculation.
  • Communication. In China, variolation may have been introduced as early as the 10th century AD, but it was a secret rite until the 16th century, when it became more publicly documented. In contrast, in 18th-century Europe, part of the Baconian program was the dissemination of useful knowledge, and there were networks and institutions expressly for that purpose. The Royal Society acted as an information hub, taking in interesting reports and broadcasting the most important ones. Prestige and acclaim came to those who announced useful discoveries, so the mechanism of social credit broke secrets open, rather than burying them. Similar communication networks spread the knowledge of cowpox to from Fewster to Jenner, and gave Jenner a channel to broadcast his vaccination experiments.
  • Science. I’m not sure how inoculation was viewed globally, but it was controversial in the West, so it was probably controversial elsewhere as well. The West, however, had the scientific method. We didn’t just argue, we got the data, and the case was ultimately proved by the numbers. If people didn’t believe it at first, they had to a century later, when the effects of vaccination showed up in national mortality statistics. The method of meticulous, systematic observation and record-keeping also helped the Suttons improve inoculation methods, Haygarth discover his Rules of Prevention, and Fewster and Jenner learn the effects of cowpox. The germ theory, developed several decades after Jenner, could only have helped, putting to rest “miasma” theories and dispelling any idea that one could prevent contagious diseases through diet and fresh air.
  • Capitalism. Inoculation was a business, which motivated inoculators to make their services widely available. The practice required little skill, and it was not licensed, so there was plenty of competition, which drove down prices and sent inoculators searching for new markets. The Suttons applied good business sense to inoculation, opening multiple houses and then an international franchise. They provided their services to both rich and poor by charging higher prices for better room and board during the multiple weeks of quarantine: everyone got the same medical procedure, but the rich paid more for comfort and convenience, an excellent example of price differentiation without compromising the quality of health care. Business means advertising, and advertising at its best is a form of education, helping people throughout the countryside learn about the benefits of inoculation and how easy and painless it could be.
  • The momentum of progress. The Industrial Revolution was a massive feedback loop: progress begets progress; science, technology, infrastructure, and surplus all reinforce each other. By the 20th century, it’s clear how much progress against smallpox depended on previous progress, both specific technologies and the general environment. Think of Leslie Collier, in a lab at the Lister Institute, performing a series of experiments to determine the best means of preserving vaccines—and how the solution he found, freeze-drying, was an advanced technology, only developed decades before, which itself depended on the science of chemistry and on technologies such as refrigeration. Or consider the WHO eradication effort: electronic communication networks let doctors be alerted of new cases almost immediately; airplanes and motor vehicles got them and their supplies to the site of an epidemic, often within hours; mass manufacturing allowed cheap production at scale of needles and vaccines; refrigeration and freeze-drying allowed vaccines to be preserved for storage and transport; and all of it was guided by the science of infectious diseases—which itself was by that time supported by advanced techniques from X-ray crystallography to electron microscopes.

Read the whole thing and follow the roots of progress.

Is Elon Musk Prepping for State Failure?

FuturePundit on twitter has an interesting theory of Elon Musk’s technology portfolio, namely a lot of it will be very valuable for living in a failed state.

Solar panels, for example, are a necessity when the state can’t deliver power reliably, as is now the case in California.

Solar panels plus the Tesla give you mobility, even if Saudi Arabia goes up in smoke and world shipping lines are shut down.

Starlink, Musk’s plan for 12,000 or more cheap, high-speed internet satellites, will free the internet from reliance on any terrestrial government.

Musk’s latest venture, the truck, certainly fits the theme and even if the demonstration didn’t go as well as planned isn’t it interesting that the truck is advertised as bulletproof. Mad Max would be pleased.

Image result for musk truck

And what will you be carrying in your Tesla truck? One of these for sure.

Finally, the Mars mission is the ultimate insurance policy against failed states.