Category: Economics

Is it inefficient to walk up the escalator?

A study in London found 74.9 per cent of people choose to stand instead of walking, especially on the longer ones. With this ‘stand on the right, walk on the left’ rule, we’re giving up 50 per cent of the space on our escalators for roughly 25 per cent of our commuters.

Look for this problem next time during rush hour where the “standing” side of the escalators ends up with a line of people trying to get on. It may seem counterintuitive, but people who are walking up escalators to save seconds off their commute are actually slowing everyone else down.

Efficiency aside, there’s another reason why walking on escalators might be a bad idea—safety. Escalator accidents are much more common than you think.

A CBC investigation found that escalator accidents happen every second day in the Montreal Metro. In the U.S., about 10,000 escalator-related injuries end in emergency room visits every year.

Many of those victims were likely walking. A  study in Tokyo found almost 60 per cent of escalator accidents between 2013 and 2014 resulted from people using escalators improperly, which includes people walking or running on them.

Here is the full story, via Michelle Dawson.  Walking up the escalator remains time efficient, however, if those choosing to walk have much higher valuations of time than those who choose to stand.  Might that be the case?

Robert Whaples reviews *Big Business*

An excellent review, here is the closing bit:

Labeling it a “love letter,” would render Cowen promiscuous (or is it adulterous?) since the letter is addressed to so many businesses. Seen as a fan letter, the book works much better. Cowen, a huge NBA fan, realizes that his hardwood heroes are supposed to be great at basketball. It’s OK to admire them from afar and not an affront if they cannot be your actual friends, as long as they can drain three-pointers. Likewise, with his business anti-heroes.

Do read the whole thing.

The white collar job apocalypse did not happen

In a follow-up paper released Friday, another economist, Adam Ozimek, revisited Mr. Blinder’s analysis to see what had happened over the past decade. Some job categories that Mr. Blinder identified as vulnerable [to offshoring], like data-entry workers, have seen a decline in United States employment. But the ranks of others, like actuaries, have continued to grow.

Over all, of the 26 occupations that Mr. Blinder identified as “highly offshorable” and for which Mr. Ozimek had data, 15 have added jobs over the past decade and 11 have cut them. Altogether, those occupations have eliminated fewer than 200,000 jobs over 10 years, hardly the millions that many feared. A second tier of jobs — which Mr. Blinder labeled “offshorable” — has actually added more than 1.5 million jobs.

But Mr. Blinder didn’t miss the mark entirely, said Mr. Ozimek, who is chief economist at Upwork, an online platform for hiring freelancers. The new study found that in the jobs that Mr. Blinder identified as easily offshored, a growing share of workers were now working from home. Mr. Ozimek said he suspected that many more were working in satellite offices or for outside contractors, rather than at a company’s main location. In other words, technology like cloud computing and videoconferencing has enabled these jobs to be done remotely, just not quite as remotely as Mr. Blinder and many others assumed.

Here is more from Ben Casselman (NYT).

Another difference between Pakistan and India

Observing India tends to make people more libertarian.  At least parts of the private sector are quite vibrant, and the heavy hand of government can be seen in many places.  Plus you might think “the country is too big in the first place,” so you will be thinking in terms of decentralization, and devolving power to the states and union territories, rather than strengthening the central authority.

Observing Pakistan tends to make people more statist.  The private sector has fewer well-known successes.  The central authority appears too weak, and problems with insufficient tax revenue are extreme, even for a developing economy.  As for federal income tax, there are only about 1.2 million active taxpayers, in a country of over 200 million people.  The very pleasant Islamabad aside, urban public goods seem underprovided, even relative to Indian cities.

It is an interesting question which countries at least seem to provide evidence for which sets of political views.

My trip to Karachi

Most recently, the city has been beset by a plague of flies — a “bullying force,” says the New York Times, “sparing no one.” The swarm of flies, which I was fortunate enough to miss, was the result of monsoon season, malfunctioning drainage systems clogged with solid waste, and slaughtered animals from the Muslim celebration of Eid. (The same monsoon season, by the way, led to power blackouts of up to 60 hours.) On a livability index, Karachi ranks near the bottom, just ahead of Damascus, Lagos, Dhaka and Tripoli.

There is no subway, and a typical street scene blends cars, auto-rickshaws, motorbikes and the occasional donkey pulling a cart. It’s fun for the visitor, but I wouldn’t call transportation easy.

And yet to see only those negatives is to miss the point. Markets speak more loudly than anecdotes, and the population of Karachi continues to rise — a mark of the city’s success. This market test is more important than the aesthetic test, and Karachi unambiguously passes it.

And:

Most of all, I am impressed by the tenacity of Pakistan. Before going there, I was very familiar with the cliched claim that Pakistan is a fragile tinderbox, barely a proper country, liable to fall apart any moment and collapse into civil war. Neither my visit nor my more focused reading has provided any support for that view, and perhaps it is time to retire it. Pakistan’s national identity may be strongly contested but it is pretty secure, backed by the growing use of Urdu as a national language — and cricket to boot. It has come through the Afghan wars battered but intact.

That is all from my longer than usual Bloomberg column, all about Karachi.

My Conversation with Alain Bertaud

Excellent throughout, Alain put on an amazing performance for the live audience at the top floor of the Observatory at the old World Trade Center site.  Here is the audio and transcript, most of all we talked about cities.  Here is one excerpt:

COWEN: Will America create any new cities in the next century? Or are we just done?

BERTAUD: Cities need a good location. This is a debate I had with Paul Romer when he was interested in charter cities. He had decided that he could create 50 charter cities around the world. And my reaction — maybe I’m wrong — but my reaction is that there are not 50 very good locations for cities around the world. There are not many left. Maybe with Belt and Road, maybe the opening of Central Asia. Maybe the opening of the ocean route on the northern, following the pole, will create the potential for new cities.

But cities like Singapore, Malacca, Mumbai are there for a good reason. And I don’t think there’s that many very good locations.

COWEN: Or Greenland, right?

[laughter]

BERTAUD: Yes. Yes, yes.

COWEN: What is your favorite movie about a city? You mentioned a work of fiction. Movie — I’ll nominate Escape from New York.

[laughter]

BERTAUD: Casablanca.

Here is more:

COWEN: Your own background, coming from Marseille rather than from Paris —

BERTAUD: I would not brag about it normally.

[laughter]

COWEN: But no, maybe you should brag about it. How has that changed how you understand cities?

BERTAUD: I’m very tolerant of messy cities.

COWEN: Messy cities.

BERTAUD: Yes.

COWEN: Why might that be, coming from Marseille?

BERTAUD: When we were schoolchildren in Marseille, we were used to a city which has a . . . There’s only one big avenue. The rest are streets which were created locally. You know, the vernacular architecture.

In our geography book, we had this map of Manhattan. Our first reaction was, the people in Manhattan must have a hard time finding their way because all the streets are exactly the same.

[laughter]

BERTAUD: In Marseille we oriented ourselves by the angle that a street made with another. Some were very narrow, some very, very wide. One not so wide. But some were curved, some were . . . And that’s the way we oriented ourselves. We thought Manhattan must be a terrible place. We must be lost all the time.

Finally:

COWEN: And what’s your best Le Corbusier story?

BERTAUD: I met Le Corbusier at a conference in Paris twice. Two conferences. At the time, he was at the top of his fame, and he started the conference by saying, “People ask me all the time, what do you think? How do you feel being the most well-known architect in the world?” He was not a very modest man.

[laughter]

BERTAUD: And he said, “You know what it feels? It feels that my ass has been kicked all my life.” That’s the way he started this. He was a very bitter man in spite of his success, and I think that his bitterness is shown in his planning and some of his architecture.

COWEN: Port-au-Prince, Haiti — overrated or underrated?

Strongly recommended, and note that Bertaud is eighty years old and just coming off a major course of chemotherapy, a remarkable performance.

Again, I am very happy to recommend Alain’s superb book Order Without Design: How Markets Shape Cities.

The Danger of Reusing Natural Experiments

I recently wrote a post, Short Selling Reduces Crashes about a paper which used an unusual random experiment by the SEC, Regulation SHO (which temporarily lifted short-sale constraints for randomly designated stocks), as a natural experiment. A correspondent writes to ask whether I was aware that Regulation SHO has been used by more than fifty other studies to test a variety of hypotheses. I was not! The problem is obvious. If the same experiment is used multiple times we should be imposing multiple hypothesis standards to avoid the green jelly bean problem, otherwise known as the false positive problem. Heath, Ringgenberg, Samadi and Werner make this point and test for false positives in the extant literature:

Natural experiments have become an important tool for identifying the causal relationships between variables. While the use of natural experiments has increased the credibility of empirical economics in many dimensions (Angrist & Pischke, 2010), we show that the repeated reuse of a natural experiment significantly increases the number of false discoveries. As a result, the reuse of natural experiments, without correcting for multiple testing, is undermining the credibility of empirical research.

.. To demonstrate the practical importance of the issues we raise, we examine two extensively studied real-world examples: business combination laws and Regulation SHO. Combined, these two natural experiments have been used in well over 100 different academic studies. We re-evaluate 46 outcome variables that were found to be significantly affected by these experiments, using common data frequency and observation window. Our analysis suggests that many of the existing findings in these studies may be false positives.

There is a second more subtle problem. If more than one of the effects are real it calls into question the exclusion restriction.To identify the effect of X on Y1 we need to assume that X influences Y1 along only one path. But if X also influences Y2 that suggests that there might be multiple paths from X to Y1. Morck and Young made this point many years ago, likening the reuse of the same instrumental variables to a tragedy of the commons.

Solving these problems is made especially difficult because they are collective action problems with a time dimension. A referee that sees a paper throw the dice multiple times may demand multiple hypothesis and exclusion test corrections. But if the problem is that there are many papers each running a single test, the burden on the referee to know the literature is much larger. Moreover, do we give the first and second papers a pass and only demand multiple hypothesis corrections for the 100th paper? That seems odd, although in practice it is what happens as more original papers can get published with weaker methods (collider bias!).

As I wrote in Why Most Published Research Findings are False we need to address these problems with a variety of approaches:

1) In evaluating any study try to take into account the amount of background noise. That is, remember that the more hypotheses which are tested and the less selection [this is one reason why theory is important it strengthens selection, AT] which goes into choosing hypotheses the more likely it is that you are looking at noise.

2) Bigger samples are better. (But note that even big samples won’t help to solve the problems of observational studies which is a whole other problem).

3) Small effects are to be distrusted.

4) Multiple sources and types of evidence are desirable.

5) Evaluate literatures not individual papers.

6) Trust empirical papers which test other people’s theories more than empirical papers which test the author’s theory.

7) As an editor or referee, don’t reject papers that fail to reject the null.

Very real progress on the market concentration debate

As you might expect, it is coming from Chang Tsai-Hsieh and Esteban Rossi-Hansberg, here is their abstract:

The rise in national industry concentration in the US between 1977 and 2013 is driven by a new industrial revolution in three broad non-traded sectors: services, retail, and wholesale. Sectors where national concentration is rising have increased their share of employment, and the expansion is entirely driven by the number of local markets served by firms. Firm employment per market has either increased slightly at the MSA level, or decreased substantially at the county or establishment levels. In industries with increasing concentration, the expansion into more markets is more pronounced for the top 10% firms, but is present for the bottom 90% as well. These trends have not been accompanied by economy-wide concentration. Top U.S. firms are increasingly specialized in sectors with rising industry concentration, but their aggregate employment share has remained roughly stable. We argue that these facts are consistent with the availability of a new set of fixed-cost technologies that enable adopters to produce at lower marginal costs in all markets. We present a simple model of firm size and market entry to describe the menu of new technologies and trace its implications.

This is likely to prove one of the most important papers of the year, here is the pdf link.  The authors open with the example of The Cheesecake Factory, and also health care:

The standardization of production over a large number of establishments that has taken place in sit-down restaurant meals due to companies such as the Cheesecake Factory has taken place in many non-traded sectors. Take hospitals as another example. Four decades ago, about 85% of hospitals were single establishment non-profits. Today, more than 60% of hospitals are owned by forprofit chains or are part of a large network of hospitals owned by an academic institution (such as the University of Chicago Hospitals).

And:

…rising concentration in these sectors is entirely driven by an increase the number of local markets served by the top firms.

Here is a key point:

…we find that total employment rises substantially in industries with rising concentration. This is true even when we look at total employment of the smaller firms in these industries. This evidence is consistent with our view that increasing concentration is driven by new ICT-enabled technologies that ultimately raise aggregate industry TFP. It is not consistent with the view that concentration is due to declining competition or entry barriers, as suggested by Gutierrez and Philippon (2017) and Furman and Orszag (2018), as these forces will result in a decline in industry employment.

This is interesting too, and it departs from say what Amazon is doing:

…we show that the top firms in the economy as a whole have become increasingly specialized in narrow set of sectors, and these are precisely the non-traded sectors that have undergone an industrial revolution. At the same time, top firms have exited many sectors. The net effect is that there is essentially no change in concentration by the top firms in the economy as a whole. The “super-star” firms of today’s economy are larger in their chosen sectors and have unleashed productivity growth in these sectors, but they are not any larger as a share of the aggregate economy.

The paper is titled “The Industrial Revolution in Services.

From the comments, on the Coase theorem

#1 on prefiguring of the so-called Coase theorem, consider also p. 396-7 of W.H. Hutt, “Co-ordination and the Size of the Firm,” South African Journal of Economics 2(4), December 1934:

“Now, under one ownership, their relations would, given competitive institutions, be exactly the same, provided that both methods were equally efficient from the social standpoint. There is no reason why the spreading of the lines of responsibility back to several sources should lead to less effective planning than subordinacy to an authority emanating from one source, given the equal availability of relevant knowledge to the managers who devise the plans…The most important significant difference between the two cases is that, in practice, in the one case there may not be the availability of relevant knowledge that there is in the other.”

That is from Daniel B. Klein.  And:

For a still earlier ‘discovery’ with transaction costs and all see my former colleague Yehoshua Liebermann’s “The Coase Theorem in Jewish Law,” Journal of Legal Studies, Vol. 10, No. 2 (Jun., 1981), pp. 293-303

That is from Moshe Syrquin, link for both here.

Do workers discriminate against female bosses?

Yes, it seems:

I hire 2,700 workers for a transcription job, randomly assigning the gender of their (fictitious) manager and provision of performance feedback. While praise from a manager has no effect, criticism negatively impacts workers’ job satisfaction and perception of the task’s importance. When female managers, rather than male, deliver this feedback, the negative effects double in magnitude. Having a critical female manager does not affect effort provision but it does lower workers’ interest in working for the firm in the future. These findings hold for both female and male workers. I show that results are consistent with gendered expectations of feedback among workers. By contrast, I find no evidence for the role of either attention discrimination or implicit gender bias.

That is from a new paper by Martin Abel.

Premature Imitation and India’s Flailing State

Walking around one of the tonier districts of Mumbai I came across a sign, “Avoid Using Plastic Carry Bags.” The sign would not have been out of place in Portland or Berkeley but less than a block away cows and people were sleeping on the street. The incongruity motivated my new paper, Premature Imitation and India’s Flailing State (with Shruti Rajagopalan). We argue that one reason that India passes laws which are incongruous with its state of development is that Indian elites often take their cues about what is normal, good and desirable from Western elites. There’s nothing wrong with imitation, of course. We hope that good policies will be imitated but imitation in India is often premature. Premature because India does not have the state capacity to enforce the edicts of a developed country.

India has essentially all the inspections, regulations, and laws a developed country such as the United States has, but at approximately $235 of federal spending per capita the Indian government simply cannot accomplish all the tasks it has assumed. Consider: U.S. federal government spending per capita was five times higher in 1902 than Indian federal government spending per capita in 2006 (Andrews, Pritchett, and Woolcock 2017, 58). Yet the Indian government circa 2006 was attempting to do much more than the U.S. government did in 1902.

Premature imitation doesn’t simply mean that proportionately less is done it results in tensions that lead to corruption and a flailing state, a state that cannot implement its own rules because it is undercut by the incentives of its own agents. Premature imitation amplifies a development trap.

What then is to be done? We argue that the ideal policy regime for a government with limited state capacity is presumptive laissez-faire.

The Indian state does not have enough capacity to implement all the rules and regulations that elites, trying to imitate the policies of developed economies, desire. The result is premature load bearing and a further breakdown in state capacity….At the broadest level, this suggests that states with limited capacity should rely more on markets even when markets are imperfect—presumptive laissez-faire. The market test isn’t perfect, but it is a test. Markets are the most salient alternative to state action, so when the cost of state action increases, markets should be used more often.Imagine, for example, that U.S. government spending had to be cut by a factor of ten.Would it make sense to cut all programs by 90 percent? Unlikely. Some programs and policies are of great value, but others should be undertaken only when state capacity and GDP per capita are higher. As Edward Glaeser quips,“A country that cannot provide clean water for its citizens should not be in the business of regulating film dialogue.” A U.S. government funded at one-tenth the current level would optimally do many fewer things. So why doesn’t the Indian government do many fewer things?

Presumptive laissez-faire is not an argument that laissez-faire is optimal but an argument that state capacity is a limited resource that must be allocated wisely. The idea runs against the “folk wisdom” of development economics. The folk wisdom says that developing countries today can leap over the laissez-faire period  that most developed countries went through and instead move directly to the middle way.

In the alternative view put forward here, relative laissez-faire is a step to development, perhaps even a necessary step, even if the ultimate desired end point of development is a regulated, mixed economy. Presumptive laissez-faire is the optimal form of government for states with limited capacity and also the optimal learning environment for states to grow capacity. Under laissez-faire, wealth, education, trade, and trust can grow, which in turn will allow for greater regulation.

Read the whole thing.

How strong is the evidence that the EITC boosts labor supply?

New work from Henrik Kleven:

This paper reconsiders the impact of the Earned Income Tax Credit (EITC) on labor supply at the extensive margin. I investigate every EITC reform at the state and federal level since the inception of the policy in 1975. Based on event studies comparing single women with and without children, or comparing single mothers with different numbers of children, I show that the only EITC reform associated with clear employment increases is the expansion enacted in 1993. The employment increases in the mid-late nineties are very large, but they are influenced by the confounding effects of welfare reform and a booming macroeconomy. Based on different approaches that exploit variation in these confounders across household type, space and time, I show that the employment effects align closely with exposure to welfare reform and the business cycle. Single mothers who were unaffected by welfare reform (but eligible for the EITC) did not respond. Overall and contrary to consensus, the case for sizable extensive margin effects of the EITC is fragile. I highlight the presence of informational frictions, widely documented in the literature, as a natural explanation for the absence of extensive margin responses.

Via A. Dube.  The effectiveness of EITC used to be a consensus view, so if this result holds up, it would require some substantial revisions in how we think about both welfare and job incentives.

We had Nash and Schelling — who did the Soviets have?

The bi-polar confrontation between the Soviet Union and the USA involved many leading game theorists from both sides of the Iron Curtain: Oskar Morgenstern, John von Neumann, Michael Intriligator, John Nash, Thomas Schelling and Steven Brams from the United States and Nikolay Vorob’ev, Leon A. Petrosyan, Elena B. Yanovskaya and Olga N. Bondareva from the Soviet Union. The formalization of game theory (GT) took place prior to the Cold War but the geopolitical confrontation hastened and shaped its evolution. In our article we outline four similarities and differences between Western GT and Soviet GT: 1) the Iron Curtain resulted in a lagged evolution of GT in the Soviet Union; 2) Soviet GT focused more on operations research and issues of centralized planning; 3) the contemporary Western view on Soviet GT was biased and Soviet contributions, including works on dynamic stability, non-emptiness of the core and many refinements, suggest that Soviet GT was able to catch up to the Western level relatively fast; 4) international conferences, including Vilnius, 1971, fostered interaction between Soviet game theorists and their Western colleagues. In general, we consider the Cold War to be a positive environment for GT in the West and in the Soviet Union.

That is from a new paper by Harald Hagemann, Vadim Kufenko, and Danila Raskov, via Ilya Novak and Beatrice Cherrier.  And via Kevin Vallier, here is a new paper on how Schelling’s game-theoretic notion of stability may have come from his very early work on macroeconomics.

Why do rates of entrepreneurship vary?

Why do societies vary in their rates of entrepreneurship and organizational founding? Drawing on the largest available longitudinal sample comprising 192 countries over 2001-2018, I examine the evidence in relation to several explanations, including variation in the density of established organizations, national investment in research and development (R&D), technology transfer to new companies, the quality of science, technology, engineering and math (STEM) education, venture capital (VC) availability, and governmental support and policies for entrepreneurship. Contrary to prevailing theories, there is limited empirical support for these explanations. Rather, the evidence shows that the strongest predictors of cross-national variation in entrepreneurial activity were normative, with social norms being the most strongly associated with entrepreneurialism and rates of organizational founding. This study further examines the relationship between norms and societal culture and finds that more gender-egalitarian societies and societies that value and reward performance and endorse status privileges had on average higher rates of organizational founding, net of differences in national income and economic growth. The paper discusses the implications of these findings in relation to research on the social determinants of entrepreneurship and organizational founding.

That is from a new paper by Valentina Assenova.  Let me just repeat one sentence in there, as it is one of the most important sentences in all of economics:

Rather, the evidence shows that the strongest predictors of cross-national variation in entrepreneurial activity were normative, with social norms being the most strongly associated with entrepreneurialism and rates of organizational founding.

Recommended.  Here is Assenova’s other new paper, showing entrepreneurship is correlated with higher innovation.

Via the excellent Kevin Lewis.

How much does advertising matter anyway?

Our results reveal substantially smaller advertising elasticities compared to the results documented in the extant literature, as well as a sizable percentage of statistically insignificant or negative estimates. If we only select products with statistically significant and positive estimates, the mean and median of the advertising effect distribution increase by a factor of about five.

That is from a new paper by Shapiro, Hitch, and Tuchman, via Paul Novosad.