Results for “becker”
166 found

Further thoughts on a carbon tax

I saw you had a post up about some work I did with Bob Gordon, and I
found your comments very interesting.  I have a couple questions that I
hope might help clarify your thoughts on the subject.

First, you
seem to argue that we would expect a CEO to be paid her marginal
product.  As you point out, there is ample evidence that a CEO adds far
more to the value of a company than she is generally paid.  I’m
curious, though, what you mean when you say we would expect the CEO to be paid her marginal
product.  Models in this literature often assume that
each firm must hire one CEO.  The concept of a marginal product breaks
down at this point.  The firm can’t hire a second CEO.  There is no
marginal value.  It’s possible that we can look at marginal products in
terms of the skill a CEO brings to the firm, but in that case, we would
be mixing up marginal and average products if we were to simply look at
the total contribution a CEO makes to firm output.

I think you’re correct to point out the institutional factors
holding down CEO pay pre-1970.  That said though, why didn’t we see CEO
pay rising much faster than market cap during the 80’s in order for it
to catch up to where it should be?  There is a period where the
pay-market cap elasticity may have been higher than 1, but it’s only for a few
years in the 90’s.  Looking at the full 1976-2005 sample, the
relationship is nearly unitary (.935, according to Frydman and Saks).  So I guess I’m surprised there is no
catch up in pay.

I think you’re right to be skeptical of the Bebchuk-Grinstein
results.  To me, the most interesting result
from Gabaix and Landier, no matter what one thinks about their model as a
whole, is that the cross-section and time series may show very
different patterns.
So one wouldn’t necessarily expect the cross-sectional results from Bebchuk and Grinstein to predict the time-series.

One
of my biggest concerns with Gabaix and Landier’s model is that it does
not display decreasing returns to scale.  An analogous
example is Berk and Green’s model of mutual funds.  They assume that if
a manager all of a sudden
sees the size of his fund double, he will see lower average returns.  I
think this is reasonable.  When there are not diminishing returns, it
is difficult to make models function.  Gabaix and Landier are forced to
do it by assuming firms never merge.  That concerns me in this
setting.  Dixit-Stiglitz competition is often a reasonable
assumption because the models using it do not actually care about firm
size
or mergers.  In the case of CEO pay, however, firm size is clearly
critical.

The question about the marginal product of a CEO is a tricky one.  I can imagine the following definitions which either express marginal product or some modified version thereof:

1. How much better the highly-paid guy is than a less-well-paid substitute would be.

2. How much better the highly-paid guy is than the next best person (in stochastic terms, that is) the firm would get for that same sum.

3. How much a bit of extra pay causes the CEO to improve effort and thus performance.

4. The complex econometric definition offered by Jensen and Murphy, read pp.33-38 here.

5. Some number between the CEO’s value of leisure and how well the firm would do with no CEO at all.

None of these quite make sense in pure theory, and it is even harder to say which is the most important variable for practice.

Cryonics: both sides of the story

As one cryonicist puts it: "We didn’t evolve to be frozen."

But:

"It’s pretty well accepted that at the point at which the usual human
being gets pronounced dead, all their cells are alive. It’s a very
eerie question: if all their cells are alive, what is death?" says
Becker. Besides, if all the patient’s cells are alive, why can’t the
patient recover and walk out of the hospital?"

Here is the full article, which covers recent advances in cryonics.

Addendum: Or try YouTube on related issues, hat tip to Robin Hanson.  Maybe that is the right way to do philosophy, namely by cartoon.  Definitely recommended.  It also presents a solution to the current subprime crisis.

The latest evidence on racial discrimination and wages

I haven’t read through this closely, but it seems to be a very important paper:

…we show that, relative to white wages, black wages: (a) vary negatively
with a measure of the prejudice of the "marginal" white in a state; (b)
vary negatively with the prejudice in the lower tail of the prejudice
distribution, but are unaffected by the prejudice of the most
prejudiced persons in a state; and (c) vary negatively with the
fraction of a state that is black. We show that these results are
robust to a variety of extensions, including directly controlling for
racial skill quality differences and instrumental variables estimates.
We present some initial evidence to show that racial wage gaps are
larger the more racially integrated is a state’s workforce, also as
Becker’s model predicts.

Here is the paperThis version is $5 cheaper.

Dutch Treat

THE Dutch health minister, Ab Klink, is considering a recommendation to offer
free health insurance for life to anyone who donates a kidney for transplant.

The award would be quite valuable, worth about $1500 a year or $24,000 in present discounted value (30 yrs, 5% discount rate, no increase in health care costs).  Becker and Elias predict a large increase in organ supply at $15,000 so the Dutch are in the ballpark for a good test.  More here.

Thanks to Dave Undis of LifeSharers for the pointer.

CEO compensation and the marginal product of the CEO

Responding to an earlier post of mine, the very smart Ian Dew-Becker emailed me the following text:

I saw you had a post up about some work I did with Bob Gordon, and I found your comments very interesting. I have a couple questions that I hope might help clarify your thoughts on the subject.

First, you seem to argue that we would expect a CEO to be paid her marginal product. As you point out, there is ample evidence that a CEO adds far more to the value of a company than she is generally paid. I’m curious, though, what you mean when you say we would expect the CEO to be paid her marginal product. Models in this literature often assume that each firm must hire one CEO. The concept of a marginal product breaks down at this point. The firm can’t hire a second CEO. There is no marginal value. It’s possible that we can look at marginal products in terms of the skill a CEO brings to the firm, but in that case, we would be mixing up marginal and average products if we were to simply look at the total contribution a CEO makes to firm output.

I think you’re correct to point out the institutional factors holding down CEO pay pre-1970. That said though, why didn’t we see CEO pay rising much faster than market cap during the 80’s in order for it to catch up to where it should be? There is a period where the pay-market cap elasticity may have been higher than 1, but it’s only for a few years in the 90’s. Looking at the full 1976-2005 sample, the relationship is nearly unitary (.935, according to Frydman and Saks). So I guess I’m surprised there is no catch up in pay.

I think you’re right to be skeptical of the Bebchuk-Grinstein results. To me, the most interesting result from Gabaix and Landier, no matter what one thinks about their model as a whole, is that the cross-section and time series may show very different patterns. So one wouldn’t necessarily expect the cross-sectional results from Bebchuk and Grinstein to predict the time-series.

One of my biggest concerns with Gabaix and Landier’s model is that it does not display decreasing returns to scale. An analogous example is Berk and Green’s model of mutual funds. They assume that if a manager all of a sudden sees the size of his fund double, he will see lower average returns. I think this is reasonable. When there are not diminishing returns, it is difficult to make models function. Gabaix and Landier are forced to do it by assuming firms never merge. That concerns me in this setting. Dixit-Stiglitz competition is often a reasonable assumption because the models using it do not actually care about firm size or mergers. In the case of CEO pay, however, firm size is clearly critical.

The question about the marginal product of a CEO is a tricky one. I can imagine the following definitions which either express marginal product or some modified version thereof:

1. How much better the highly-paid guy is than a less-well-paid substitute would be.

2. How much better the highly-paid guy is than the next best person (in stochastic terms, that is) the firm would get for that same sum.

3. How much a bit of extra pay causes the CEO to improve effort and thus performance.

4. The complex econometric definition offered by Jensen and Murphy, read pp.33-38 here.

5. Some number between the CEO’s value of leisure and how well the firm would do with no CEO at all.

None of these quite make sense in pure theory, and it is even harder to say which is the most important variable for practice.

Thinking about Sports and Economics

I spent last Saturday at a very interesting conference on Sports Statistics, run by the Sports Stats section of the American Statistical Association.  It was a fun day, involving academics, sports journalists, and those Moneyball-inspired quants working for various sports teams.

But at some point I asked myself: Why do economists work on sports?

  1. Sports provide unique opportunities to test economic theories.  Cribbing from a New York Times article, this is the Thaler defense:

    “‘My justification for doing this is that it’s the one really
    high-stakes activity where you get to watch all of the decisions,”
    Thaler said. ”If Bill Gates invited me to watch all of his decisions,
    I’d talk more about that.”

  2. Sports shapes broader national debates.  Sports is a microcosm of our broader society and our national narrative on the important issues, from drugs, to race, to cheating, to sexual harrassment often play out on our sports pages.  In honor of a particularly compelling example, let’s
    call this the Jackie Robinson defense.
  3. Professional sports are an important part of the economy.  I call this the Dog defense, not as a dyslexo-religious statement, but simply because dogs raise an important question: aren’t pets a bigger part of the economy than professional athletics?  If so, why are there so many papers on professional sports and so few on the economics of dogs?
  4. Sports participation is an important activity.  It seems important to learn whether sports make us happier, healthier or more productive.  For instance, it is important to learn, say, what the broader effects of Title IX were.  Under this view, research on sports is part of the human capital agenda, leading me to call this the Gary Becker defense.
  5. Sports provides a useful teaching metaphor.  Many of those teaching Sabermetrics-inspired courses argue that sports provides a useful vehicle for teaching something far more important – basic quantitative reasoning.  When I teach my class on behavioral economics, I do so by analyzing anomalies in sports betting markets.
  6. Doing research on sports is fun.  It was no mistake that the conference I attended was on a Saturday.  Many of the academics in attendance were giving up leisure, not more important work. But for some, sports provides a chance to mix work with leisure; of course, if non of the above arguments holds, then it is just a chance to mix leisure with leisure.

Let me now translate this into advice, because I often hear from students wanting to write a thesis on sports.   My first response is always: Don’t.  Too often, we find our sporting heroes more interesting than other people do.  (Yes, I have been guilty of breaking this rule.)

But if you must work on sports, make sure you have a defense to this charge. I find the Thaler and Becker defenses most compelling, because they speak to the broader economic issues or yield policy implications.  The Jackie Robinson defense is also important, but not applicable often enough.  The Dog defense is often raised, but rarely compelling; neither pets, nor professional sports, are really a big part of the economy (estimates to the contrary usually turn out to be more applicable to the Becker defense).

Update on CEO pay

Gordon and Dew-Becker refer to "outsized" increases in CEO pay but scant attention is paid to the broader literature or to event studies.  You don’t have to go as far as Jensen and Murphy (1.4 cents received for every $1000 of value created) to see that CEOs don’t capture the full value of their contribution to the corporation, or anything close to it.  Read this survey, pp.33-38 in particular.  That is, even in today’s "Gilded Age" successful CEOs are underpaid relative to their marginal product, or how much they affect the value of the firm.

What about pre-1970?  The obvious interpretation is that "way back when" CEO compensation was held very low, relative to marginal product, by social conventions (and perhaps to some extent by the threat of law, especially in the 1930s and 40s).  Once these social constraints were relaxed, CEO pay rose very broadly in step with the stock market.  The elasticity of CEO pay, with respect to performance, has been rising sharply.

The citation of institutional factors may sound like a criticism of Gabaix and Landier, but nothing in their paper denies the influences of such forces.  They simply point out a recent regularity between the value of what is controlled and how much one gets paid to control it.  It’s a trivial point, but it stops being trivial when people start forgetting it.

We shouldn’t expect the elasticity of CEO pay to market capitalization, over most stretches of time, to be close to one, even if it is close to one for some time periods.  I would expect fairly long lags at times and then lots of catch up, with an elasticity greater than one for those catch-ups; the data seem to show this.  The CEOs, however productive they may be, are reaping rents relative to their leisure, and their ability to capture those collective rents need not fit any particular time path.  (That said, when you do see a 1-1 ratio it makes perfect sense.)  The data do indicate that a regime switch has led to much greater rent capture, bringing compensation closer in line with CEO marginal products but still falling short of marginal products.

So in my view the Gabaix and Landier results holds up quite well, especially if one is willing to admit the central role of cultural factors, pre-1970 or so, in limiting CEO pay.

I’m not persuaded by the Bebchuk-Grinstein result that observable factors explain only about half of CEO pay; in fact I am surprised that the observables explain as much as they do.

Here is more from Mark Thoma.  Here is a post from Ezra Klein on same.

While I disagree with some of their interpretations, the Gordon and Dew-Becker paper is a very useful summary of much of the literature on income inequality.

Who is a first-best economist?

The gut instinct…is to apply a simple supply-demand framework to the question at hand. In this world, every tax has an economic deadweight loss, every restriction on individual behavior reduces the size of the economic pie, distribution and efficiency can be neatly separated, market failures are presumed non-existent unless proved otherwise (and to be addressed only by the appropriate Pigovian tax or subsidy), people are rational and forward-looking to the first order of approximation, demand curves always slope down (and supply curves up), and general-equilibrium interactions do not overturn partial-equilibrium logic.  The First Fundamental Theorem of Welfare Economics is proof that unfettered markets work best.  No matter how technical, complex, and full of surprises these economists’ own research might be, their take on the issues of the day are driven by a straightforward, almost knee-jerk logic.

The second group — "second best" economists — is Akerlof, Stiglitz, Shiller, Krugman, and Rodrik himself; I believe you know their approach.

I think of myself as a better-than-first-best economist.  On average market solutions have positive Pareto-relevant externalities, if only through supplying experimentation and strengthening social norms in favor of commerce.  That’s true even for the market in thumbtacks, if you consider it as feeding into a broader social stream.  Externalities are virtually everywhere and often I prefer to think in terms of Hayek’s theory of spontaneous order.  Where markets should be allowed to operate, markets are usually too weak in their reach and scope.  Yes there is a continuum of social returns but only rarely are we close to an optimum. 

But I don’t mean this as a plea for laissez-faire.  Governments must produce public goods, maintain social order, and of course support markets.  At the margin, those activities, such as imposing accountability under the law, are also largely underprovided.  For the appropriate selection of policies, government is also better-than-first-best, despite its apparent static inefficiencies.

An oversimplified version of my view is that anything good is underprovided at the margin.  This follows from a belief in strong network and peer effects, and a belief in the relevance of basic sociology.

I favor much less government than Akerlof or Stiglitz or Rodrik himself; yes I view them as "second best" when it comes to government just as they are second best when it comes to markets.  But I’m often 4th or 5th best when it comes to what government does.

Who’s really the utopian?  And how did government ever work itself up to that number two?

Feminist economics

I view feminist economics as one of the more useful parts of the heterodoxy, perhaps because of its empirical component.  I see a few contributions:

1. Repeated insistence that household production is important and that it is lacking in gdp figures.  This isn’t new anymore but someone has to bang the drum.

2. Criticizing the "dominant patriarchal" assumptions behind standard models of the family, such as Gary Becker’s.  The Rotten Kid Theorem is interesting as pure theory but it has received too much attention as an actual model of the family.  The father is not always a benevolent manipulator, concerned most of all with collective welfare.

3. Insisting that economics is so often done "in a male way."  Now I happen to like the "male way of doing economics" — abstract, analytically cutting, and debate-intense.   But I’m happy to see someone linking the method to some general traits of men; put all the feminist excess aside, at some level the point is well-taken.

4. In the history of economic thought, Hazel Kyrk and Margaret Reid are worth reading, there are probably others as well.  "Home Economics" should never have been so cut off from regular economics.

5. Gender differences in analyzing the effects of policy.  Sweden, no matter what you think of it in absolute terms, is a better deal for women than for men.  Overall women are more risk-averse and less interested in accumulating large sums of wealth.  The Soviet Union was less bad for women than for men.  Many governmental health care systems are better geared toward the needs of women (e.g., easy access to pre-natal care) than for men, who require massive medical innovation to fix their heart attacks.  And so on.  These points don’t receive enough attention.

Feminist economics even has its own journal.

The down side?  I’ve never had much real world exposure to movement advocates (here is one interview).  I fear I would be turned off by their posturing, their sympathy for comparable worth, and their lack of a hardheaded willingness to recognize politically incorrect truths about gender or for that matter capitalism.  They are too skeptical about what is good in the Chicago-based economic way of thinking.  No way is feminist economics a viable alternative to the mainstream, but again improvement is possible through critique at the margins.

Is Hayek less important today?

Nicolai Foss writes:

I have the feeling that the thought of Friedrich von Hayek is receiving less and less attention…among economists and other social scientists Hayek is increasingly attaining the status of a classical writer in the sense of Schumpeter – namely somebody who is cited and invoked, but mainly for ceremonial/ritualistic reasons and more often in footnotes than in the main text. In contrast, little use is made of his work for purposes of actual theory development.

The "Hayek Industry" continues, but it feels less focal to the profession.  It is also less fashionable for outsiders to respond to Hayek, as did Lucas and Stiglitz.  I attribute this to two factors.  First the shift toward empirical work makes Hayek less relevant to many mainstream debates.  Hayek’s work had implications for the work of Kenneth Arrow, but not for how abortion legalization affects the crime rate.  Furthermore central planning and business cycles — two of Hayek’s main areas — are no longer such hot topics.  Second is the blogosphere.  Many of Hayek’s insights are deep and relatively philosophical; it is hard to put them into a snappy blog post.  For better or worse, it is easier for a market-oriented blogger to follow Becker, Alchian, or even Mises than Hayek.  I also believe that the blogosphere will, in the long run, favor the thought of Tullock over Buchanan, for similar reasons.

By the way, here is Nicolai on economists’ autographs.

Education as the critical problem behind current inequality

Here is an excerpt from my New York Times column today:

The return for a college education, in percentage terms, is now
about what it was in America’s Gilded Age in the late 19th century;
this drives the current scramble to get into top colleges and
universities.  In contrast, from 1915 to 1950, the relative return for
education fell, mostly because more new college graduates competed for
a relatively few top jobs, and that kept top wages from rising too
high.

Professors Goldin and Katz portray a kind of race. 
Improvements in technology have raised the gains for those with enough
skills to handle complex jobs.  The resulting inequalities are bid back
down only as more people receive more education and move up the wage
ladder.

Income distribution thus depends on the balance between
technological progress and access to college and postgraduate study. 
The problem isn’t so much capitalism as it is that American lower
education does not prepare enough people to receive gains from American
higher education.

Bottlenecks currently keep more individuals from improving their education…

Note that education is a fundamental issue behind the kinds of inequality we should worry about most, namely the failure of many poor people to do better over time.  It is not the fundamental problem behind every kind of measured inequality, as the column itself explains.  It does not, for instance, explain rising gains to the top one percent.  Inequality debates too often conflate different phenomena. 

Here is a non-gated version of the very interesting Goldin-Katz paper which I cover.

In a dynamic era does educational access have much of a chance of keeping up with technological improvement?  Even if we had optimal educational policies, which of course we don’t, modern technology goes "whoosh," education often just pokeys along.

Brad DeLong offers related commentary, though I think he is too quick to accuse Becker and Murphy of confusing the Marshallian scissors.  Mark Thoma offers commentary and relevant links.  Concerning Krugman’s claims, in general the data (see David Card’s Econometrica 2001 piece, plus the work of James Heckman) still find relatively high returns to additional education.

My question for Dani Rodrik

Politics works better in some areas than others.  Fairfax County has wonderful parks, libraries, and schools.  French politics has brought about a good health care system.  There are many other examples.  The mechanisms are various and often involve accident.  Sometimes governments luck into good institutional arrangements.  Sometimes a far-sighted visionary is at work.  Tiebout competition, or efficient Beckerian bargains across interest groups, may kick in.  Sometimes the median voter rules, that median voter is a good judge of outcomes, and what is good for the median is good for the nation as a whole.  Sometimes venal interest groups control politics, yet the desires of those groups happen to coincide with welfare maximization.

We can, in principle, rank policy areas along a spectrum.  Assign a "10" to the most efficient policy-generating areas and assign a "0" to the least efficient.  Don’t worry too much about what the scale means, this is Blog Land.

Where do you put trade restrictions along this scale? 

I give them a 1.5, at best a 2.  I think trade restrictions are hardly ever generated by processes which coincide with the general welfare.  I view trade restrictions as almost always motivated by the classic, crude "diffusion of costs, concentration of benefits"  logic.

If we redefine the problem more broadly, it could be said that trade policy as a whole gets an 8 or a 9.  Most of the wealthier countries, agriculture aside, have fairly free trade, as they ought to.  But what if we focus on evaluating only the quality of the trade restrictions?  How good are the restrictions we get in tracking the ideal welfare-improving restrictions?

I say 1.6438.  That is why I think Bhagwati is essentially correct to be fighting "the last war."  What is your number?

The Myth of the Rational Voter, part II

1. Bryan shows that education is the best predictor of what makes a person think like an economist.  This will create problems for his next book, which is a critique of education.  He also urges professors to teach better; he is again putting his faith in education.

2. I’m amazed that the public is as rational and smart as it is.  Few people demand that our leaders resort, say, to the tools of superstition, even though many people believe in astrology.  Our political irrationality is highly selective and self-serving in a "feel good about ourselves" way, rather than indiscriminate.  I don’t understand what, in Bryan’s theory, prevents voters from satiating in irrationality, with truly dire social consequences.  He writes of "a demand for irrationality" in stripped down Beckerian fashion, but the model in the back of his mind has a great more structure in it than the book lets on.  The sheep on the cover, for instance, do not play a formal role in the model of the book, even though conformism both eggs on and constrains real world political irrationality.

3. Voters are less irrational in many northern European countries.  I don’t agree with their socialistic view of the world, but in epistemically procedural terms they are making a much greater effort to get at the truth and put that truth into their vote.  What accounts for such a difference?

4. Bryan comes dangerously close to agreeing with me on broad matters of politics.  I think public opinion, for better or worse, is often a constraint on what is possible; that is why Henry Farrell described my view as "big government libertarianism."  Bryan sees opinion as a variable to be manipulated, but he could equally well consider it as a constraint.  His proposal to take more matters out of democratic hands begs the question of how this could be possible, given current public opinion.

5. Bryan underrates the irrationality of many private decisions.  He views "decisiveness" as the most important quality in predicting the quality of an individual choice.  I think that even if our elections were up to one decisive voter, that voter would still choose lots of batty policies or politicians.  I view pride and self-image as the most important features in predicting the quality of an individual choice.  When our pride is at stake, we often self-deceive and make bad and irrational choices, even when we are purely decisive.  I’m not convinced, for instance, that most people make very rational decisions about marriage.  Or status goods, or giving to charity.  In these cases people often "look the other way" when they should be exercising their critical judgment.

Here is the book’s introduction.  Note that my criticisms, even if they are correct, do not puncture the major theses of the book.

The tax break for employer-provided health insurance

Remember when I wrote?

…how can a simple relative price, whether a distortion or not, corrupt the cost control practices of an entire industry?  And if government provision of health care is ineffective and costly, isn’t there a positive externality from the purchase of private health insurance?

The tax break for employer-provided insurance is, more or less, thirty percent.  Therefore the cost burdens of employer-supplied health care should not exceed that same thirty percent.  Have you noticed that current problems come in the form of cost escalation at high ongoing rates, and not just from a one-time cost bump upwards? 

If you think the tax break is behind the spiral of rising costs, you need only wait.  Once the sum total of those unnecessary costs exceeds thirty percent, the tax subsidy won’t be worth it, we’ll move to a more rational system, and all will be well, more or less.

That hardly seems believable. 

Consider an analogy with food.  Say my restaurant expenditures were subsidized by thirty percent (remember the tax deductible business lunch?).  They might put too much on my plate, and they’ll start overcharging me.  Maybe.  But once the initial adjustment occurs, it won’t lead to 5-10 percent cost escalation for meals each year.  And if it did, in a few years’ time I would simply switch to the unsubsidized meal sector, thus checking how bad the problem could get.

Addendum: See also Becker and Posner today.