Wednesday, June 24, 2009

Working Paper: The Impact of Homework on Academic Achievement

I am nearing the point of submitting my job market paper for publication, and have a new draft of the paper. I also am testing out – a social networking site that links academics by institution, field, etc, and allows you to post papers. You can view/download my paper here.

New Experimental Evidence About Markets and Rationality

The paper that won the 2008 Arrow prize for senior economists looked pretty interesting, especially in light of John's arguments about the standard neo-classical assumptions. The article is available online here, though Calvin does not have access to the journal (which is a shame) but I have the article from inter-library loan if anyone is interested.

Here is the abstract:

Assumptions of individual rationality and preference stability provide the foundation for a convenient and tractable modeling approach. While both of these assumptions have come under scrutiny in distinct literatures, the two lines of research remain disjointed. This study begins by explicitly linking the two literatures while providing insights into whether market experience mitigates one specific form of individual rationality—consistent preferences. Using field experimental data gathered from more than 800 experimental subjects, we find evidence that the market is a catalyst for this type of rationality. The study then focuses on aggregate market outcomes by examining empirically whether individual rationality of this sort is a prerequisite for market efficiency. Using a complementary field experiment, we gathered data from more than 380 subjects of age 6-18 in multi-lateral bargaining markets at a shopping mall. We find that our chosen market institution is a filter of irrationality: even when markets are populated solely by irrational buyers, aggregate market outcomes converge to the intersection of the supply and demand functions.

Wednesday, June 17, 2009

The BofA-Merrill merger

Last night's installment of Frontline was designed to give Ken Lewis's point of view on the forced merger between Bank of America and Merrill Lynch. The point seemed to be that Lewis did what the government (Paulson and Bernanke) wanted him to do, even though he didn't like it, because it didn't look to him like it was in the best interest of BofA's shareholders. They even suggested (or had Maria Bartiromo suggest) that John Thain did the right thing by getting a good price for Merrill's shareholders. Lewis feels like he was punished for his good deeds--taking the TARP money and rescuing Merrill.

I find it hard to be sympathetic to either of these guys. As the story points out, toward the end of the negotiations, Thain was more concerned about lining his own and his buddies' pockets than anything else. And he was either willfully ignorant or deliberately deceptive about the depth of Merrill's problems. It seems to me that Lewis has no cause for complaint if he went into this knowing that the reason he was doing this was to save the financial system, and that he really had no idea how bad Merrill's balance sheet was. Lewis also knew that the Treasury stood ready to rescue his bank if the losses were large enough and, after all, he did have that TARP money. Nor is much said about the Treasury's efforts to find another buyer. I'm disappointed in Frontline. When are we going to get a documentary that takes a public-interest point of view?

Tuesday, June 16, 2009

Incentives for saving electricity

It is well-known that by far the cheapest way to save carbon emissions is energy conservation in homes. Yesterday's WSJ cites figures from McKinsey consultants suggesting that moving to energy-efficient home appliances saves about $108 for every ton of carbon emissions eliminated. This is what Frank Ackerman, in his new book Can We Afford the Future?, calls a "no regrets" option for reducing greenhouse gasses (pp. 56-60). So why isn't it being done? Ackerman points to the usual suspects: lack of information, lack of access to financing, and the effects of housing tenure. What it is not is lack of incentives. So as reported in the Journal, the approach of Rep. Peter Welch (D, VT) of offering tax rebates for homeowners and businesses to invest in efficiency is unlikely to have much effect. A serious communications and marketing program has a better chance of working. This is a case where behavioral economics has more to teach us than the standard model.

All of this raises questions for me about the "environmental Kuznets curve," the idea that as people get richer, they will spend more on environmental quality. Spending on the environment is what we used to call a "regrettable expenditure,"  like health care and security. It doesn't make us happier, just less unhappy. While we may be willing to pay more for such goods if the expenditures are collective (government spending or insurance), it is hard to part with this money on an individual basis. Nobody gets excited about buying a new water heater or changing to CFL or LED lighting, even if it saves money in the long run and reduces climate change as well. It doesn't make everyday life any nicer. The process has to involve changing people's values so that they can get really geeked about energy saving. I have discovered that on digital cable we have a whole channel devoted to this (grouped in there with HGTV, DIY, Create, and several other of my wife's favorites). Now if I could bring myself to watch it more....

Tuesday, June 9, 2009

Speaking of GM...

In the argument over who ruined GM, and whether it can be saved, I tend to view management as the key. Stuck in my mind I have a TV documentary I saw a long time ago. I don't remember who the executive was, or which company he worked for, but I remember his words. "The trouble with small cars is that you take out value faster than you take out cost." There you have it: a management philosophy that claims that to make a car smaller and more efficient, you have to "take out value." The opposite of the Toyota/Honda philosophy of putting as much value as possible into efficient cars. No wonder car buyers passed up Detroit offerings that screamed "CHEAP" and instead paid premium prices for Accords and Corollas.

Yes, Americans have a century-long love affair with the big, powerful, luxurious land yachts of the sort made by the Detroit Three. We also have a love affair with trains like the Century Limited and the Phoebe Snow, planes like the Lockheed Constellation and the DC-3, and luxury ocean liners like the Queen Elizabeth and the Titanic. You can still rent a horse-drawn carriage for an hour and take a romantic ride around downtown GR. But that doesn't mean that we prefer them to modern, efficient transportation for everyday use. When Detroit learns that, they'll be OK.

Monday, June 8, 2009

Is the canonical model "useful"?

At the ACE anniversary conference in April, I delivered a plenary address in which I argued that the standard, canonical model in economics is discredited, has been effectively abandoned for research purposes, and needs to be abandoned for teaching and prescriptive purposes too. My interlocutors made the claim that the model should be kept because it is "useful." For some, this seemed to mean that it is useful the way a map is useful, using abstract symbols to present a model of reality accurate enough to give directions to reach a goal. If you want to get from Waco to Houston, it will get you there. This seems to echo the famous statement of Robert Solow: "All theory depends on assumptions which are not quite true. That is what makes it theory." (QJE, Feb. 1956) Others claimed that without a general model that connected different phenomena together in a common causal framework, we would have no way to get a handle on what we know, and no framework for conducting research. Gabriel Martinez even made the remarkable claim that having a false framework is better than having no framework at all.

In that famous paper, Solow went on to say, "(I)t is important that the crucial assumptions be reasonably realistic," which he did not think was true of the Harrod-Domar model. A map is not useful if it puts the freeway exits in the wrong places, so that you think you are in Houston when in fact you got off in Galveston. The canonical model assumes perfect competition, which is a crucial assumption, and is not realistic. It answers questions (as Martinez said), but it gets the answers wrong. So the model predicts there will be equilibrium in labor markets, when in fact there is unemployment. It predicts the law of one price will hold, when it hardly ever does. It predicts that financial markets will be efficient, when in fact they periodically collapse. And it doesn't answer questions about some extremely important issues, like the size distribution of income or the optimal scale of the economy for ecological sustainability. It ignores the complexity of human decision-making, and the reality of economic power. This is not useful, but pernicious.

In my talk, I made some proposals about basic principles that a new economics should be founded on. But the frustration expressed with heterodoxy (by Robbie Mochrie and others at the conference) is that it doesn't offer a general, all-encompassing model. My claim is that we don't need one. Post-modern methodology suggests that they are dangerous anyway, but our research in economics is being guided by new questions, new techniques, and new basic principles that don't issue in a comprehensive mathematical construct, and we are still learning more every day. There is no shortcut to truth. Often you have to dig for it with your bare hands. The principles we need come from a basic biblical understanding of the nature of human beings, our relationship with God, and God's will for our relationships with each other. That will tell us where to dig.