EconomiX and Other Opinions

Lokpal bill and media

2011-12-13T01:55:00.000-08:00

Watching the media coverage of the Lokpal bill standoff is interesting. I notice that all the media outlets have their own version of a smart reporter (Barkha Dutt being the unchallenged leader)who then goes on to interview a host of politicians and journalists and or a bunch of aam aadmis who let lose with their personal experiences of corruption. Its a race to the bottom in terms of a critical discussion of corruption. If the country really wants to tackle corruption it cannot be by simply creating yet more laws and not enforcing them? Surely not by adding yet another layer of bureuacracy which can be corrupted? I don't have the answers but I don't believe the Lok pal is the only or even the best way to tackle corruption. How can we know without any evidence? What we need is an academic expert who knows how corruption was tackled successfully or where it failed and why. We need science and facts. The BBC at least does find experts to talk of things and not just politicians. You need skills and training so let the journalists do their job and rely on academics for the evidence of what works.

On Friendships

2010-12-10T14:24:00.000-08:00

Of all the "ships" in the world, this is one that is the most under-rated...
Of course I know that most mature adults understand that friendship networks are really really important to their sense of well being, still it seems to me that we make do with whats available easily than actively searching for the friends who make us happy. Unlike relationships where everyone kind of knows that they are looking for "The One", its not the case with friends. Extroverts think anyone can be potentially a friend, introverts think no one can. But what if friendships are like relationships, maybe not requiring the same kind of exclusivity, but requiring time, commitment and effort both in searching for the right friends and then making sure they stay. Personally I find that some friends consistently make me better when I have contact while with others I am left wondering what was missing, why was it so ambiguous etc.
There are the unrequited friendships when one person wants to befriend another but its only one way, there are the expedient friendships, the fly by nights, the ones with benefits and so on...its quite a sociological mine! Economists have researched friendship networks to see (e.g. see Currarini, Jackson and Pin, 2009), they have impacts on health, e.g. drug use among teenagers, and other socio economic outcomes. But I wonder whether my friendships are driven by economics...I prefer not to think so...

The United Shops of America

2010-11-30T12:05:00.001-08:00

Visiting the USA this year and I feel it should really be re-named...Having been exposed by now to the relentless advertising on cable TV for a few months now, UK TV seems like an ad-less haven! Cannot get through one episode of "How I met your mother" without at least 15 ads in between...its not just the frequency but also the composition thats fascinating: there are the usual ones for cars, breakfast cereals, OTC drugs, movies but on top of that its the advertisements for prescription drugs and lawyers that take my breath away! You would never know that such diseases existed until they told you that you may well be suffering from them....depression, different types of cancer, diabetes, gout, arthritis etc and son after the ad there is the mandatory fast forward recital of the various side effects. Then there are the lawyer ads: "do you or anyone you know suffer from the symptoms of asbestos poisoning? Do yu or anyone you know work in an area that might give you asbestos poisoning? You are entitled to blah blah, Call us now!"
Luckily I am of the ADD persuasion when it comes to ads...they pass by me without my brain registering anything. Some people I know on the other hand just soak up all this information so they can "talk to their doctor" about it...

Next suggestive justification for the re-naming: Thanksgiving, Xmas holidays are less about "holidays" and more about getting consumers out in the shops. So shops are closed on thanksgiving, but open with a vengeance with huge sales starting at 3-4am in many stores...people then start lining up for the goodies the night before in the bitter cold. Maybe its exciting, maybe it generates that extra bit of revenue...Im trying to think WHY. This BTW is called "Black Friday"...seems like the term originated in Philadelphia in 1966 and was used to denote the heavy traffic congestion due to sales the day after thanksgiving..it has now spread wider. Black Friday is apparently the busiest shopping day of the year! So presumably, thats why the shops open so early...creating traffic jams and road (and parking) rage in the early hours! There I was, naively thinking that maybe this was a way to give poor people a chance to get to the sales - surely the rich will not give up their precious time standing in line...Lets not forget "Cyber Monday" which are the online sales the monday after thanksgiving..

This is a country where apparently people STILL aren't buying enough, thats having a recession? Looks a bit tough to believe when you see the parking wars outside the big shops on Black friday...

Beating yourself at your own game

2010-09-26T06:37:00.000-07:00

How many of you have seen this beautiful VW advertisement?
http://www.guardian.co.uk/media/video/2008/dec/22/advertising-volkswagen
It took me a while to realize that its really quite insightful...most of the time we spend
criticizing ourselves and kicking ourselves...in fact I do it so much that many days I end up exhausted with the effort of trying to find excuses for my behaviour and just give up and escape to some passive activity where I cant "fail" (by my own standards).
Here is what "Psychology Today" tells us:
"We can observe this voice at work in various areas of our lives; it tells us not to get too close in our relationships or go too far in our careers. These thoughts can be cruel and berating: Who do you think you are? You'll never succeed. You're not like everyone else. No one will ever care about you. These thoughts can also be deceptively calm and soothing: You're just fine on your own. The only person you can rely on is yourself. You should reward yourself with one more piece of cake. Just have one last drink; it will make you feel better."
Clearly the way we cope with our critical inner voice is really important for interactions and success in the world. I find for example that when this voice is very strong you can see it reflected in the choices people make. People who give in to their own criticisms will tend to choose "friends" who confirm these criticisms. They will tend to underperform in work, confirming what their inner voice keeps on telling them. They will deliberately limit their effort so they can avoid the hurtful feelings of the voice which tells them they have no ability anyway...and so on. In fact a new branch of economics aims to tackle the question of how "identity" influences important decisions.
"Identity Economics bridges a critical gap in the social sciences. It brings identity and norms to economics. People's notions of what is proper, and what is forbidden, and for whom, are fundamental to how hard they work, and how they learn, spend, and save. Thus people's identity--their conception of who they are, and of who they choose to be--may be the most important factor affecting their economic lives. And the limits placed by society on people's identity can also be crucial determinants of their economic well-being."(Kranton and Akerlof's book "Identity Economics")

If identity has to do with a notion of who we are - what is our "correct" level in the workplace and in choice of partners - it would explain why people overwhelmingly do not marry across social class or race in some countries, why ability and effort are highly correlated with high levels of confidence or even "over confidence". Differentiated wages convey a signal to workers of what the employer really thinks about them may destroy morale quite effectively among the less confident workers. When their perception of themselves changes, their performance on the job adjusts to those changes...

Social Capital

2010-07-04T07:29:00.000-07:00

The term "social capital" was popularized by a sociologist called Robert Putnam. He has written extensively about community life, and how it can lead to higher levels of good outcomes like health, education etc. The problem with social capital (and I'm lifting extensively from J.Sobel's nice article summarizing the recent work on it), is that it is too vague. No-one knows what exactly it refers to, and whether and how it can be built. So I wanted to provide my laundry list of what I believe should be the essential ingredients of social capital:
1. It should refer to "informal" ways of transacting, e.g. relational contracts vs legal contracts.
2. It should be decentralized
3. It should be continuous with respect to individuals (i.e. a single individual cannot shift it by a large amount)
4. It should be "local".
5. It can come as endowment (e.g. you may inherit your parents networks), or may be built by investing in networking.
6. Success in building social capital should depend on a combination of ability, endowment and investment.
7. Governments can facilitate the building of social capital by subsidizing community centres, local newspapers, etc but ultimately
whether it succeeds depends on the alternative ways available to accomplish various transactions.
8. Friendship or social networks are highly related to the main activity of an individual, e.g for students it is their classmates, for adults it is often work related. Usually building these is a low cost activity done for direct consumption benefits but may lead to other types of benefits..
9. Within the narrow space an individual occupies both at home and school/work, I think physical distance matters: neighbours at home and at work matter a lot more than non-neighbours: so investment costs increase in distance - both social and physical.
10. Social capital is associated with an aggregative unit, e.g. a country, a region, a workplace. Even though built by individuals, only the aggregate version is social capital.
11. It can potentially be bad as well: a close knit community is often more tradition bound being based on sanctions for un-cooperative behaviour.
12. An important function of social capital is to facilitate information flows and prevent opportunistic behavior through punishments.

Economists already look at the effects of "salient" social capital for a particular issue: they may not call it that, but peer effects in health and education are an example, other examples are how political affiliations are affected by affiliations of close relatives and friends and workplace..

At the end can we say which region/workplace/country is high in social capital? Scandinavian countries maybe? But immigration may change that...possible things that are important: level of development, levels of inequality (tax system), geography- openness to inward migration, communication systems. Can we say Bhutan is high in social capital?

Ego and other animals

2010-04-11T03:06:00.001-07:00

This is an article about the Ego. Having read a lot and observed myself closely, I now feel ready to comment on this topic which I believe a lot of people should be interested in, if they are not already…
Well, my interest started as a result of a crisis year where I had a number of interpersonal interactions which were, to say the least, negative. A number of negative experiences led me to look for peace and a solution to these problems.
Solutions were slow to emerge: it seemed that no matter how I said something, it was always the wrong thing.

I’m still not sure it’s a “solution”…but anyway. I visited a friend who introduced me to books by Eckhart Tolle. There is nothing special about him, except that he writes and talks well…but I think I understood because of my need to understand. So, what he says basically is to detach yourself from your ego. What is an ego? Well, I understood it best with examples: ego is what you identify with, it is your story. It is your past, your future. Not your present.
Ego is what separates you from everyone else, it is what makes you superior or inferior to anyone else. It is what prevents you from enjoying the present, and primarily it is that which causes superficial un-winnable conflicts with others. It prevents you from being your authentic self. Even writing this blog, is a way for my ego to feel superior in my understanding…!

So now, how does one get rid of the ego? Apparently the first step is simply to recognise when it is used. I acknowledge that my ego is making me write this blog…that this is not “me”. I am being “present” in that I am aware of the ego.
So, who am I? I am the presence that is aware of the ego.
Actually, when you are ready for this understanding I find that it works. Its practical and simple and it totally works!

Other interesting insights from Tolle’s books: when there is a situation you can control, you should either enjoy it, and if you cannot enjoy it, accept it. If you cannot accept it, then stop doing it. And then he talks of the “pain body” which all of us are born with. Some people have a more active pain body than others. The pain body is an organism that lives inside you and is built up of all the past hurts thar civilization has imposed on itself and it consists of your own past emotional pain. Whenever you are repeating a pattern that you are comfortable with, the pain body gets excited, and active….basically it wakes up and feeds on new pain, and can completely take over your personality. You become a slave to it and start reacting in ways that reinforce the pain…how do you escape? Again, first step is to be aware that this is the pain body, to be able to laugh at it and understand whats happening…to react in an authentic way. To observe the pain in a detached way and understand where it comes from and to then give yourself the permission to feel the pain without reacting..
The beauty of his books is that the advice sounds very abstract but the advice is really very practical…

How to win votes on the cheap: Lessons from Indian Elections

2010-01-18T03:15:00.000-08:00

In a recent conversation with an Indian politician, I asked how they chose to spend their tax money between different groups of voters. He replied that it was prioritized: there would be the largest emphasis on “swing” voters, then on loyal (partisan) voters who vote for the party regardless and finally on voters who were partisan for other parties! In my research we reach a surprisingly similar result based on data on grants from the central government to 14 state governments in India during the period 1975 to 1997. The most important instrument in the control of incumbent parties is the allocation of the budget. When the central government allocates grants to state governments, we find that the alignment of the incumbent party at the state with the incumbent party at the center together with how “swing” a state is predicted to be in a particular state election affects how much is allocated: a state that is aligned and swing receives 16% higher transfers than a state which is unaligned and not swing.

Grants are used by state governments to finance public goods – e.g. road building, electrification of villages, telephone connectivity, water or sanitation facilities in poor neighbourhoods, employment guarantee schemes etc. These projects build goodwill for the party that’s credited with providing the grants. If a state government is aligned with the central incumbent then both levels of government benefit: voters will reward the party at the state level election or the central election. But if the state incumbent party is not aligned, then the credit is shared between two different parties: it is this that causes central governments to limit the grants to unaligned states. Swing states are those where the voters are undecided between parties. A small increase in goodwill can lead to large gains in votes. Of course the benefit only goes to the incumbent party at the center if the state is an aligned one. It turns out that parties allocate expenditures to maximize their chances of getting re-elected and this effect holds both for central as well as state level elections.

In our data, the Congress Party dominated central elections for most of the period under study. The Indian states which turn out to be electorally very important at the state level elections are Bihar, Kerala and Uttar Pradesh. Both Bihar and Uttar Pradesh had multi party contests during the period 1975 to 1997, where a small swing in favour of one party lead to a large change in election results. In Kerala, there were two main alliances: one led by the Congress party and one led by the Communist Party of India. Our measure of alignment is Bihar is high (0.7, where the maximum is 1) relative to other states, hence Bihar ends up being a favoured state.

To illustrate our results even better: compare the two states of West Bengal and Rajasthan: West Bengal has a low alignment with the central government during the period of study (it was dominated by the Communist party during this period) and was not a swing state during this period, Rajasthan on the other hand was aligned and swing. Rajasthan got an average per capita grant of Rs 115 (the highest) in 1980-81 prices while West Bengal got Rs 39 on average. Rajasthan also happens to be marginally higher ranked than West Bengal on per capita income. This shows the problems with letting politics decide the allocation of grants: governments look less at how deserving or needy a particular state is and more at how important the state is for re-election.

So, what can be done? It is generally agreed that grants decided by the Finance Commission are less manipulable for political gains, as they are governed by formulae based on the needs of state governments. A simple policy prescription from our study is to reduce the discretionary elements in grants and base them on economic considerations based on formulae.

India has a parliamentary democracy with a first past the post voting system. Parties are interested in winning the largest number of state elections, as winning in state elections is closely linked to winning in central elections. Our conclusions hold for such countries, but similar studies have been carried out in European countries and Latin American countries (e.g. Sole-Olle and Sorribas for the case of Spanish municipalities, Armesto for Argentina, Leigh for Australia etc) suggesting that while the precise way in which politics affects this decision may vary, the idea that politicians choose budgets not so much to benefit citizens but to increase their own chances of re-election is a robust one.

Roman Interlude

2009-09-16T13:55:00.000-07:00

The most apalling thing happened....it rained the whole weekend. I was dreaming of my trip to fabulous Rome since two months, dreaming of the beautiful Bernini statues in the sun, and guess what! The statues were still beautiful but no sun...
We reached Termini station and I hauled my heavy laptop and luggage out of the train to find that there was a deluge, and I had to walk through the deluge to our little hotel (Santa Chiara) behind the Pantheon. The hotel made up for it...we could sit and chat in the night on the steps of the Pantheon. Built as a Basilica to the , it ultimately became a tomb to the most famous Roman artists like Raphael, Carracci and Corelli.

I could only collect the images of Rome: cobbled streets much wider than you would expect...the statues at every corner, the bookshops and the restaurants advertising American breakfasts. We made our way to the churches to find the paintings of Caravaggio and Michelangelo culminating in the Vatican's Sistine Chapel. Oh and the cars: so tiny they fit everywhere. The Fiat Cinquecento (?) was ubiquitous.

On the way, when it rained we dashed into a bookshop: here we had coffee with Dante Alghieri looking down very sternly...

And the Vatican? We waited in the line for the museum and to my surprise it took only half an hour to get inside...no wonder because we were packed like sardines in the museum. A very nazi-ish looking guard yelled "Silenzio"!

boredom

2009-06-27T14:38:00.000-07:00

In his 1995 essay “In Praise of Boredom,” Nobel Prize–winning poet Joseph Brodsky wrote: “When hit by boredom, go for it. Let yourself be crushed by it; submerge, hit bottom. In general, with things unpleasant, the rule is, the sooner you hit bottom, the faster you surface.” Adds Vodanovich: “If you don’t succumb to its negative effects, boredom is a great motivational force.”
Thats taken from a Scientific American article on boredom.

So easy to say. I dont think its true. Boredom is a debilitating condition. It arises from a disconnect between what you want and what you are doing/getting, a fundamental disconnect between values and actuals. But this is not consistent with the fact that there are some people who are NEVER bored and some who are ALWAYS bored. So if its a temporary disconnect then this should not be the case...unless it has to do with self awareness. people who are self aware know what makes them bored and they avoid it? They live life according to their values?

And the self help guys say: if you are bored then stop being a boring person...if you cant be interested in the little things around then something is wrong with you. I agree but Im too bored to find out what is wrong!

Neuro enhancing drugs

2009-06-17T04:31:00.000-07:00

This subject is fascinating to me. We can visualize a world where these drugs exist and competition between people will be dirtied by the drugs. Someone gets an AER and you say" Oh well, its the drugs, look at the size of her head (brain)! Thats not normal.." We will be like olympics athletes and before you can get an article published you would need to get a drug test?? Hows it ever gonna work?? Or are they going to announce the drugs they took and that can be published along with the article...why not? Nothing wrong if they increase your creativity! Problem is so far they only seem to increase concentration rather than creativity. Theres the ADHD drug Ritanil: you can, BTW, buy it without a prescription at:
http://www.freedom-pharmacys.com/rxdrugs/ritanil.html.

But so far apparently there is nothing that actually INCREASES creativity!

It doesn't matter though...my colleagues are working on lab experiments that show that a small happiness boost leads to an increase in "productivity". This I believe! So, heres a new advertisement for prozac: "Free yourself to be the best: happy people are successful people" or something like that!
Actually, what would I not give to be in the shoes of one of my super satisfied colleagues (SSC to keep it anonymous).. those that seem infinitely satisfied with themselves, those who interpret everything that happens to them as uniquely challenging and those who know they can overcome any challenge. It would simply be heaven. Thats all I can say....

Regret, disappointment, and learning

2009-06-14T15:00:00.000-07:00

Been reading a lot (as usual) about this...apparently there is a huge difference in psychology between feeling regret and dissapointment. You could feel regret for various reasons, maybe you missed out on a large prize because you didn't pay attention to what you were supposed to do or because you didn't put in enough effort or you could feel it if you gave too much and you could have gotten away with "less money on the table"...Whatever. On the other hand if you simply lost something due to bad luck you just feel "disappointed" but you do not feel regret since there was nothing you could have done.
Why do we even care?? If all of these motivations led to the same behaviour then one should not care -- however it seems that thats not the case. You can learn from mistakes only if there is regret. Thats why its important to know when you have regret and when not.

Im trying to think of the last time I faced regret. Thing is it never happens like that since everything in life is a complicated combination of luck and effort...I never really know if it was my (lack) of effort or whether it would have happened anyway...most likely I think its always the latter. So the point is that two different observers (myself and an antagonist) would have different perceptions of who made the lesser effort and whether luck played a role: so its so subjective that there IS no pattern...

Finally what about the winners curse? Is it disappointment or regret? It could be regret that you overpaid given the new information revealed. But you would not have known that before anyway. So no regrets, only dissapointment?

And how can you test the difference?

Relativity and happiness

2009-06-11T00:34:00.000-07:00

I learnt some interesting things this weekend...some of the latest research in Neuroeconomics and relativity. What do people care about? It seems they care very much if someone beats them in a game of skill but not so much when its a game of luck (Aldo Rustichini, a professor at Minnesota did this experiment using fMRI machines and Minnesota students). So, lets say someone wins a lottery, research shows that they are not very happy in the first few years as perhaps they attribute it to luck rather than skill (and it would be difficult to argue with that, unless choosing random numbers requires skill). But after some years they convince themselves that they do deserve it after all, and become happy. What are the implications of this? If you want to increase happiness, this means the state should equalize skills rather than money... i.e. what outcomes SIGNAL about skills matters more than itself. Together with the recent book by Richard Nisbett “Intelligence and How to Get It," ( see http://www.nytimes.com/2009/06/07/opinion/07kristof.html?_r=1&scp=2&sq=iq&st=cse) this suggests that equalizing educational opportunities is the key to equalizing "skills"... intrinsic talent is really not that important as was always thought...

Another interesting piece of research by Claudia Senik in Paris suggests that the inequality in levels of happiness reported by couples is a very good predictor of whether the relationship lasts or not: so the longest lived marriages are those where either both partners are equally happy or equally unhappy! You know the old saying "misery loves company"...well misery loves company but only if its equally miserable, you dont want to be with someone who is excrutiatingly happy while you are dying...
(see e.g. http://www.nytimes.com/2009/06/07/opinion/07kristof.html?_r=1&scp=2&sq=iq&st=cse)....

Finally, I never thought there was anything good about the sex ratio imbalance in China or India (in 2006, there were 120 boys born for every 100 girls, in India 930 women to 1000 men) but a new theory and some supportive evidence claims that it is indeed the imbalance that is responsible for the high Chinese savings rate...this is how the logic works: the competition for young women to get married to, is getting harsher given the imbalance. Hence parents of boys start saving early so that they can compete in the bride price and showing high status for the boy when he gets married...at the same time, since in China the boy and his wife look after parents in old age (no social security), while girls go away, this also increases the incentives of the girls family to save more for their old age! Hence savings goes up as a whole assuming that people have children at the same rate as before: save during the first 20 years then splurge...

On the control of hot emotions

2009-05-23T09:34:00.000-07:00

I read a really interesting article on a psychologist who is interested in personality. There are a lot of pop psychology personality tests on the web and the underlying premise is that personality is a fixed thing. Well, this may not be quite true, personality may be different in different situations. Some features of a person's character however seem to be very important and this he says is the ability to control emotions...he carried out an experiment with children who were given marshmallows which they could either eat straight away or wait a bit and get another one. they were left in a room with the marshmallow and given a bell to ring when they could not wait any longer. Some of the children waited and got the reward while others rang the bell in almost no time. He followed these children into adulthood and found a high correlation between those who waited and those who were successful in life! Its not so much the ability to resist temptation for a longer run payoff thats important but the ability to control their desires. The successful kids did this in a variety of ways but essentially they did it by suppressing thoughts of marshmallows and distracting themselves with other things. Moreover this ability can potentially be learnt but requires diligent practice. Having the right parents can help a lot!

I've only recently become aware of this ability and it certainly rings true to me. People who are able to turn off their hot emotions are much more advantaged.
So, go on, I would say" Dont eat the marshmallow" !!

Happiness

2009-05-04T06:13:00.000-07:00

I follow various happiness blogs now. Important things I learnt: (1) Flow activities are important: like writing a blog. The end is unimportant, only the process matters. So also, climbing scary mountains will qualify, matter of life and death activitities too (bungee jumping?, sky diving) (2) Heard the story about the wise guy...a man came to him asking for help in being happier. He told him to buy some goats and keep them inside his house for a week and then come back. So thats what the man did. He came back in a week totally sick of the smell of the goats and their little pebble shaped turds all over the house...and complained about this to the wise guy (WG). Well WG says" Now get rid of the goats. You will be happy!" .(3) Connections to others: close emotional bonds, good friends.

Also funny: from facebook: one of my friends posted this: a cure for very happy people:
http://www.theonion.com/content/video/fda_approves_depressant_drug_for

Vindicated...and the Bankers Conspiracy theory

2009-02-14T13:40:00.001-08:00

Sarkozy criticized Gordon Brown's VAT reductions. I feel vindicated.
A new conspiracy theory has emerged in the Physics Dept at Oxford: Why are bankers paying themselves huge bonuses despite public outrage? Why is Ed Balls saying that the recession will be much worse than it is now? Do they (govt+bankers) know something we dont? Is everything going to collapse? They will care about reputation unless its the end game. So it must be the end game say the Conspiracy theorists....

VAT reductions? Why?

2009-01-24T05:13:00.000-08:00

I saw an article by James Suroweicki in the New Yorker, this was the first justification I saw of the VAT cutting exercise of the Labour government and the proposal to cut withholding tax by the Obama govt...till now I was convinced that it was nonsense. Why try to increase spending indirectly by cutting taxes on consumers: the reductions in price due to VAT are minimal, I for one never noticed anything and they rely on consumers deciding to spend instead of save. Why not instead just increase spending on public works -- we do need better tracks for the trains, we need better hospitals, universities etc. So, why?

Well, Suroweicki cites the behavioural economics stuff: people tend to spend more when they perceive a windfall gain to be an increase in income rather than an increase in wealth. Hence if the government wants people to spend they should increase income, i.e. give small increases in monthly take home pay but not large lump sums...all very well. But I still dont understand why its not easier to simply increase spending on public works, because that will surely not be saved at least in the first round..

While on the topic of the financial crisis: Its still quite amazing that almost none of the CEOs who led the way to financial ruin for so many are held accountable. They are not being taxed, its the middle classes as usual who bear the brunt...who else pays withholding tax? Madoff was surely only one Mr Ponzi....so if banks are nationalised will they actually change their incentives to punish those who take these risks?

A few people I have heard, have taken this to mean the end of capitalism as we know it. They are buying sustainable ways of living: having your own kitchen garden to grow produce, solar panels for electricity and hoarding food. the idea is that when the end comes it will be too quick to be able to survive without planning...governments will not be able to tackle the problems....money will be worthless...

2008-12-25T02:05:00.000-08:00

Lemons Visas and Grooms

2008-12-21T01:16:00.000-08:00

What could possibly be the link between lemons, visas and grooms? One answer is that in the market for each of these things one 'side' of the market, either the buyer or the seller, typically has more information than the other. At this point I should probably mention that I am referring to badly made cars, not little yellow fruit, when I talk about 'lemons' here. There are many markets where the different sides of the market have differential information about the quality of the item that is on sale. Buyers and sellers have opposite incentives in this case - buyers want to pay a price that takes into account the fact that they may end up with a low quality item while sellers of low quality goods have the highest incentives to sell! The markets for lemons, visas and grooms are some examples of this kind of market. In what follows I will explain what economic theory predicts will happen because of this feature that one side of the market has more information than the other.
The economic phenomenon that causes the price of used cars to be much lower than the average value of a used car is called Adverse Selection and this was the insight for which Professor George Akerlof won the Nobel prize in Economics in 2001. It occurs because the seller of the car knows the quality of the car he is selling while the buyer does not. In other words, the seller knows if his car is a lemon (ready to be junked) or not. The potential buyer, however, cannot distinguish between cars that look the same. The potential buyer, of course realises that lemons exist in the market for used cars and this possibility will cause him to lower the price he offers for every used car. Suppose now that you are the owner of a car that is not a lemon: a reasonable reaction would be to withdraw the car from the market. If most 'non-lemons' are withdrawn from the market, the average quality of a car on the used car market falls even further, leading a further fall in the price offered for used cars and so on. This process is called 'the unravelling of the market'. One solution to this problem that we see emerging is for car dealers to act as middlemen in this market: they invest in a reputation for telling the truth when they say that a car is not a lemon. This effectively stops the market for used cars from unravelling.

There can be lemons in the job market as well. Less able workers know their ability but at the outset employers cannot distinguish it from that of more able workers. In a world with no means of accreditation, an employer has to pay wages taking into account the fact that workers might be of low quality, then it is the high ability workers who leave the firm - they do not wish to work at low wages. This means that the share of lemons in the market increases and the wage that employers can offer also falls...until only lemons are left at the firm!!

What about visas? Indians applying currently for US visas face a daunting task: the price of a visa to the US has increased tremendously. At the same time the actual process of obtaining the visa has also become much worse, with long waits outside the embassy for interviews etc. Moreover Indians who are resident in other countries have to bear the cost of holding an Indian passport whenever they need to travel between countries. Usually visa offices are open for two hours early in the morning in cities far away from where they live and even when they can get there in time they are greeted by long lines and often seemingly random rules of entry into the consulate. European countries who signed the Schengen agreement vie with each other in trying to push the unfortunate visa seekers onto one another. The rationale given for this unsavoury treatment to Indians is that they are members of a suspect group that stays on uninvited in other countries or that may indulge in terrorist activities.

We may think of the visa process as a kind of market for visas where the price is the opportunity cost of time spent in getting the visa.. But here, unlike in the market for cars and workers, it is the buyers who know more than the sellers. The buyer of the visa knows whether he will honour its terms or whether he will violate them. So there are some applicants whose intentions are dishonourable - they may even be terrorists - and some who are not. But the US embassy cannot distinguish between them in much the same way as the buyers of used cars cannot tell when a car is a lemon. And just like in the lemons story, it is the "good" guys, the applicants who want to visit family and friends or just tour around, who will be the first ones to give up on their visits as it becomes increasingly difficult to obtain a visa. It is true that some potential terrorists will get deterred as well. But it is indeed those who have the worst intentions, the biggest stakes in destruction, the most determined ones, who will have the motivation to get through the difficult entry process. Adverse Selection rears its ugly head again! So, my prediction is that the more stringent visa process will weed out only the less dangerous terrorists: we will see less terrorist attacks but when there is one, it will be devastating.

Now imagine the buyers and sellers in the market for grooms in a traditional society: the sellers are grooms and the buyers are brides. Potentially a bride may be able to buy different grooms at different prices. Consider the pool of educated women looking for mates. Let's say that men are looking for "traditional" women who will be caregivers and let's say women can be of two types: traditional or modern. However a man cannot tell by looking at a woman what type she is. He may reasonably expect that the more educated a woman is the less likely it is that she would be a traditional type. Thus if a woman is more educated he should ask for a higher dowry in the hope of discouraging modern women from marrying him. The only women who would accept to pay this dowry are the highly educated ones who are traditional! So among the pool of educated women, if we observe a dowry being given, it should be higher the higher is the education of the woman. However if incomes or ability to pay dowry are higher for modern families, then more traditional women will not be able to pay these dowries and only educated women will remain in the market. Grooms will respond by increasing their price even further to keep out modern women and so the market unravels again!

In reality things are more complicated of course, but this is just a flavour of the kind of applications that economic theory has. Adverse selection pops up in unexpected places!

the persistence of Reputation

2008-12-14T12:47:00.000-08:00

Academics must publish in "top" journals in order to be noticed by anyone of any significance.

We all know that its easier to publish if you belong to one of the "top" schools in USA or a few outside. No one has carried out an experiment though -- just to check how strong the affiliation bias is.

As someone said "good papers are written by good people. Good people are those who write good papers". There lies the root of the problem! Once you establish a reputation with one good paper, you're done basically -- you get a job in a top school and then you can keep publishing in top journals for the rest of your life.

Of course only someone like me who is OUTSIDE the club would rant about it! The great thing is that it wont matter who does rant, unless you're on the inside....

Then look at Oxford and Cambridge. For some reason they became famous at some point and there was no looking back...now the best students will go there and it will not matter if the upstart universities are better staffed or not -- the reputation will persist. That means good teachers would be attracted there and so on and so forth. Can anyone ever break this persistence? Can a new university do better? Not if it is competing with the same or lower resources than Oxford...