Assorted Links

1. Eva Vivalt at NYU looks at how much do impact evaluations generalize in her job market paper. Her guest post at the World Bank Development Impact blog summarizes the paper well. The following paragraph caught my attention:

In the greater paper, I also find that when academics or NGOs implement a project, the project tends to yield higher effect sizes than when a government implements it; worrisome if the smaller, academic/NGO-implemented projects are intended to estimate the effects of the program were the government to implement it on a larger scale.

The generalizability of impact evaluation is very important for policy implementation, and more work needs to be done on this.

2. Brookings report on the rationale of encouraging higher education in STEM fields to meet the demand of employers. This made me wonder what forces are driving the location decision of different types of firms and how local policies interact with those. Sounds like there’s some spatial equilibrium there.

3. New York Times interview with executive women on finding and owning their voice. The whole article is worth reading. but these two pieces of advice stand out:

One of the things I see sometimes is that women mistake words for voice. They feel that because they have a seat at the table and they say something, that’s good. But it’s important for women to know that having a voice really means having a track record of success and accomplishments, so that people want to listen to what you have to say, because you’re saying something of value. So use your voice, but use it strategically.

Sometimes when you’re the only woman in a meeting, or one of just a few women in the group, you can feel like you almost have to say something. I think there are women who just want to make sure that they present at a meeting and that people are hearing them. But I think it’s just as important that you listen, because when you listen you get more out of the meeting. Sometimes you’re waiting to talk, and then you’re not listening. You have to balance listening and speaking. Then it becomes more natural.

The effects of taxes and transfers (2): incorporating human capital accumulation in life cycle labor supply models

Following our last class on simple models of life cycle labor supply, we discussed about incorporating human capital accumulation into the individual decision-making process. Now the wages are no longer exogenous. Instead, current wage depends on the amount of labor supplied in the last period, which is a proxy of human capital accumulation. Everything else stays the same. If this model is a more realistic description of the world (which is likely), the traditional estimation of Frisch elasticity (intertemporal substitution elasticity) will be biased downwards. To see this, note that over time wage rates are rising as a result of human capital accumulation, but the returns to “learning by doing” is decreasing (as the individual gets nearer to retirement). The total marginal return on labor supply estimated by Frisch elasticity combines these two effects and understates the true intertemporal substitution effect.

These models are nice, but here are two questions worth considering:

The first question is due to my classmate DS: How should we perceive the process of human capital accumulation?

The model presented above assumes that human capital accumulation happens through working more hours, which implies labor supply and human capital are complements. But they might well be substitutes: think about workers who have accumulated a body of knowledge and can work more efficiently with shorter hours. In this case, the Frisch elasticity might not be downward biased.

The second question is due to my classmate MZ:

Suppose you are at a cocktail party and two people start arguing over the effect of raising or lowering taxes on the incomes of wealthy people. Someone mentions that you are a budding young economist, so the two parties temporarily stop arguing to hear your words of wisdom. What do you say?

After our discussion, I think a fair answer would be that tax changes affect people’s behavior along multiple margins. The more margins we allow people to respond to in our analysis, the more distortionary effects we are likely to find. Obviously, economists rarely agree and even if they agree, it takes a long time for them to channel through policy making and have a real-world impact.

Cultivating loving kindness through meditation (3)

The topic tonight was forgiveness through loving kindness meditation. We had an insightful discussion before the actual meditation about the nature of forgiveness.

Forgiveness is about self liberation. A quote from the Buddha says:

Holding on to anger is like holding a hot coal that you are going to throw at someone.

Feeding into the seed of anger in our heart might give us self righteousness, but we also hurt ourselves without solving the real problem.

To forgive is to not to forget. Forgiveness should never be condoning wrong behavior. Instead, we are acknowledging the fact that people might be undergoing confusion and suffering when they hurt others. Knowing this fact allows us to relate hurtful behavior to fundamental elements of humanity and to not target our anger at a specific person. As Martin Luther King. Jr. has wisely pointed out, once we are aware of the fact that there is some good in the worst of us, and there is some evil in the best of us, we are less likely to hate our enemies.

The meditation goes as follows. We imagine three scenarios: instances where we have hurt others, where others have hurt us, and where we have hurt ourselves. We seek forgiveness from others, and offer forgiveness to the people we have hurt as well as to ourselves. The three sentences for each scenario are:

If I have hurt or harmed anyone, knowingly or unknowingly, I ask for their forgiveness.

If anyone has hurt or harmed me, knowingly or unknowingly, I offer them forgiveness.

For all the ways I have hurt or harmed myself, knowingly or unknowingly, I offer myself forgiveness.

Notice that rather than direct apology, we are “offering” forgiveness to cultivate the intention.

The next step is to visualize each of the three cases and repeat a longer text which says the similar. At the end of the meditation, feel the breath and notice the changes in your body (likely you feel some pressure is gone).

After the meditation, Sumi offered two pieces of advice on how to forgive. First, we should understand that quite often people are acting badly because they are confused themselves. Second, we should be aware that most times the harm is not personal. Some hurtful behavior is directed towards a certain group of people, not an individual in particular.

Next time we will do loving kindness for all beings.

The effects of taxes and transfers (1): from static to life cycle labor supply models

The second half of this semester I am taking a PhD module on the effects of taxes and transfers by Professor Joe Hotz. I have enjoyed it so much that I decided to write a series of reflective posts on it. This post is the first one. References to the papers are available upon request; I won’t post them here because of time constraint.

Taxes and transfer programs change individual behavior through various channels, among which labor supply is one of the most important and policy relevant. Knowledge about the responsiveness of labor supply towards tax changes allows us to better evaluate the distortionary effects of taxes and the magnitude of dead weight loss of different tax schedules (e.g. progressive vs. regressive).

The earliest models of labor supply assume individual decisions are made in a static setting (Heckman, 1974). Given exogenous wage and non labor income, individuals choose to their labor supply levels to maximize utility (which depends on their tastes). There is no dynamic concerns: “lifetime” is treated as the one and only period where the individual needs to make a decision.Tax changes figure into individual’s budget constraint through changing pre-tax wage rates. In more sophisticated models, taxes on wages and nonlabor income are modeled jointly.

Since labor supply decisions are made throughout the life cycle, static labor supply models yield incomprehensible estimates for labor supply elasticity that cannot be used for policy evaluation. Life cycle labor supply models are developed as a consequence. The simplest life cycle model (MaCurdy, 1980) assumes no uncertainty, i.e. wages, prices, and interest rates are all exogenous and known to the individual. From there we can derive the Frisch elasticity (holding the marginal utility of wealth constant) which measures the intertemporal substitution of labor supply. Frisch elasticities allow us to infer individual dynamic behavior along a given profile, but a structural model of individual effects needs to be estimated in order to derive compensated and uncompensated elasticities for cross-sectional comparisons.

Later models incorporate uncertainty into the evolution of wages, prices, and interest rates. In such settings, individuals maximize expected utility over their remaining life and adjust their labor supply/consumption choices after period-specific information is revealed. Using appropriate IVs that are not correlated with present-period “shocks”, we can still adopt the first-difference method used in the perfect certainty models to estimate intertemporal elasticity.

A few other papers relaxed the unrealistic assumptions that individual utility is separable contemporaneously between leisure and consumption and across periods. Ziliak and Kniesner (1999. 2005) found that contemporaneous consumption and leisure are complements, and ignoring this relationship can bias the estimates for labor supply elasticity.

The important takeaway is tax changes will affect people’s behavior along multiple margins. The significance of the earliest models lies in their simplicity. The subsequent development in the literature enriches the life cycle model and allow people to respond to foreseeable as well as unpredicted changes in wage rates and prices, to endogenously determine their wages (through human capital accumulation), to have preference for joint consumption of leisure and other goods, etc. I will write a post on human capital accumulation after tomorrow’s class.

For this course, each student is required to lead one class, where he/she has to write summary notes of the papers, do a presentation, and draft a few discussion questions. I found it’s harder than I thought to summarize a few related papers (to extract the “juice” out of them) and to explicitly point out how they complement each other or where the dispute is. You need to really digest the papers, think through about the fundamental modelling assumptions and empirical methodologies, and what are the pros and cons of each approach. It took me one and a half week to fully digest and to organize the four papers such that my classmates would spend the minimum time getting the essence out of them. But I felt really glad to receive positive feedback on my summary notes and presentation. It was also rewarding to see my questions generated a fair bit of insightful discussion. Keep it up!

Assorted Links

1. Nice and intuitive graph by Brookings on the trade networks within the US. It looks a great deal like the Salop circle that has been widely used in the IO literature. These location models are so fascinating that I’ll have to devote a separate post to them!

2. New paper by Erica Field and coauthors on peer effects in business training. Here is a summary of the paper by the World Bank Development Blog. There is striking evidence that when women go to short-term business training with a friend, they are more likely to take out a loan and deliver better business results. The exact mechanism remains to be explained.

3. Liran Einav and Jonathan Levin review the use of big data in economics.

Pascaline Dupas on Decentralization and Efficient Targeting of Subsidies

Pascaline Dupas, a development economist at Stanford University, gave a talk in our department this afternoon on how decentralization affects the targeting of subsidies in Malawi.

The allocation of public subsidies to targeted beneficiaries is an important task of governments in developing countries. Three conditions need to be met to maximize the effectiveness of these subsidies:

1. They should be assigned to people with the highest returns.

2. There should be limited leakage on the way to assigned beneficiaries.

3. Beneficiaries should put subsidies in appropriate (intended) use.

The second and the third conditions have been explored extensively in the development economics literature. For example, economists have examined the effectiveness of conditional cash transfer (CCT) programs on school enrollment of children in poor families. By making school enrollment a precondition for cash transfers, the government hopes to nudge parents to send their children to school, which they probably wouldn’t do if the transfers were unconditional.

The purpose of this paper is to investigate the first condition. More specifically, they look at the effectiveness of centralized (proxy means tested, or PMT-based) vs. decentralized (through chiefs) allocation of subsidies in Malawi. Dupas and her coauthors ask the following questions:

To what extent does the poor performance of local authorities in the aggregate come from inefficient allocation of resources or subsidies? How well do chiefs target? Could a centralized (PMT-based) system do better?

In Malawi, like in many other African countries, chiefs play an important role in allocating resources within local communities. There are advantages and disadvantages of letting the chiefs assign the subsidies instead of the government. PMT-based systems assign subsidies based on asset owned by individuals/families, but asset is a poor predictor for consumption levels of the poor, and the latter is a much more reasonable measure of poverty. Chiefs, on the other hand, are likely to have more local information, especially regarding the relative characteristics of the households within the community. Therefore, they might do a better job assigning the subsidies to targeted beneficiaries. However, chiefs might also favor their kins and dampen the intended equalizing effects of the subsidies.

The authors assess the efficiency of subsidy allocation along two margins: poverty targeting and productivity efficiency. The former is giving subsidies to people who are eligible based on their consumption of perishable food, while the latter assigns subsidies to people where the returns are the highest. If chiefs know that there will be income pooling between community members after subsidies are put to use, they will have more incentive to allocate subsidies to the most productive households in order to maximize efficiency. Such an outcome will also be more likely the more heterogeneity there exists in productivity.

Dupas showed us the error rates of three systems of subsidy allocation: a hypothetical PMT-based system, an allocation through chiefs, and a random allocation. There are two types of errors: type I error where an eligible individual is not given a subsidy, and type II error where an ineligible individual is given one. Surprisingly, chiefs seem to do as well as a PMT-based system at identifying the targeted beneficiaries.

How to incorporate productivity and equality considerations into the decision process of the chiefs? The authors proposed a general framework where the chief maximizes a weighted sum of households’ benefits from the subsidy (in terms of expected additional profit) within the community. They divide households into different classes based on their relationship with the chief, poverty status, and returns to the subsidy. The relative weights of the chief towards different classes can be recovered through comparing the allocation patterns of food versus input subsidy, with the assumption that the former doesn’t involve productivity considerations while the latter does.

Although the question they are investigating is interesting and important, I wish the speaker were clearer about what alternative allocation systems could generate similar effects as allocating through the chiefs. In particular, if the only advantage of the chief relative to a centralized agency is that he (or she, in the rare case) has updated local information, would it be possible to create a self-monitoring system within the community such that people divide the subsidy optimally among themselves? Another related concern is that the chief is likely to base their judgment on self-reported characteristics of the household when allocating resources. If they don’t observe the true productivity of households in the community, how might that affect the findings about their productivity efficiency consideration? I look forward to reading their paper when it comes out.

Cultivating loving kindness through meditation (2)

The topic for discussion today at the Buddhist meditation meeting is loving kindness towards a difficult person.

We have all encountered difficult people in our lives. However, it is worth noticing that the difficult people might not be as “bad” as we think they are. They might have different perspectives and lifestyles from ours, or they might make misguided decisions even under good intentions. Moreover, they might be undergoing suffering themselves, and this suffering shows up in their lack of understanding towards others.

It is easier to extend our loving kindness to these difficult people once we extends the space of our heart. If you add a spoon of salt into a glass of water, the water will taste very salty. However, if add the same amount of salt into a lake, the saltiness will be washed away. Just like the capacity of the lake is able to dilute saltiness, we will be able to dilute the bitterness from interacting with difficult people by extending our empathy towards them.

Developing loving kindness for a difficult person is straight forward in meditation practice. Following the previous procedure, after we extend loving kindness to the neutral person, we pick a difficult person and think about he/she in a context where he/she is happy or have done something good to others. Then we try our best to wish them happy, safe, healthy, and be at peace. The next step of all human beings follows directly.

The topic for next week is forgiveness through loving kindness meditation.