Sunday, January 30, 2011

Anonymous Politicians

Don Boudreaux has an entertaining and interesting thought experiment about politics. Here's his conclusion:

My proposal, if adopted, would screen for truly public-spirited people to serve in elected office. When, say, 8ANJf9, proclaims his or her (we’ll not know the person’s sex) devotion to the greater good and the public weal, that proclamation will be believable.

Of course, adoption of my proposal is not without its downsides – but yet another hallmark of the economic way of thinking is to recognize the ubiquity of trade-offs.

All the tawdry ‘glory’ of elected office will be stripped away, so that such offices are no longer sought by fame-seeking megalomaniacs.

What is most interesting about his "proposal" of an alternative system of politics is subtle. It is an absurd proposal to make politics anonymous -- too absurd for most to take seriously -- but if we take the idea to its extreme, the thought experiment demonstrates how important fame, ego and establishing a legacy are to politicians as we know them.

On reading the post, I got to thinking about the role that ego and glory in politics plays if politicians care about leaving a legacy. From this perspective, ego can have an important positive role in political incentives. A politician concerned about how he'll be remembered wants to be remembered for doing good. On the flip side, enacting a lot of long-lasting bad policy has a larger cost to the politician if he cares about legacy. Both of these effects of ego-via-legacy will tend to push a politician toward better policy.

This is to say that assigning names to politicians' actions might be a good thing to the extent that good policy improves the politician's legacy (and it is even better if the politician cares a lot about that legacy). Of course, all this assumes that we eventually find out what policies the politician is responsible for enacting (and what are their effects). Politicians who can anonymously enact some policies, yet lay claim to others for legacy's sake, aren't ideal either.

Thursday, January 27, 2011

Economics and Freedom

This passage from Ed Glaeser struck a chord with me:

But then we turn to welfare, and that’s where we make our great leap.

Improvements in welfare occur when there are improvements in utility, and those occur only when an individual gets an option that wasn’t previously available. We typically prove that someone’s welfare has increased when the person has an increased set of choices.

When we make that assumption (which is hotly contested by some people, especially psychologists), we essentially assume that the fundamental objective of public policy is to increase freedom of choice.

Our opponents have every right to contend that economists are unwisely idolizing liberty, but they err by saying we sail without a moral North Star.

The rest of the article is worth a read as well. It is an elegant and eloquent statement of one of the foundations of the microeconomics of welfare analysis.

Sunday, January 23, 2011

People will line up for this one

If people in capitalist countries can grow up playing Monopoly, can people in communist countries grow up playing Queue? Now they can (HT: Tyler Cowen):
It's not quite the perfect fit - the ultimate capitalist board game and left-wing politics - but the creators of the new communist version of Monopoly, Queue, think it could be a big hit.
The game is supposed to teach people "what queuing is like." If it takes a long time to finish a game of Monopoly, I wonder how long it will take to finish a game of Queue. I can hardly wait.

Wednesday, January 19, 2011

Is this a bad title for this post?

According Jeff Ely, it is bad, but not as bad as "Titles: Referring You to a Post on How to Signal Your Seminal Contribution."

The absolute worst thing you can do with your title is to insert a colon into it. (quiet down beavis!) As in, Torture: A Model of Dynamic Commitment Problems. Or Kludged: Asymptotically Inefficient Evolution. In the first case you have just ruined a seminal-signaling one-word title by adding spurious specificity. In the second, you just took an intriguing one-world title and turned it into a yawner.

The second worst kind of title is the question mark title. ”Is the Folk Theorem Robust?” This says to the reader: ”You picked this up because you want to know if the folk theorem is robust. Well, if I knew the answer to that I would have told you right away in the title. But look, all I could do is repeat the question, so you can safely assume that you won’t find the answer in this paper.”

By the way, I love that Ely's seminal blog post on this topic is entitled "Titles." Way to demonstrate by example.

Monday, January 17, 2011

Math Review of Econometrics

To prep for giving an honors econometrics course in the spring quarter, I have been recording math-stat "review" videos and posting these to my YouTube channel. I'm planning to use the videos to focus the course meetings on discussions of econometrics rather than statistics and probability.

In case you are curious, this playlist reviews concepts from probability, random variables, expectation, variance, covariance, conditional expectation, random sampling and convergence in probability (weak law of large numbers) in about an hour and 20 minutes.

As the pace is rather fast, this playlist isn't ideal to learn these topics for the first time, but you may find it to be a helpful review (or supplement to your own econometrics, probability or math-stat courses):

On a separate note, I learned how to embed an entire YouTube playlist (rather than one video at a time). The video box in this post has all of the math-stat review videos I have recorded in sequence.

Thursday, January 13, 2011

Subgame Perfect? Not bad.

Here's a nice tutorial on backward induction from one of the YouTube channels I follow.


The only low point in the video for me is where he says something to the effect of "don't do this or you'll lose needless points." That's true, but the essence of the video is that outcomes aren't equilibria. Students should lose points if they miss that point.

Wednesday, January 12, 2011

Opportunity and Inequality

Greg Mankiw picked up on this topic with a response to an interesting Paul Krugman blog post on economics and morality. Here's the key passage from Mankiw:
According to this study (which I found thanks to a pointer by Paul Krugman), the elasticity of son's income with respect to father's income is about 0.5 in the United States. How do you interpret this fact?

Some people might be tempted to see it as evidence against equality of opportunity. After all, it shows that it matters where you started. Rich parents can buy better schools, expensive tutors, fancy summer camps, and all sort of other great stuff for their kids. How fair is that?

But what strikes me about that 0.5 number is not how large it is but how small it is. As I understand it, that 0.5 estimate is roughly the correlation between father and son income. That means that the percentage of variance of son's income explained by father's income--that is, R-squared--is only 0.25. This last number is sometimes called the "heritability" of a characteristic.


The bottom line: In light of the heritability of talent, it would be shocking if we did not find some significant heritability of income. And that would be true even if equality of opportunity were perfect.
Here's Krugman from his original post:
Now, inequality of opportunity is only one reason for the inequality in outcomes we actually see. But of what remains, how much reflects individual effort, how much reflects talent, and how much sheer luck?
These questions are worth pondering, and both Mankiw's and Krugman's full posts are worth a read. For some related pondering, here's a link to Heckman's initiative on human potential. There is a lot of related research on this topic, but that's a readable starting point.

Monday, January 10, 2011

Muffin Cutting and The Power of the Knife

Every day, I eat half of a Costco muffin for breakfast (and so does my wife). She gets up earlier than I do, and for this reason, she gets to decide on how the muffin is divided. By the time I go to eat my half muffin, she has already begun eating her "half." Aside from cutting my own muffin, the only choice I have is to accept the sliver she left me.

This is a modification of what is known as the ultimatum game: Given a cake (or muffin), one player decides on how to divide it. The other accepts or rejects.

In the standard ultimatum game, both get none of the muffin if the second rejects. Rejection is an off-the-equilibrium path threat that is not credible. After all, more is better (or assumed to be), so just a crumb from the muffin will be enough to prevent the second player from rejecting the deal. If this is how our muffin game worked, my wife should leave just a crumb.

There are a couple of important differences between the muffin-cutting game and the ultimatum game. First, my wife gets to eat her share regardless of my decision, so saying "I reject this half muffin" has no bite because she'll just eat what she cut anyway.

Second and more importantly, our daily muffin-cutting game is a dynamic game. If I reject the half muffin today, she'll have to eat what she meant to leave for me tomorrow. Moreover, rejection of the deal means that I get the power of the knife tomorrow, and I get to keep that power as long as my division of the muffin is accepted by my wife.

This dynamic aspect of our muffin-cutting game keeps the power of the knife in check. The knife cannot cut too deep because that will leave too great of an incentive to take the knife away.

Our daily muffin-cutting routine has gone on for about four months, and I have only had to reject a couple of times to make sure I get my fair share of the muffin. Almost always, I end up getting (almost) half of the muffin and I don't have to do the cutting. In equilibrium, she gets a little more than half of the delicious muffin, and I don't have to cut it in half. It's a good deal for both of us.

Wednesday, January 5, 2011

Should I return to face the music? What about now?

A friend of mine e-mailed me a link to this article on the Ohio State Inkgate suspensions. Here's the quote he forwarded:
Tressel said he impressed the seriousness of the suspensions on the five players by threatening to leave them back in Columbus unless each promised to return next season and face the music. Pryor repeated his intention to do just that seconds after the game, saying, "We made dumb mistakes two years ago, the NCAA had to do their job.
My response? "Interesting. I wonder if Tressel understands subgame perfect Nash equilibrium. Time will tell."

Before the game, the players had every interest to promise to return next season. After the game is over, however, Tressel can only use good old-fashioned guilt to sway the players' decisions. To rephrase my response to my friend, is the guilt enough to keep them from going back on their promise? Time will tell.

Sunday, January 2, 2011

From valuing teachers to firing the bad ones

In an excellent column in today's New York Times, Greg Mankiw says:
Educational reform, therefore, should be a high priority. To be sure, this is easier said than done. But research suggests that one key is getting rid of bad teachers. In a recent study, the economist Eric Hanushek says that “replacing the bottom 5 to 8 percent of teachers with average teachers could move the U.S. near the top of international math and science rankings.”
Because the title of the study is "The Economic Value of Higher Teaching Quality," I wondered if that was the policy Hanushek meant to hit headlines. Maybe he meant this sentence to merely provide context for his estimates, rather than be a full-blown policy recommendation. I had to know, so I found his paper and read what he had to say.

Mankiw's phrasing is right. Hanushek does recommend firing the underperforming teachers, but he also has two other interesting policy recommendations. The first is paying teachers for better performance (but giving meaningful incentives, doing it better) and here's the author on the second:
But there are also other policies that are suggested by the economic aspects of teacher quality. Specifically, it is important to consider the significant interaction between teacher effectiveness and class size – since all of the impacts on individuals are magnified across entire classrooms. A simple conclusion from the estimates is that, even without eliminating any teachers, the most effective teachers should be assigned larger classes and the least effective should be assigned smaller classes. In that way, the aggregate impact of less effective teachers is lessened, and the more effective teachers are better utilized. Of course, any direct impacts of altered class size would be relevant, but the existing research makes it difficult to include that in any systematic manner. Further, the more effective teachers might react badly to having larger classes, which in turn require more work. Indeed anecdotal evidence suggests that schools may try to do the opposite. If pay is completely constrained, schools may reward the better teachers by giving them smaller classes. These concerns could be eliminated if teachers are paid a portion of their economic returns.
I only skimmed the paper, but it appears to be a thorough assessment of educational policy. It is balanced and it convinced me that a serious discussion of how to reward teacher quality is needed. What better way to start that discussion than to get some attention grabbing headlines?