Social Science

My 3rd-grade daughter had some interesting social science homework this week.  Classify each of the following statements as either a fact or an opinion. (The first two are easy warm-ups.)

1. As footwear, moccasins are better than sneakers.
2. There are Iroquois living in New York State today.
3. Many Native Americans were expert craftsmen.
4. The Native American diet was more nutritious than our own.
5. Europeans had no right to settle in North America.
6. Native Americans should be treated with great respect.

The answers are after the jump.  This is a public school. Still, be careful with your expectations about political correctness (and reverse political correctness.)

Your Ideas Please

I have a student who is in charge of Northwestern’s Undergraduate Economics Society and he is planning an event in the Spring.  They have some money and they want to organize an activity for their membership that will be fun and economics-oriented.  Think of this as an opportunity to design an experiment involving any number of students (up to hundreds of students), but it should be fun as well as educational.  I know that our readers will have some good ideas for them.  Please share them in the comments.

Bathing Bookies

Via The Sports Economist comes a report that Las Vegas bookmakers are seeing big losses on NFL games this year owing to the large number of very bad teams and the difficulty of getting the point spreads right.

The Golden Nugget sports book, for instance, opened with St. Louis getting 12.5 points (the half to help with ties). That way, if you bet the Rams and the actual game ended 21-10 Indy, you’d win the bet with a score of 22.5-21 St. Louis.

A betting line is fluid though and will correct itself as money pours in for the favorite or underdog. Despite the Rams getting all those points, at home no less, the money kept going to Indy. The line reacted by moving all the way to 14 points at kickoff.

Still 90% of the money was on the Colts at game time and the Colts won 42-6.  Perhaps the problem is that there is a large variance in the market’s estimate of the likely point spread.  The bookmaker has to make a good guess the first time becuase too much adjustment of the line allows arbitrage.  And a bad guess can be costly.

Birth Order and Behavior

Its easy to make up just-so stories to explain differences across siblings as being caused by birth-order.  This article casts doubt on the significance of birth order.

But we can ask the question of whether birth order should matter and in what ways.  Should natural selection imply systematic differences between older and younger siblings?  Here is one argument that it should.  Siblings “share genes” and as a consequence siblings have an evolutionary incentive to help each other.  Birth order creates an asymmetry in the ways that different siblings can help each other.  In particular, oldest siblings learn things first.  They are the first to experiment with different survival strategies.  The results of these experiments benefit all of the younger siblings.  (Am I a good hunter?  If so, my siblings are likely to be good hunters too.) Younger siblings have less to offer their older siblings on this dimension.

As a result we should expect older siblings to be more experimental than their younger siblings and more experimental than only children.

Here is evidence that older siblings have more years of education than younger siblings and more years of education than only children.

More on University of California Furloughs

The link I posted previously was somewhat outdated as it mentioned only that furloughs were under consideration.  As a part of the recent budget agreement, the UC furlough is now a done deal.  Here are some more recent stories.

I have heard that, system-wide, professors will take an 8% cut in pay.  The word “furlough” usually means something like a temporary layoff.  Here it means that workers will have shorter hours and commensurately lower pay.  For example, UC non-faculty staff will have a few days off each month.

What are the marginal hours where Professors will be furloughed?  Saturdays.  That is, no classes will be cut, all administrative duties remain intact, pay is cut 8%.  Presumably this means that my colleagues in UC system will be doing 8% more surfing the web when they are not in the classroom.

My Intermediate Micro Course: Markets

In the last lecture we demonstrated that there was no way to efficiently provide public goods, whether via a market or any other institution.  Now we turn to private goods.

We start with a very simple example: bilateral trade.  A seller holds an object that is valued by a potential buyer.  We want to know how to bring about efficient trade:   the seller sells the object to the buyer if, and only if, the buyer’s willingness to pay exceeds the seller’s.

We first analyze the problem using the Vickrey-Clarke-Groves Mechanism.  We see that the VCG mechanism, while efficient, is not feasible because it would require a payment scheme which results in a deficit:  the buyer pays less than the seller should receive.

Then, following the lines of the public goods problem from the previous lecture we show that in fact there is no mechanism for efficient trade. This is the dominant strategy version of the Myerson-Satterthwaite theorem. In fact, we show that the best mechanism among all dominant-strategy incentive compatible and budget balanced mechanisms (i.e. the second-best mechanism) takes a very simple form.  There is a price fixed in advance and the buyer and seller simply announce whether they are willing to trade at that price.

We see the first emergence of something like a market as the solution to the optimal design of a trading institution. We also see that markets are not automatically efficient even when there are no externalities, and goods are private.  There is a basic friction due to information and incentives that constrains the market.

Next we consider the effects of competition.  Our instincts tell us that if there are more buyers and more sellers, the inefficiency will be reduced.  By a series of arguments I show the first sense in which this is true.  There exists a mechanism which effectively makes sellers compete with one another to sell and buyers compete with one another to buy.  And this mechanism improves upon the fixed price mechanism because it enables the traders themselves to determine the most efficient price.  I call this the price discovery mechanism (it is really just a double auction.)

Finally, in one of the best moments of the class, what was previously some random plots of values and costs on the screen coalescees into supply and demand curves and we see how this price discovery mechanism is just another way of seeing a competitive market.  This is the second look at how markets emerge from an analytical framework that did not presuppose the existence of markets at the beginning.

Here are the notes.

The Legal Profession Without Bar Examinations

At Volokh Conspiracy, Ilya Somin writes:

This week, many of my former students will be undergoing the painful experience of taking the Virginia bar exam. My general view on bar exams is that they should be abolished, or at least that you should not be required to pass one in order to practice law. If passing the exam really is an indication of superior or at least adequate legal skills, then clients will choose to hire lawyers who have passed the exam even if passage isn’t required to be a member of the bar. Even if a mandatory bar exam really is necessary, it certainly should not be administered by state bar associations, which have an obvious interest in reducing the number of people who are allowed to join the profession, so as to minimize competition for their existing members.

What changes would we see if it was no longer necessary to pass the bar in order to practice law?  We can analyze this in two steps.  First, hold everything else about the bar exam fixed and ask how the market will react to making it voluntary.

The first effect would be to encourage more entry into the profession.  Going to law school is not as much of a risk if you know that failing the bar is not fatal.  There would be massive entry into specialized law education.  Rather than go to a full-fledged law school, many would take a few practical courses focused on a few services.  Traditional law schools would respond by becoming even more academic and removed from practice.

Eventually the bar will be taken only by high-level lawyers who work in novel areas and whose services require more creativity and less paper pushing.  But the bar will no longer be the binding entry barrier to these areas.  The economic rationale for the entry barrier is to create rents for practicing lawyers so that they have something to lose.  This keeps them honest and makes their clients trust them.

Now reputation will provide these rents. Law firms, even moreso than now, will consist of a few generalist partners who embody all of the reputation of the firm and then an army of worker-attorneys.  All of the rents will go to the partners.  The current path of associate-promoted-to-partner will be restricted to only a very small number of elites.

As a result of all this, competition actually decreases at the high end.

All of these changes will alter the economics of the bar exam itself.  Since the bar is no longer the binding entry barrier, bar associations become essentially for-profit certification intermediaries.   This pushes them either in the direction of becoming more selective, extracting from further increases in rents at the high end or less selective and becoming effectively a driver’s license that everyone passes (and pays a nominal fee.)  Which direction is optimal depends on elasticities.  Probably they will offer separate high-end and low-end exams.

My bottom line is that banning the bar increases welfare but perhaps for different reasons than Somin has in mind.  Routine services will become more competitive and this is good.  Increased concentration at the high end is probably also good because market power means less output and for the kinds of lawyering they do, reduced output is welfare-improving.

Micro-Lending for the Not-Well-Heeled-Enough

This is not one of those arrangements where donors can sponsor a needy child or a sorghum farmer in the developing world. The person asking for help is a 21-year-old neurobiology major at Harvard, and she is requesting a loan from Harvard alumni.

The service, Unithrive, resembles micro-lending in a number of ways (except perhaps the sticker.)

Unithrive, which made its debut last month, matches alumni lenders and cash-strapped students, who post photographs and biographical information and can request up to $2,000. The loans are interest-free and payable within five years of graduation.

See the article in the New York Times.

Is Higher Education a Bubble?

We used to be in denial that there were any bubbles, now everything is a bubble.   This article in the Chronicle of Higher Education sounds the alarm on higher education (tassle twirl:  lone gunman.)

Is it possible that higher education might be the next bubble to burst? Some early warnings suggest that it could be.

With tuitions, fees, and room and board at dozens of colleges now reaching $50,000 a year, the ability to sustain private higher education for all but the very well-heeled is questionable. According to the National Center for Public Policy and Higher Education, over the past 25 years, average college tuition and fees have risen by 440 percent — more than four times the rate of inflation and almost twice the rate of medical care. Patrick M. Callan, the center’s president, has warned that low-income students will find college unaffordable.

Meanwhile, the middle class, which has paid for higher education in the past mainly by taking out loans, may now be precluded from doing so as the private student-loan market has all but dried up.

The analogy to the housing bubble is certainly tempting.  Pell grants and Stafford Loans are to Colleges what Fannie and Freddie are to housing.  It is undeniable that easy access to credit fueled rises in tuition.  It is not a stretch to think of these loan programs as essentially subsidies to Universities as they raise tuition dollar for every dollar of loans that are essentially forgiven.

But the analogy doesn’t go any farther than that.  There is no speculation fueling demand for higher education.  There is a permanent and measurable difference in earnings for college graduates.  There will continue to be a robust market for credit to students because, to borrow a phrase, consumption wants to be smoothed.  And unlike subsidized loans for housing, there is a real externality that justifies continued federal presence in the student loan market.

B School vs. Econ Dept economists

Greg Mankiw thinks B-School economists are “practical” and “empirical” while Econ Dept economists are free to be abstract and theoretical.

I don’t think this is true for the research done by economists differs across these two types of schools but it is true that the teaching is different.  The MEDS Dept at Kellogg where I work is somewhat different from other business schools as it  has always been very theory focused.  The Econ group at Stanford GSB is similar.  Some of the best work in game theory, contract theory and decision theory came out of these departments.

It is the case, as Mankiw says, that teaching has to be practical and useful in a  B School.  Whether that drives research or not depends on the philosophy of the school.  I have never felt any pressure for my research to be practical.

Mankiw writes his post to answer David Brooks’s query about why B School economists are giving him better answers about the current state of the economy.  As finance is a B School specialty, it very natural that B schools profs may know more about what a CDS is without having to look it up on Wikipedia! But again, finance economists are not more “practical” or “empirical” than econ dept economists.  I bet Doug Diamond and Milt Harris at Chicago GSB have really perceptive things to say about the financial crisis as has Oliver Hart at Harvard Econ.  They will use simple, clear models (hopefully!), to explain their ideas about how to fix incentives in the financial sector.    And then maybe somone will give a little theory a chance as much as data analysis!

Why Are The Ivies So Bad at Sports?

Here is an interesting article about the history of the Ivy league and the member Universities’ attitudes toward sport.

The Ivy is never going to be the Southeastern Conference—and nobody is suggesting it should be. The schools don’t need the exposure of sports to attract students and alumni donations. But some of the league’s alumni complain that the schools offer their students the best of everything, except in this one area. “Why not give them the same opportunities and the same platform in athletics that you do in academics?” says Marcellus Wiley, a former NFL defensive end who played at Columbia in the 1990s. “I think they should revisit everything.”

If we take the objective to be maintaining reputation and attracting donations then there is a broader question.  Why is the  concentration among schools which compete on academic excellence so much higher than among those that compete on athletics?  Competition for dominance in sport appears to be  more costly and occurs at a higher frequency that the competition for academic excellence.  Some possible reasons:

1. There is more variance in academic talent than in talent in sports.  Thus the top end is thinner and the market is smaller.
2. There is more continuity in academic strength purely because of numbers.  A bad recruiting class for the basketball team a few years in a row and you are back to square one.  A freshman class at Harvard is large enough that variations wash out.
3. It is easier to throw money at sport.  One coach makes the whole program.  Assessing the talent of faculty and attracting it with money is more complicated.  And maybe irrelevant.

I would like to believe 1 but I don’t.  I would like not to believe 3 but its hard. I do believe 2.

Useful Math?

A post at Language Log explores the use of mathematics in linguistics.  It closes with

Anyhow, my conclusion is that anyone interested in the rational investigation of language ought to learn at least a certain minimum amount of mathematics.

Unfortunately, the current mathematical curriculum (at least in American colleges and universities) is not very helpful in accomplishing this — and in this respect everyone else is just as badly served as linguists are — because it mostly teaches thing that people don’t really need to know, like calculus, while leaving out almost all of the things that they will really be able to use. (In this respect, the role of college calculus seems to me rather like the role of Latin and Greek in 19th-century education:  it’s almost entirely useless to most of the students who are forced to learn it, and its main function is as a social and intellectual gatekeeper, passing through just those students who are willing and able to learn to perform a prescribed set of complex and meaningless rituals.)

Before getting into economics and after getting out of physics, I took calculus and found it very useful and interesting for its own sake.  I do see that the way calculus is taught in the US is geared toward engineers and physicists, but I have a hard time thinking of what mathematics would substitute for calculus in the undergraduate curriculum if the goal was to teach students something useful.  It can’t be analysis or topology.  I took abstract algebra as an undergraduate and found it esoteric and boring.  Discrete mathematics?  OK maybe statistics, but don’t you need integration for that?  Help me out here, if you had the choice, what would you replace calculus with? And remember the goal is to teach something useful.

Traffic School

I got two speeding tickets in less than one year.  I worked off the first one by taking an online course.  For the second one, they make you go to an 8 hours (!) course over two nights.  The only course that fit my schedule was in Rolling Meadows.  Just like Old Orchard in Skokie, there may have been farmland there a while ago but there are no rolling meadows now.

It’s obvious that the punishment in terms of wasted time is harsh so that you do not speed again.  Your first thought is whether you can persuade the teacher to let you go early.  This desire was very strong on Thursday night when the Bulls were playing the Celtics in Game 6 of their best of seven series.  The class took place in the basement of a courthouse and it turns out the police monitor the teacher to make sure he does not let the class off early.  Of course the teacher would love to go home early too so the incentives for renegotiation are huge.  The police have to stay anyway so they enforce the rules.

So I was stuck in the class but I kind of enjoyed it because I got to meet people I do not meet everyday otherwise.  I also got lots of information that I would not gotten in my normal interactions.

The hippie woman:  “I got a ticket because I gave a ride to a Jamaican guy who turned to be a homeless  ex-convict.  I got a speeding ticket when I got scared driving him to his shelter.”

The hippie girl: “When I have fatigue, I do yoga to wake up before I drive”

The truck driver: “Go to White Castle before you drink.  The grease soaks up the beer.”

The Comcast guy:  “Ritalin is like cocaine if you don’t have ADD.  I’m taking Ritalin now so I can sit in this class without going crazy.”

Lucca, the waiter: “The strip clubs in Indiana are better than the strip clubs in Chicago.  The Indiana girls are nicer and they want dates.  Always go to a ranch style strip club.”

I’m not sure how the last comment was related to the class.

Unraveling

The NBA will not draft players who are under 19 or who are not at least one year past high school graduation.  Most players opt for at least one year of NCAA basketball where they are unpaid and (at least nominally) full-time students.  The first step toward the unraveling of this system has occurred as Jeremy Tyler has left San Diego High School and will skip his senior year to play professional basketball in Europe.  After two years he will be eligible for the NBA draft at which point he is a likely number 1 pick.

“It’s significant because it shows the curiosity for the American player just refusing to accept what he’s told he has to do,” Vaccaro said. “We’re getting closer to the European reality of a professional at a young age. Basically, Jeremy Tyler is saying, ‘Why do I have to go to high school?’ ”

Tenure is Obsolete?

That’s the position of an editorialist writing in the Washington Post.  The author is a tenured professor so this is not an attack from the outside.  He argues that tenure continues to be an important safeguard of academic freedom but that

…the system has turned the academy into one of the most conservative and costly institutions in the country. Yes, conservative: Economists joke that their discipline advances one funeral at a time, but many fields must wait for wholesale generational turnover before new approaches take hold.

The system also hamstrings younger untenured professors, making them fearful of taking intellectual risks and causing them to write in jargon aimed only at those in their narrow subdiscipline: Thus in economics, people have “utility functions” instead of needs and wants.

Tenure is indeed important for academic freedom.  I have seen a few cases in which tenure insulated from public pressure academics who expressed controversial views.  However, in my opinion this is a small part of the benefit of the tenure system and in fact the editorial has it backward.

It is true that academia is conservative.  But by merely observing that

1. We have tenure
2. We are conservative

it does not follow that 1 implies 2.  Without tenure it would be even worse.  Basic research occurs in universities because there is a missing market:  it is too difficult to guage its benefits in the short-run.  This is often true even for insiders within the field, let alone outsiders who would make hiring, firing,  and promotion decisions based on published research.  Without a good measure of successful research, these decisions would be based on litigatable bright-line criteria which would create greater distortions in research than tenure has.  Witness that a professor of political economy would judge economists for using “utility functions.”

Indeed, the author makes exactly my point with the example of untenured professors. Only untenured professors face the prospect of having their research evaluated for promotion.  They understand very well the incentives this creates.  Unfortunately there must be one such evaluation period.  Tenure ensures that there is at most one, and that it is as short as possible.

Paying for Grades

The NY Times reports on some preliminary results from one of Roland Fryer’s field experiments in which students are rewarded with cash for high AP test scores.

Results from the first year of the A.P. program in New York showed that test scores were flat but that more students were taking the tests, said Edward Rodriguez, the program’s executive director.

Fabio Rojas at Orgtheory.net, interprets this as saying that the incentive didn’t work.

The question is simple: does paying kids improve performance? As I mentioned yesterday, the preliminary evidence is that children are more likely to participate in the test, but they are not more likely to get better grades.

I think he has jumped to his conclusion.  If more students take the test, then we are drawing in the marginal students whose baseline test scores would be lower than average and would bring therefore bring the average down.  Since the average did not go down that means that performance by infra-marginal students (and probably even the marginal students) improved.