Most must have seen it. In case not this is a good read by Josh Fischman on state of neuroeconomics (HT: mankiw’s blog). As you go through the article you can relate neuroeconomics what happened to beh eco when it started..
Archive for November, 2012
How is neuroeconomics faring?
November 20, 2012Does IKEA follow law of one price?
November 20, 2012A very interesting paper on Swedish Home Furniture Multinational – IKEA (The paper informs the comoany is actually based out of Netherlands because of tax benefits but still maintains its Swedish identity!). It is making a lot of news in India lately as govt has allowed 100% FDI in single brand retail.
The paper looks at the various decisions IKEA makes with respect to its products and prices of products. Being a multinational there are plenty of decisions to make:
Indian political system like USSR’s?
November 19, 2012I missed this interesting comment by Prof Jagdish Bhagwati in ET.
He compares current Indian political system to that in former Soviet Union. In both head of government is just a figurehead and head of party rules:
Political scientists your time is now..
November 19, 2012A nice column by John Fitzgibbon a lecturer in Politics and International Relations at Canterbury Christ Church University.
He rightly says political scientists should wake up and make their statement. We are in a world where understanding politics is critical to figuring what is happening around the world:
How Netanyahu Went from Idealism to Pragmatism on Economic Policy..
November 19, 2012A nice article on how Benjamin Netanyahu Israel’s PM tried to steer the economy.
In 2009, when he was made the PM few expected his govt to last:
How Alex Ferguson managed Manchester United..
November 19, 2012HBS Profs. Anita Elberse and Thomas Dye have prepared a case of the great football manager. HBSWK discusses the case with the authors.
What Wall Street Doesn’t Understand About International Trade ..(Importance of local neighborhood)
November 15, 2012An excellent summary of a paper which shows how local neighborhood and immigration roots matter more for international trade than anything else. The paper is here.
Making the best international trading decisions may be as easy as taking a stroll around the local neighborhood.
A recent research paper states that it’s possible to predict whether a US firm will trade with any given country by studying the ethnic makeup of the nearby community, according to new research. What’s more, firms that correlate their international trading activity with the local ethnic community significantly outperform those that don’t—a fact that has escaped notice of financial analysts.
The findings could help Wall Street make better earnings performance forecasts, according to the authors of Channels of Influence, by Harvard Business School Associate Professors Lauren H. Cohen and Christopher J. Malloy, and Umit G. Gurun, an associate professor at the University of Texas at Dallas.
The authors run this terrific natural experiment to figure importance of ties in trade:
Establishing scientific proof required a situation in which the team could exogenously change the ethnic population of metropolitan areas near firms. The legality and feasibility of such an experiment seemed unlikely from a human rights perspective.
However, the researchers decided to focus on a specific period in US history in 1942, following the Japanese attack on Pearl Harbor, when the United States forced more than a 100,000 Japanese Americans to relocate from their homes on the Pacific coast to internment camps in other parts of the country. Not knowing how long the internment would last, many of the internees hurriedly sold their houses and assets before leaving. And so, when they were freed a few years later, many no longer had homes. Others tried to return to the West Coast, only to find that they faced hostility and violence from their neighbors. As a result, after they were freed a few years later, many internees ended up resettling in the regions surrounding the internment camps—including Arizona, Arkansas, Idaho, Wyoming, and Utah. Thus, the Japanese American populations in these areas grew significantly and suddenly.
“The Japanese population in Arkansas in 1940 was literally 3 people,” Cohen says. “With the internment camps, the government increased that population by almost 18,000. For sure, this was a huge exogenous shock.”
The researchers then looked solely at the international trading activity of firms located near the internment camps that were exogenously shocked with the increased Japanese population. They found that these firms traded significantly more with Japan, thus establishing the causal link between the exogenous population change and trade decisions. When additionally examining only those firms formed before 1946 (when the internment camps were evacuated), they found similarly large impacts on trade with Japan. “We can link the causal effect from the immigrants to the firm trade decisions, even 60 years later,” Cohen says.
Superb…
Historically, Wall Street has failed to consider the local ethnic population trading strategy when assessing the value of a firm. In fact, the researchers found that analysts are significantly less accurate in their earnings forecasts on “strategic” trading firms than on non-strategic firms.
“With nearly 50 percent of sales being driven by overseas sales—and the surrounding population being a big driver of that activity—understanding this is crucial to understanding the value of a firm,” Cohen says.
We could actually see if we can draw similar experiences in India…Do firms trade more with firms which have affinity ties? Intuitively it sounds yes but empirically?
India’s growth reforms – Pro Business or Pro Market?
November 15, 2012Blogging has been absent for longer than I had thought. I would still remain away from discussions…Just point to some interesting links/papers..
Atul Kohli of Princeton gives India’s growth reform story a different twist..He looks whether India’s reforms were pro-market or pro-business. He says they were mostly pro-business and govt tried to stimulate growth making policies favoring business interests..The distinction between pro-business and pro-market:
Whereas a pro-market strategy supports new entrants and consumers, a pro-business strategy mainly supports established producers [Rodrik and Subramanian 2004]. A pro-market strategy rests on the idea that free play of markets will lead to efficient allocation of resources, as well as promote competitiveness, hence boosting production and growth. This simple but venerable idea inspired the so-called “Washington consensus” on development during the 1980s and the 1990s [Williamson 1990].
The papers were written in 2006 in EPW and came in two parts- Part One which looks at 1980s and Part Two from 1990-05.
First part abstract:
Happy Diwali to all!
November 12, 2012Blogging has been absent thanks to the festival season in India…It is likely to be the case for a couple of more days..Plan to be back in a couple of days…
Wishing all the viewers and visitors of the blog a very happy diwali from mostlyeconomics…Have a great time!
Another review of Why Nations Fail…
November 8, 2012Well with a book like that and such authoritative authors, reviews to only grow.
Ross B. Emmett of Michigan State University writes a nice review of the book. He does not agree with few ideas regarding the book.
My review will capture three of my central problems with their argument. I begin with a methodological problem, which will bring me to a historical (and even anthropological/theological) problem, and then conclude with my niggling doubt about the authors’ concerns about inclusivity.
Not getting into discussing the review for lack of time..
Of Talk, Economics, Love and Innovation
November 8, 2012Nice different kind of paper by Ross B. Emmett.
He insists on importance of talking in considering human interaction which helps understand economics better:
How ebay reduces trade costs..
November 8, 2012Nice paper. The usual claim is globalization would lead to a borderless world. However, some papers showed distance thrived and people still traded more with neighbors..
In the 1990s advances in transportation and communication technologies led many commentators to believe that geographic distance between countries would soon no longer encumber international transactions (e.g. Cairncross 1997). Despite some anecdotal evidence in support of the \death of distance” hypothesis (e.g. Friedman 2005), a large number of academic papers suggests that distance is \thriving”, not \dying”. Disdier and Head (2008), using a meta-analysis based on 1,000 gravity equations, found that the estimated coecient on distance has been slightly on the rise since 1950. Chaney (2011) argues that the need for direct interactions between trading partners, resulting from information frictions rst highlighted by Rauch (1999), explains why distance still matters for international trade today. Similarly, Allen (2011) suggests information frictions account for 93 percent of the distance e ffect. This would suggest that advances in technology in recent decades have failed to reduce information frictions. Is this the death knell for the “death of distance” hypothesis?
However research on ebay shows different findings:
In this paper we breathe new life into the \death of distance” hypothesis. We argue that the right place to look is in online markets which, as opposed to offline markets, make full use of technologies that can reduce information frictions. Indeed, as argued by Hortacsu et al. (2009) and Goldmanis et al. (2010), the main bene fit of the internet as a trade facilitator is to reduce search costs, and it is reasonable to think of online marketplaces as “frictionless” in this regard. Exporters no longer need to make multiple phone calls, send faxes, write emails, attend trade fairs and networking events. And while importers still incur some search costs, these are typically brought down to a simple internet search. In any event, online search costs are not necessarily correlated with how remote markets are.
The findings show:
Using a dataset on eBay cross-border transactions and comparable offnline trade flows, we estimated a distance eff ect on trade flows about 65 percent smaller online than offine. The largest distance reducing eff ects are observed where they are most needed, i.e., in countries which are little known, have corrupt governments, high levels of income inequality, little internet penetration and inefficient ports. This is promising in terms of the potential for technology to render trade more efficient and development friendly. Importantly, the welfare gains from the reduction in distance related trade costs are large. If information frictions offline were reduced to the level prevailing online, real income would increase by 29 percent on average
Interesting research application of ebay..
Remembering the first 9/11 (and Gandhi’s key ideas)…
November 7, 2012I was amazed to read this speech from Dr Ramachandra Guha. Not on economics though..
He compares the attack on WTC on 9/Sep/2001 with another event held on the same date in South Africa:
Thinking of coming to Canada to do an MA in Economics?..
November 7, 2012A nice post by Prof. Frances Woolley of Worthwhile Canadian Blog.
She give some ideas and tips to those who want to pursue MA in economics in Canada. In the comments she explains the difference in Canada MA vs US MA:
In the US, students go from BA to the PhD program, right?. An MA is a consolation prize they give you if you drop out of the PhD after a year or two, right? In Canada the MA is a real degree. You go from BA to MA, then some students continue on to the PhD.
Do Indian Voters Respond to Candidates with Criminal Charges?
November 7, 2012A nice paper and perhaps one of the many to follow given the general election in India in 2014. And we have plenty of action on criminal and scams front as well. They look at 2009 general elections for some answers
So do people penalise political candidates with criminal backgrounds?
It is the Politics Stupid!
November 6, 2012Here is a new research note from me…
Comments/suggestions are welcome..
Constitution making in action: The case of Iceland..
November 6, 2012Such articles are so interesting. Prof. Thorvaldur Gylfason of Univ of Iceland has been writing in voxeu on changes in Iceland’s constitution post crisis.
In his new piece he points how people in Iceland are participating in design of the constitution. He begins with an exciting thought:
How Fed policies post-crisis could have been better?
November 6, 2012A Fed official criticising the Fed policies post crisis. This is nothing new for Dan Thornton as he has been doing it for a while.
He divides the crisis in two phases. From Aug-07 to Lehman and Post-Lehman. As per him, Fed should have expanded its balance sheet in the first phase itself as signs of crisis were evident. This would have allowed Fed to be far more pre-emptive
I have argued that the Fed didn’t massively increase the monetary base in early 2008 when it should have but did following Lehman Brothers’ bankruptcy announcement because it had no choice, and also took steps to maintain the monetary base at the post-Lehman level rather than allowing the monetary base decline passively as it should have as financial market stabilized and the recession ended. Faced with unacceptably high unemployment and anemic economic growth, the FOMC tried to stimulate aggregate demand by attempting to reduce longer-term rates using forward guidance, QE, and Operation Twist.
The FOMC’s behavior was motivated by policymakers nearly religious faith in the EH, the fact that the Fed only make loans and investments or controls the federal funds rate either through open mouth operations or by engaging in large-scale open market operations, and the increased emphasis on “financial market frictions” to account for what some see as the apparent historical effectiveness of monetary policy. The last of these helps explain the FOMC’s failure to significantly increase the monetary base in early 2008. The first two account for the zero interest rate policy, QE, and Operation Twist.
The Fed’s response to the financial crisis would have been much better had policymakers taken the massive empirical rejections of the EH seriously, considered the fact that long-term Treasury yields were unresponsive to the 425 basis point increase in the federal funds rate target from June 2004 through June 2006, and believed, as I do, that real long-term rates are largely driven by economic fundamentals, such as the rate of economic growth and are therefore and are effectively independent of countercyclical monetary policy. Moreover, policymakers should take the Fisher equation seriously. If they did, they would realize that a zero nominal interest rate policy is inconsistent with 2 percent inflation and positive economic growth, i.e., a positive real long-run interest rate. While a zero nominal policy rate might be defensible for a relatively short period of time, it is totally indefensibly as a long-run policy
He says Fed has simply chosen to do something:
Finally, I believe that the FOMC’s extreme actions likely reflect Friedman’s (1970) suggestion of a central bank’s version of the natural human tendency to say, ‘For God’s sake, let’s do something,’ when faced by unpleasant developments. The action is its own reward, even if it has consequences that make the developments still more unpleasant.” Unfortunately, extreme actions can have negative consequences for growth and longer-run economic and financial market stability. The long-run economic consequences of such a policy are difficult to predict. However, such policies can have long-run consequences for the Federal Reserve monetary policy; namely, the loss of credibility and influence as the increasingly extreme policy actions generate smaller and perhaps worse outcomes (Wall Street Journal, 2012; Bank for International Settlements, 2012).
Strong critique of Fed policies..
Corruption and nexus in real estate and politics…Case of India
November 5, 2012An interesting paper by Devesh Kapur and Milan Vaishnav. The authors mentioned the paper in his Business Standard column recently. The nexus between real estate and politics has been known for a while in India. However, how to track it empirically?
The authors track the cement consumption by real estate companies to throw some light on the issue.
Acemoglu/Robinson on India and China puzzle…(reply to Arvind Subramanian)
November 5, 2012One should have expected a reply though was amazingly quick. I had pointed to Subramanian’s review of the development tome Why nations fail. In this Subramanian said India and CHina are a puzzle in this entire development exercise. India has inclusive political institutions but growth remains poor. China has extractive political institutions but has a superb growth record in the last 30 years. How does this fit in with WNF claims that inclusive political instis lead to economic development?
The authors have replied to the criticism.
Thoughtful reviews deserve some (hopefully equally thoughtful) responses. Subramanian is certainly right to draw attention to China and India. But perhaps his review is too brief to have done justice to our theory and its implications on these topics — so much so that he actually omits any mention of the extensive discussion of China and extractive growth in the book.
They start discussing China but I start from India. There have been couple of replies from the duo on China’s puzzle but nothing at all on India.
We go to pains in the book to emphasize that electoral democracy isn’t the same as inclusive political institutions. This becomes particularly binding when it comes to India. India has been democratic since its independence, but in the same way that regular elections since 1929 don’t make Mexico under PRI control an inclusive society, Congress-dominated democratic politics of India doesn’t make India inclusive. Perhaps it’s then no surprise that major economic reforms in India started when the Congress Party faced serious political competition. In fact, the quality of democracy in India remains very low.
Politics has not only been dominated by the Congress party but continues to be highly patrimonial, and as we have been discussing recently, this sort of patrimonialism militates against the provision of public goods. Recent research by Toke Aidt, Miriam Golden and Devesh Tiwari (“Incumbents and Criminals in the Indian National Legislature”) shows there are other very problematic aspects of the Indian democratic system: a quarter of the members of the Lok Sabha, the Indian legislature, have faced criminal charges, but alarmingly, such politicians are more likely to be re-elected than those without criminal charges, reflecting the fact that Indian democracy is far from being an inclusive ideal.
What’s more, blaming India’s poverty on its democratic recent past, as Subramanian seems to do, is probably more than a little unfair. After all, India has been growing since independence even if the growth rate was disappointing for the first three decades, and it seems to have largely stagnated during British colonialism as Tirthankar Roy shows in The Economic History of India, 1857-1947.
Superb stuff..What most have been saying for a while. Dejure inclusive institutions do not mean de fecto inclusive developments.
Moreover, why so little on India?
In contrast to China, there is much less in Why Nations Fail about India, mostly because of space limitations. Be that as it may, Subramanian’s summary that our theory suggests India should be prosperous isn’t quite right.
Hope there is a full book on India in future..
Now on China…
First, our theory isn’t that political institutions directly determine economic prosperity. Rather, we claim that economic institutions determine economic prosperity, and explain why the link is between inclusive economic institutions and sustained economic growth — not necessarily short-run economic growth. We then argue that inclusive economic institutions can only survive in the long run if they are supported by inclusive political institutions. On the way, we provide explanations and examples for why for extended periods of time economic institutions with fairly important inclusive elements can coexist with extractive political institutions. This is all brought together under our discussion of extractive growth under the auspices of extractive political institutions (see Chapter 5).
So China story is basically a result of inclusive economic institutions. This has led to higher growth. And where did these inclusive economic institutions emerge from? Well it is politics again and the perspective is very different:
We also noted, in contrast to the standard accounts of Chinese economic reforms, that these didn’t have their origins in some clever planning by Chinese leaders but in political struggles within the Politburo pitting Deng Xiaoping against the Gang of Four. It was once again politics — not clever planning, design or economic advice — driving economics. In fact, the recent thought-provoking book by Victor Nee and Sonja Opper,Capitalism from Below convincingly argues that early reforms were neither instituted by the party nor were they outcomes of experimentation, but resulted from the party catching up with what had been going on on the ground given the political vacuum and crisis wrought by the Cultural Revolution.
They point out that before Deng Xiaoping’s reforms, privately-led experiments with production for the market and ending collective incentives had started. For example, in Anhui province, peasant households had already dissolved communes and collectives before any reforms, and had started a land-lease system. They suggest it was this sort of development that forced the hand of Deng Xiaoping and Communist Party elites to start loosening of central planning and collectivization. Whether Nee and Opper’s interpretation is correct or not, what seems clear is that there was a radical change in economic institutions in China and most likely this resulted from a variety of political factors — rather than from Deng Xiaoping’s farsighted genius as the hagiographic biography of Deng, Deng Xiaoping, by Ezra Vogel suggests.
However for growth to be sustainable, there is a need for inclusive political institutions.
So when economic institutions take steps towards greater inclusivity — which has happened many times in history and is exactly what happened in China starting in 1978 — this can usher a rapid period of economic growth. Where political institutions come in is that inclusive economic institutions can emerge and encourage growth in the short run but cannot survive in the long run under extractive political institutions. It is for this reason that the rapid growth of China over the last three decades isn’t an exception to our theory. If China manages to continue to grow for several more decades and reach levels of income per capita comparable to those of the United States or Germany while still austerely authoritarian and politically extractive, that would be an exception to our theory. This is exactly what we argue in Chapter 15 as well as pointing out why the transition from extractive to more inclusive political institutions in China will be difficult.
People have question how China grew despite such extractive political instis, AR duo say wait for some more years. 30 years is not as long a time for sustained growth….
Even in this blogpost, focus remains on China 😦
Mostly Economics 
