Sep 30, 2009

Crickonomics!

With the ICC Champions Trophy entering the last-four stage, and Australia winning against Pakistan after a last-ball thriller – I’m running a high cricket fever! While growing up in my country, like every other kid my age, my dream was to become a cricketer (like Wasim Akram or Brian Lara), but as time progressed, and after the school cricket coach failed to realize my immense cricketing talents, I realized that I was better at another sport called Economics! Cricketers are “like derivative traders or rock musicians or authors. They are a small group of people who have an exceptional chosen talent”

Edward Lazear and Sherwin Rosen, who did an in-depth analysis of tournament theory, show how small differences in abilities (or luck) can result in a large difference in players’ pay-check. “A salesman who can sell 10% more than his peers in a company is likely to get paid 10% more. On the other hand, a batsman with a 10% faster-than-average response to a ball traveling towards his throat at 100 miles per hour is likely to end up earning 100 times more than the average cricketer.” Complete article here.

A cricketer cannot make his mark at the highest level unless he is selected in the national team, unlike football where playing in the EPL or La Liga (or the LA Galaxy for some!) might be the ultimate goal of some, or a Canadian hockey player might as well get a chance to be drafted in the NHL if not Team Canada, or a Japanese batter in the MLB etc. There are a whole host of choices in these team sports (in terms of monetary gains), but not in cricket. Yes, we now have the Indian Premier League (IPL), but that is an event which is wrapped up within 6 weeks in a given year, and there are stark intra-team differences in the salaries paid to players within the IPL – as most of it goes to the players who have already been playing for their respective national sides for quite some while. Playing for English or an Australian country, might help a cricketer earn more than what he earns while playing for his national side, but the difference in remuneration isn’t much when compared to other team sports (and English counties have a cap on selection of overseas players). So in the cricketing labor market, there is only one buyer of your talent, and that is the National team selection committee – a situation we would like to call Monopsony. But this is what makes cricket interesting – you do everything for the love of the sport, even if that entails having a no-result after a five-day test match!

Sep 29, 2009

Goodbye to 1 grosz...

The Polish National Bank (NBP) wants to withdraw from the market in 2 years one and 2 grosz coins (lowest nominal value, equivalent to 1 cent/penny/etc...). According to the Bank, the consumer will not be harmed since, while some prices will be rounded down, others will be rounded up. Marketing specialists, however, for whom a price of PLN 3.99 is a better selling line than PLN 4 due to consumers' framing schema of interpretation, have already started to show concern. Such "price illusion promotions" are so common that the NBP could easily introduce a 0.99 coin.

Undoubtedly, some people will benefit from the change... history has seen many swindlers who made their fortunes on price rounding. For example, consider the famous example from Sweden. When pensions were readjusted to account for inflation, a post office accountant would round up all numbers after the second decimal place, and accumulate them on his private bank account. Moreover, the books didn't show anything, and there were no dissatisfied consumers, since the pensioners received precisely what they expected.

NBP states that last year it produced 172 million 2-grosz coins and 316 million 1-grosz coins, which translates into PLN 24,4 million taken out of the taxpayers' pockets. Not a small sum! However, for me even more puzzling is whether the substential demand for 1 and 2 grosz coins is in fact so largly due to marketing specialists. In March of last year, in an online forum I read about a group of amateur charlatans who wondered whether it pays to collect 1 and 2 grosz coins and sell them as scrap metal. Under the market prices, for 1 kilogram of 1-grosz coins (604 coins) they could earn PLN 4. Not too much, but maybe just enough to make a deal on the price difference...

Sep 27, 2009

geen go home!!! gringos vayanse a su casa

Here and here a paper with a nice identification strategy to show that US military bases in Colombia are causing more harm that help.

Opportunity costs of romantic evenings and IQ of babies

Couple of months ago we were talking with my girlfriend about the impact of season of your birth on your intelligence, and health. My theory was that less educated, poor people are more likely to conceive a child in the winter. Children born in fall and early winter underperform their peers simply because they are more likely to come from a family with low socioeconomic status.

Guess what, NBER published a paper "SEASON OF BIRTH AND LATER OUTCOMES: OLD QUESTIONS, NEW ANSWERS, 2008" that is supporting my theory. The sad thing is, that I am not the author of the paper, the cool thing is that they got it wrong (or so I believe)! They argue that less educated, poor man are more likely to be exposed to temperature extremes. Such exposure lowers their sperm count and they are less likely to conceive a child. Fine, but I think I have a more plausible explanation.

In my opinion the differences are caused by opportunity costs of making a baby. The less intelligent baby is likely to be conceived in december, january, february , and march. All of these are rather cold months.
In my opinion richer people have significantly wider choices of entertainment during the winter, but the gap narrows during the summer. In the summer you can hike, go to a park, sun bath, swim in the lake, jogg all of these without having to pay a single penny. What can you do for free in the winter? Virtually nothing! While the rich ones have wide range of possible pastimes in the winter (skiing, snowboarding, going to movies, going for a dinner and thousands more) and would have to give them in order to have a romantic evening, the poorer ones have way simpler choice: "Shall we watch TV or make love?". And this is what in my opinion drives the difference, opportunity costs of romantic evenings! On average smartest children are conceived in the months when the gap between opportunity costs of making a baby for a rich and poor are smallest. The least intelligent are conceived when the gap between the opportunity costs is the largest...

Sep 26, 2009

The Swiss menace

No, I’m not talking about the Geneva housing market, but am referring to one of the Op-Ed columns by Mr. Krugman on the American Health Care system in the NYT. This time though, it is ‘cheese’ and ‘health insurance’ we see in the same sentence. According to Krugman, there are three possible ways for an improvement in the US health system.

#1: The British way
#2 The Canadian way
#3 The Swiss way

Krugman says “.. the truth is that the plans on the table would, roughly speaking, turn America into Switzerland — which may be occupied by lederhosen-wearing holey-cheese eaters, but wasn’t a socialist hellhole the last time I looked.”

Two years ago, Michael O. Leavitt (US Health and Human Services Secretary) visited Switzerland and the Netherlands, since policymakers had been promoting a system with universal coverage but rely on the private sector. Ironically though, the Swiss health-care system is based on the “Managed care” which is a concept originating from the American health system. A Swiss system would further mean increased regulation to ensure universal coverage.

What if Obamacare is chosen by the US as the ‘right’ way to go, would it actually “Swissify America” as Krugman states? Would the American public be comfortable with the Swiss model, given that health costs in Switzerland have been rising more than 4%, and a country where insurance costs have been increasing at a higher rate than the general increase in price and GDP – yet health indicators far superior than the US!

The following graph shows the distribution in the cantons of the average monthly premiums for adults (older than 26 years) in CHF for 2005 - GE (Geneva) is right where it should be!




Was TARP Successful?

Just when we thought the crisis might be over, real questions are emerging as to whether the US Government's financial bailout has actually been successful. According to Neil Barofsky, the Inspector General in charge of the TARP program, the US financial system could very well be in a more dangerous place than it was pre - bailout.

How could this be, I hear you asking?

Consider the following facts. The US financial system is now dependent on fewer and bigger banks than before. Despite Treasury assertions that TARP money can't be tracked because 'money is fungible', detailed records concerning the use of TARP money kept by banks shows that much of it has been used to buy stakes in other banks, making the financial world more interdependent and more exposed to 'domino effects' than previously. Not only this, but TARP has failed in its originally stated aim of stimulating bank lending (since then, Treasury shifted the goalposts for measuring success of the program - to the goal of 'preventing systemic financial failure - such that it could be deemed a success).

So all in all, it is still an open question as to whether TARP was a success.......it's gonna be real interesting to see if this program has buttressed or weakened the long term security of the US financial system.

You can watch the full interview with Barofsky below:




A further interesting profile this guy can be found here. Also, for an excellent chronology of the crisis, checkout Bernanke's recent speech at Jackson Hole.

One more reason to respect deadlines

Here the result of a longitudinal study showing that:
Students who found reason to avoid work-related tasks at university, and who were pessimistic about their chances of success, were more likely, 10, 14 and 17 years later, to report feeling disengaged from their job, and were more likely to report experiencing work-related burnout.
Of course, those with higher work-ethic and more optimism were less likely to experience work related burnout. For those who are not aware of the syndrome,here, Wikipedia has a description of what is "Occupational burn-out" and who is more likely to suffer from it.

Sep 24, 2009

Milk Market crisis in Europe

Last Saturday I found out in the news of a dairy farmers protest in Plainpalais. Their target was Migros. Yesterday I kept reading about angry farmers dumping milk all over Europe (from the Netherlands to Spain). Why this waste? What is going on? The reason lies within three facets: distorted policy and the global economic crisis.

The dairy market is and has always been characterized by either restriction to production, or price support programs, or both. The effect of those systems is generally a a very price- inelastic supply curve, and a market price heavily influenced by demand fluctuations.
In the past years, due to several concurring factors, the price of milk increased rapidly, so rapidly (due to global higher demand) , that, for example, the EU decided to abolish their export subsidies, while allowing a gradual increase in production quotas. The combined effect would have been to bring prices closer to the "world market" level, and so to kick start a process of gradual liberalization of the dairy market. What happened in between, we know now, is the global crisis, which provoked an unprecedented drop in worldwide prices due to a collapse in demand. The situation is that, in sign of protest and to prevent the price from falling further, some farmers have decided to dump milk. At the same time, some of them blame the big distribution chains (like Migros in Switzerland) of starving them by imposing a market price which, they say, barely covers the cost of production.

Temporary solutions are being proposed to stop the protests, but the idea of the EU commissioner is to maintain the stated objective of gradual liberalization of the market by 2014. One option under study will be to improve on existing market based mechanism to prevent prices from fluctuating so heavily, like for example, strengthening the market for milk futures. Like to say, we need more market, less state intervention for this not to happen again.

Sep 23, 2009

Foreign aid, corruption and disciplined nonconformists

Dambisa Moyo, move over. The best book blasting foreign aid powerfully is Michela Wrong's. It's our turn to eat turns out to be much more than the story of John Githongo, the Kenyan anti-corruption crusader.
Through the book we are gripped by the suspense of John's hiding in London from dangerous Kenyan officials, we learn about Kenya's colonial history, we live the 2007 elections and burnin and lootin that followed, we get annoyed by the World Bank and the UK's DFID corruption and complicity, we get enraged at politicians (read hyenas) and we understand better how ethnicity can hurt Africa. All this written a la John Le Carre with a montage a la Pulp Fiction. No boring academic rhetroric here.
John blew the whistle on a grand corruption scandal and in the end nothing changed. With this one precise story, we learn more about the political economy of foreign aid and development than with any other title claiming the crown. Aid watch praised it, Chris Blattman not as much, I just loved it. If "the hope of a secure and liveable world lies with disciplined nonconformists" (MLK), my hope is in John.

They got this one RIGHT

I've read nice article by Akerlof and Romer: "Looting: The Economic Underworld of Bankruptcy for Profit, 1993." Where they describe how in the 80s financial institutions were looted by their shareholders on the expense of depositors (better: on the expense of state that guaranteed the deposits). It's scary how well the description of the 80s fits the Subprime crisis.

The looters then were owners/shareholders, the loot were (among other things) excessive dividends.
The mean to artificially inflate financial performance were (among other things) high risk construction project with very high interest rate. In the end, the government picked up the check.

The looters today were managers and the loot excessive bonuses...
The mean to artificially inflate financial performance were high risk mortgages with very high interest rate.
After the bubble bursted, the government picked up the check.

The last sentence of the paper says:
If we learn from experience, history need not repeat itself.

p.s. (In general, I agree with big bonuses in the financial industry. In certain cases - Freddie Mac and Fannie Mae the bonuses were in my opinion basically above described loot... )

Sep 22, 2009

Quotable Quotes

From my hometown newspaper concerning winners and losers from the crisis:

"(Economics is a) science that has disappeared up a mathematical dead end, couldn’t see the crisis coming, couldn’t explain it to anyone once it broke, and couldn’t come up with a way forward after it happened."

"It will be a long time before economists are listened to again."

Sounds like we have a credibility problem with the general public.........

The full article is available here.

Sep 20, 2009

How rich is Greg Mankiw?

All economists "are starving artists in comparison to Harvard University’s Greg Mankiw, author of some of the best selling economics textbooks in the country... In 2005, when he stepped down as chairman of President Bush’s Council of Economic Advisers, Mr. Mankiw reported royalties of between $1 million and $5 million on one book alone: Principles of Economics, published by Thomson Learning. He reported between $100,000 and $1 million in royalties on his book Macroeconomics, published by Worth Publishers"

Other salary statistics here. Advising Central Banks seems pretty lucrative too.
ht: rb

Sep 18, 2009

Saliva trade in South Africa

When a government policy can be tricked it will and illegal markets will emerge. Here is great example.

"Tuberculosis sufferers in Khayelitsha, Cape Town, were found to be selling samples of their sputum to healthy people to pass off as their own in a scam to gain medical grants."

Buyers of the samples are "then able to get a card from a clinic indicating they have TB and use this to fraudulently obtain a temporary disability grant of R1,010 per month from the department of social development."

It is not greed, it's human nature.

ht. economix

Sep 17, 2009

The "Rockin Baron"

Here on the International Herald Tribune an interesting profile of Baron Karl-Theodor von und zu Guttenberg or simply Karl-Theodor zu Guttenberg (if you don't like titles), the current German Minister for Economics.

According to Wikipedia he is currently the most popular politician in Germany, and so an influential figure to determine the faith of Germany's federal cabinet on the election of September 27.

He is the "Rockin Baron" because of his passion for Rock Music (AC/DC in particular, pas mal!). He switched from being a Foreign Policy expert within the CSU, to the limelight as Economic Minister, gaining rapid popularity. Despite being an aristocrat, "he and his wife, Stephanie, a direct descendant of Otto von Bismarck, have embraced the 21st century, appearing in German gossip columns and transforming themselves from aristocrats to celebrities".

As the article suggests, he is enlivening a low-profile political campaign in Germany, More, he seem to offer a simple, but compelling recipe for Germany's economic future: simplify the tax system, reduce the regulatory burden, make it a freer economy. Simple, but solid as rock!

He got this one WRONG


Taken from the Amazon.com review of The New Era of Wealth (Brian Wesbury, 2002):

First, the good news: smart investors will continue to get rich. Brian S. Wesbury, an economist and respected economic forecaster, believes the trends that led to so much wealth creation in the last two decades of the 20th century--a boom in productivity from technological innovation, smaller government, and anti-inflationary U.S. Federal Reserve policies--will continue in the first two decades of the 21st century. As Wesbury sees it, people who worry about the soaring stock market leading to a repeat of 1929 are looking for the wrong bogeyman.

It's ironic, that in 2004 he was named by USA Today one of the top 10 economic forecasters. (By the way, when they say an economist, they mean he has a BA in economics...). Anyway, I am not judging the book as such, (I haven't read it yet - but in general I am a "bit" sceptical about investor's handbooks), I just think the review is funny or maybe ironic?

p.s. has anyone read it?

Sep 15, 2009

Bob Shiller

Here is a "must read" profile of the Yale professor who saw the crisis coming in house prices. It explains The Chart and his behavioral methods.
I particularly liked the idea of a "Rising Tide Tax System", where "tax rates would automatically adjust along with levels of income inequality. If the incomes of the middle class and the poor were growing at a faster pace than the incomes of the rich -- as happened during the 1950s and '60s -- tax rates on the rich would fall. But if the incomes of the rich were growing the fastest -- as has happened over most of the last 35 years -- their tax rates would rise."
The recent growing inequalities, he explains, have "made it harder for policy makers to take steps, such as removing trade barriers, that would lift the economy...The Rising Tide Tax System is meant to make people feel that the economy is fair, that they can trust the institutions around them, that they can have the confidence to take risks that, in the end, will benefit the larger economy."

Sep 14, 2009

"Tit for Tat" on Trade: US vs China

After the move by the US last Friday to levy tariffs on tires exported from China, now China retaliated with a countermove on US export of automotive parts and Chicken to China.
"The Chinese government’s strong countermove followed a weekend of nationalistic vitriol against the United States on Chinese Web sites in response to the tire tariff. “The U.S. is shameless!” said one posting, while another called on the Chinese government to sell all of its huge holdings of Treasury bonds.

The impact of the dispute extends well beyond tires, chickens and cars. Both governments are facing domestic pressure to take a tougher stand against the other on economic issues. But the trade battle increases political tensions between the two nations even as they try to work together to revive the global economy and combat mutual security threats, like the nuclear ambitions of Iran and North Korea.

Mr. Obama’s decision to impose a tariff of up to 35 percent on Chinese tires is a signal that he plans to deliver on his promise to labor unions that he would more strictly enforce trade laws, especially against China, which has become the world’s factory while the United States has lost millions of manufacturing jobs. The trade deficit with China was a record $268 billion in 2008."
Needless to say, more trade protectionism is not what the world needs now for recovery.

Sep 13, 2009

Temptation Blocker

Internet addicted? Never getting work done due to surfing, blogging or chatting?

Here is the best tool I downloaded in years: The "Temptation Blocker". This small program allows to temporarily disable programs like Firefox, Skype or Outlook. You can e.g. block your internet browsers for, say, 2 hours. The only way out (before time is up) is by typing in a random 32 character code, which is a painful hurdle. Brilliant!

P.S. Mac users with procastrination tendencies have a nice alternative: "Mac Freedom", a program that disables your WiFi connection.

Sep 12, 2009

Fire the Behavioral Econs! (not really,but...)

A lot has been said on how cool, interesting, realistic etc., behavioral finance and economics are. Behavioral Finance/Econ professors are valuable stock that the finance industry would love to possess…

I was thinking that if you have some of these guys as staff, you could maybe ask them for their opinion on how to manage your university’s endowment (Havard’s 36,9 billion and Yale’s 27 billion in 2008 was a lot of money…). This would be especially valuable before and during the crisis that was "foretold" by some of them.

So here is the “shocking graph” indicating the number of Behavioral Econ/Finance courses (you could have graphed # of professors, no change) taught at an Ivy School on the X-axis, and annual 2008/2009 endowment return on the Y axis…

The more Behavioral econs you have, the more you lose*... Firing them could be a solution :-), but that's not what I want to talk about. My point is that, these academics are giving talks to banks, mutual funds, and especially policy makers, but how can we expect anyone to really listen to them when their own institutions don't? I often have the impression that when it comes to the economy, economic policy, you name it..., economists are the last ones to be asked for an opinion...


*don’t take it literally

Incredible toaster

I just bought a new toaster at Target. It cost me $6.33. How is it possible that it cost as little as $6.33? The only shipping cost from China should be that high! Or even the gas of the truck that brings it from the port to the shop (passing by a warehouse...how about the rent of that warehouse?)
How can a "toaster with more than 400 components and sub-components, made from nearly 100 different materials", including oil for plastic, cost as little as $6.33?
As Tim Harford writes, "for no effort and very little money, we can buy a toaster and enjoy the global efforts of an uncounted workforce, and the accumulated knowledge of the centuries that the toaster embodies". Indeed!

Sep 10, 2009

Great documentary on Privatization

I have certainly lost much of my leftist background as I went through the mixed impact of learning about economics which to some extent brainwashed me and to some extent made me wiser. For those who feel alike take the time to watch this documentary. Despite the general anti privatization attitude all documentaries on this subject have it makes some really good points and gives food for thought and reason for economics to be still needed and asking it to give some good answers....(in English with German subtitles)


Geneva cold city

Geneva has an identity problem. That’s what sociologists at the “Identities and Lifestyle Changes” conference at Geneva University just concluded. They highlight that it is difficult to encounter new people and create social ties, with 50% of survey respondents claiming the city is "cold".

On the social capital side, they found that only “29.1% of the local population is involved in any kind of voluntary work – much lower than in Basel (38.2%) and Zurich (40.4%), and below the 40.8% Swiss average”. Indeed, “the city is made up of many closed communities which don't interact. The elite are completely isolated in the places they live and work.”

“Geneva has always been a chaotic place made up of parallel worlds which are full of contradictions and difficult to manage…50,000 people move to or away from Geneva every year. And every day 500,000 people cross the border into Geneva from neighboring France and Vaud”

They say Geneva needs an urban marketing strategy like Basel where you “don't put garbage on the floor, which is normal in Geneva, and you respect things like public transport"

Full article here.

ht. James Cohen

Sep 9, 2009

Trade agreements from the bottom-up

I don't understand why The Economist now declares that trade agreements are bad for multilateral liberalization, while the empirical evidence is still mixed, as some papers find that preferential tariffs cuts cause MFN cuts. Moreover, trade agreements are more like a bottom-up approach to reform while WTO centrism is more like top-down reform. Trade agreements might be the way to go to slowly reach a trade game that fits every player. While a WTO deal might cause a lot of painfully destabilising (efficiency improving) "adjustments", trade agreements could achieve the same results probably less painfully. The WTO should adapt.

Sep 8, 2009

Great leaders


"Prime Minister Stephen Harper has received the rarest and most expensive gift at the recent G8 summit, a book given by his Italian counterpart Silvio Berlusconi, worth $460 000"
Apparently, Harper was just lucky to get that one. But he can't keep it since it's worth more than $1000. So Italian tax payers' money ends up somewhere, lying around, in the Canadian government.
Source: La Presse

Don't invest in mutual funds

Here are two quotes from "New Facts in Finance, J. Cochrane, Chicago Fed 99".
Thus, if there is skill in stock picking, we should see some persistence in fund performance. However, a generation of empirical work found no persistence at all. Funds that did well in the past were no more likely to do well in the future.
and
Since the average fund underperforms the market, and fund returns are not predictable, we conclude that active management does not generate superior performance, especially after transaction costs and fees. This fact is surprising. Professionals in almost any field do better than amateurs. One would expect that a trained experienced professional who spends all day reading about markets and stocks should be able to outperform simple indexing strategies
Why the hell do people keep on putting their money in? There are virtually no transaction costs associated with looking up this information. It's even on Wikipedia. Where is the rationality?

Sep 7, 2009

Supply and Demand: Champagne!

In this article from the Telegraph, an interesting example concerning the "law of demand and supply" applied to the Champagne. As these two articles from "The economist" further explain, the drop in demand from all over the world (see the graph) started because of the crisis



and the glut of supply built up in recent years (when demand was booming), will likely determine a slash in price, more likely by Christmas, which is typically the season with higher consumption. For those who love sparkling win...ehm, Champagne, you should be able to get good deals, unless you were already into Prosecco and liked it.

Sep 5, 2009

The Dude and Time Series Econometrics

To some of us doing the Gerzensee Study Program, he's informally known as 'The Dude' (not to be confused with the one from the film The Big Lebowski). But to the rest of the world he's more well known as Mark Watson, Professor of Economics and Public Affairs at Princeton University.

One of the foremost academic macroeconometricians in the world, Watson has written extensively on a wide variety of topics. This morning I was watching the first in a series of lectures he gave (together with his coauthor Professor James Stock) at the NBER Summer Institute in 2008 concerning 'What's New In Time Series Econometrics'. Here Watson and Stock serve up a veritable alphabet soup - SVAR, HAC, DSGE, IV and MCMC - as well as other interesting topics such as forecasting with many predictors and time varying models.

For anyone doing time series, these lectures are a must!!

How to define a graduate student?


Proposition :
If you are a graduate student, Wikipedia cannot answer all of your questions.

Proof:
Can't you see it dammit?
.........................................................................
It's truly sad part of life. My life is in ruins, what can I rely on for help if not on Wikipedia? ...



Sep 4, 2009

World Bank Bums

Ever been to DC? Then you might have been surprised by the large number of homeless people. In particular, you may have noticed a group of homeless people living in the small park in front of the World Bank. It is somewhat ironic that the largest poverty-fighting institution in the world faces severe poverty on its own doorsteps. Everybody at the Bank or the Fund knows them, seeing them on the way to work (or from their windows) every day. I am wondering whether the Bank has ever tried to do something to help them, e.g. via initiatives such as “Pimp this Bum”. I am also wondering why there is barely any research on homeless people in the US or Europe, while there are tons of papers on poverty in Africa or Asia.

Why travel thousands of miles to conduct yet another wildly expensive field survey in Uganda or Indonesia, while so much remains to be understood about the most disenfranchised segments of our own societies? Put differently: Why not conduct randomized field experiments with the bums on Pennsylvania Avenue, instead of doing the 50th one in Kigali?


P.S. I have just found a small economic literature on homelessness (e.g. here), although none of it seems to be based on such detailed data as available to development researchers.

Sep 3, 2009

The typical African family

"...the typical African family consists of a wife-beating alcoholic male and starving refugee females raped by child soldiers, soon after massacred by the janjaweed just before they would have died of AIDS anyway."

from sarcastic Bill.

Sep 2, 2009

RDB monthly update

Here are just a few updates before the RDB's second quarterly report to be released on October 1st 2009.

Watching Bill Easterly

Is Jeffrey Sachs behind this?

Sep 1, 2009

Trust is built by a competitive environment

The study of culture and economics has become super interesting as recent methods to identify causality (use the culture of second generation migrants, natural experiments etc…) have shown that in many ways culture affects economic outcomes and is quite persistent. But if this was the whole story poverty would be irremediable…there must be a way to change culture…

Recently I have been way more interested in what shapes culture than in how culture shapes outcomes, mostly inspired by Ha Joon Chang who reminded us that the Japanese were once perceived as lazy and the Germans as thieves.

So how do economic institutions cause culture? This Vox column reminds us “Montesquieu had argued that markets themselves created civilised people. But early in the 20th century, the sociologist, Georg Simmel argued that it’s not markets per se that lead to good culture, but market competition. Uncompetitive markets would not build it, but competitors pitted against each other in a quest for market share would”. This is the hypothesis explored by the underlying paper.

Using a US natural experiment where financial deregulation happened at different times across states and created more competition, it shows that increased sectoral competitiveness increased trust levels at the state level. It also shows that workers whose firms are located in competitive sectors have higher trust levels. It is quite convincing in arguing against the possibility of selection and omitted factor bias and in explaining that trust is built when working in a competitive environment.