The impact of poor climate

We often cannot choose where we live, especially as academics, and have to bite the bullet when we end up in places where the climate is less than favorable. You sometimes wonder why humans willingly decided to settle in numbers in uninviting places. And it matters, as people not like poor climate, but that may be compensate by other factors, like having a job. Still, climate matters for satisfaction.

David Maddison and Katrin Rehdanz document using the world values survey that poor climate has a significant impact on life satisfaction. The latter is defined by self-reported survey results, thus to be taken with a rock of salt, and poor climate is defined by a measure akin to a standard deviation from a comfortable temperature, 65F or 18C. How significant the impact is cannot be evaluated without seeing some statistics about the climate measure, but let us believe the authors for a moment. This means that, ceteribus paribus, people in Central America and some parts of Africa should be the happiest. Of course, all other things are not equal. And there may be others things that correlate with temperature variations that also have an impact of happiness. For example, long nights in the winter have a strong impact on depressions in Nordic countries.

Maddison and Rehdanz then proceed to look at the consequences of a climate change scenario which provides country specific temperature changes. From this exercise, they find that Europe will gain in satisfaction, the US will be unaffected and Africa will suffer tremendously. While this is an interesting first shot at the question, I am not quite sure I am willing to run with it. In particular because the initial elasticities may be tainted by correlates that do not vary with climate change (for example, length of night is not expect to change), and because climate change will have other important consequences, for example about the availability of fresh water. But at least, this paper gets us thinking about these issues, and it highlights that those who would suffer the most are those that have the least to do with the origin of climate change.

How to fight tax evasion

Tax evasion is a serious problem in developing countries because of the tiny administrative capacity of authorities and the size of the informal sector. Even in more developed economies, say, the Southern European ones, tax evasion is part of daily life. Again, administrative capacity is lacking. One could even argue it is a problem in the United States seeing the tiny auditing staff of tax authorities and the complexity of the tax code. Tax auditors have thus to define priorities.

Mirco Tonin studies the rules that Italy and Bulgaria instituted. In Italy, businesses and self-employed people reporting revenues below some level are subject to higher scrutiny. The idea is thus not to go after those who declare to be big fish, but rather those who may hide it. And making it known that there is such a threshold induces people to declare more to tax authorities. In Bulgaria, authorities are after employees and firms that declare too little in social security contributions. This is also forcing them to declare more to avoid scrutiny.

Tonin uses a model of imperfect monitoring to figure out whether such threshold rules make sense. And yes, they improve tax revenue, as those who have higher true income declare more than the threshold, and those below become more truthful. Now all you need to do is figure out where to put the threshold to equalize marginal tax revenue and marginal auditing cost, possibly adjusted by the dead-weight cost of taxation and for observable characteristics of the tax payer.

Are consumption taxes more equitable?

There is no doubt that consumption taxes are more efficient that labor income or capital income taxes, because they do not punish activities one would like to see promoted in an economy (labor supply, investment). But they are widely regarded as unfair, as the consumption share of income is higher for poor people. Hence the implementation of exclusions for essential goods where consumption taxes exist, in order the achieve some tax progressivity.

Isabel Correia claims that switching from income taxes to consumption tax can lead to less inequality even in the absence of lump sum transfers. This is a very counterintuitive result, and this is probably the reason why it made it into the American Economic Review (Yes, I know, I am breaking a trend here). But despite my best efforts, I still do not understand how this could happens, and the article provides very little in terms of explanation. Not only is no intuition provided, but the idea of using Gorman aggregation to reduce the model to a representative agent model seems wrong in this context. If anybody has read and understood the article, please help me here.

How not to encourage home ownership

Many governments try to encourage home ownerships by various means. I am not convinced this needs encouraging, as it leads to over-acucmulation of residential capital. Additionally, it is a myth that home ownners are happier and better citizens, as I reported previously. But suppose, for a moment, that a government really wants to increase the home ownership rate. How could this be best achieved. Two recent papers look at this.

First, Emre Ergungor compares mortgage interest subsidies to mortgage down-payment subsidies, and finds the latter work better. It is clear that down-payments are a significant hurdle for first time home buyers, and the recent crisis has at least partly been attributed to too easy down-payments, so one needs to be careful with this result. This is why Ergungor looks at loan performance for low to middle incomes. He finds that a one percent interest reduction is equivalent to a $3200 down-payment subsidy in that it leads to a 75 point reduction in default rates, and the latter is much cheaper to implement.

Second, Christian Hilber and Tracy Turner make the point that the tax deduction of mortgage interest makes mortgages more affordable but also raises house values. So in the end who benefits? Apparently only higher incomes in markets with few regulations. Hilber and Turner do not try to explain why this would happen, but I suppose this has to do with the high marginal rates on tax expenditures for high incomes, although I cannot explain the regulatory impact. In any case, there is more evidence that this type of subsidy should be abandoned.

ABM+NKDSGE=?

Agent-based models have a track record of generating stock market bubbles when they include agents that are not optimizing and use backward-looking decision rules. But they do not seem to have convinced the profession of their relevance because of the perceived arbitrariness of model components and the fact that they basically predict that a broken clock is right twice a day. Hence, it should be quite interesting to try to embed an agent-based model into a more widely accepted model and see how far this can bring us.

Matthias Lengnik and Hans-Werner Wohltmann do this by including two type of asset traders in a Neo-Keynesian model: fundamentalists, who are forward-looking and expect that price will get closer to the fundamental equilibrium, and chartists, who are backward-looking and obey some predefined rules based on past prices. This introduces some degree of history dependence and assumes that both types of agents are fooled every time. They never learn. And asset prices are thus essentially exogenously determined. The non-financial part of the model follows some old-fashioned model where inflation linearly impacts the output gap, and inflation is determined by the output gap and the evolution of stock prices. In other words, we are back the wind-generating hand-waving of 1980's macro, and not exactly something I would call DSGE.

Anyways, let's see what comes out of this. Of course, by the very nature of the model, there can be multiple equilibria, and an unstable equilibrium is possible. So one has to be very careful with simulations as potentially a lot of scenarios are possible. Yet, Lengnik and Wohltmann base their entire analysis on a single 40 quarter run of their model. They call is "representative." In which sense? Have all runs the same statistical properties? Or did the authors mine for the most convenient one? None of the results can be believed until this is clarified.

Suicide in happy places

It is quite baffling that the countries with the highest standards of living, and among several dimensions the happiest ones, also exhibit the highest suicide rates. Is it that places where material necessities are easily met other more psychological worries take over? Is it that somehow happiness is more volatile, or more diverse?

Mary Daly, Andrew Oswald, Daniel Wilson and Stephen Wu use two data sets that allow to compare suicide rates and happiness across US states to show that this paradox is also true within the United States. This thus invalidates the cultural or institutional explanations of the international paradox. This also allows to use all sorts of cross-state controls, but none makes the paradox disappear. Daly, Oswald, Wilson and Wu then conclude that there must be a direct causality from happiness to suicide: living among happy people is depressing for some. This may be consistent with the fact that suicide rates drop in war time. And it is difficult to imagine the reverse causality, that high suicide rates make survivors happy.

The economics of swinging

This is not about economic fluctuations or long cycles like Kondratieff cycles, this is about the sexual practice of partner exchanges or group sex. This practice that started in US military families in World War II has now spread world-wide, first as wife swapping than with women's emancipation into couple exchanges that a organized through websites or swinging clubs. Estimates vary widely, but somewhere between 1 and 15% of the population practices it.

Fabio d'Orlando tries to explore the economics of swinging. In the absence of much data and theory about it, he draws heavily on Jeremy Greenwood and Nezih Guner's theory of the emergence of premarital sex (discussed here) and modifies it to a theory of increasing kinkiness of sex. I did not think this was very inspiring in this paper, but a (long) footnote caught my eye.

Swinging clubs charge an entrance fee, which depends on who enters. Couples pay, say, $50, but single men $150. This is more than a night with a prostitute, but single men seem to value of having sex with a woman who does not fake it. Single women, however, are typically not allowed in on the premise that they are prostitutes. The interesting bit is how a swinging club owner should maximize profits, given that couples are more likely to come if there are fewer single men. Given the hidden nature of this market and thus the lack of information, it would interesting to see the diversity of outcomes.