December 28, 2009

New on EconTalk: Market Failure and Government Failure


I've been a subscriber of the EconTalk series of podcasts maintained by George Mason University's Russ Roberts. EconTalk has been a source of interesting and intellectual discussions about relevant economic issues for me, so it's about time I help promote this website.

In particular, the latest podcast is Brookings Institution's Clifford Winston on "Market Failure and Government Failure." The standard case has always been that markets sometimes fail, and because of this, there is a need for government to step in and correct the failures. But then again, governments also fail and are most of the time imperfect. Therefore, it is always the case that when you talk about market imperfections, government failures are also part of the discussion. I think this is the reason why the economics field of public choice theory exists starting with the "father of public choice theory" and continuing with great economists James M. Buchanan and Gordon Tullock. Buchanan also won a Nobel Prize in economics for his work in public choice theory.

December 24, 2009

New interesting papers # 001


In the spirit of the excellent work done by the CSSRR website, I'd like to start a series of what I think are interesting new papers from the different top Economics department websites. This is the first:


University of Cambridge (Cambridge Working Papers in Economics)
#0946: Growth, Development and Natural Resources: New Evidence Using a Heterogeneous Panel Analysis
by T.V.V. Cavalcanti, K. Mohaddes, and M. Raissi
(November 2009)
"This paper explores whether natural resource abundance is a curse or a blessing. In order to do so, we firstly develop a theory consistent econometric model, in which we show that there is a long run relationship between real income, the investment rate, and the real value of oil production. Secondly, we investigate the long-run (level) effects of natural resource abundance on domestic output as well as the short-run (growth) effects. Thirdly, we make use of a non-stationary panel approach which explicitly es- timates the long-run relationships from annual data as opposed to the dynamic and static panel approaches which might in fact estimate the high-frequency relationships. Fourthly, we account for cross-country dependencies that arise potentially from oil price shocks and other unobserved common factors, and allow countries to respond differently to these shocks. Finally, we explicitly recognize that there is a substantial heterogeneity in our sample, consisting of 53 oil exporting and importing countries with annual data between 1980-2006, and adopt the methodology developed by Pesaran (2006) for estimation. This approach considers different dynamics for each country and is consistent under both cross-sectional dependence and cross-country heterogeneity. We also check the robustness of these results by using the fully modified OLS method of Pedroni (2000). Our non-stationary approach also allows for country-specific unobserved factors, such as social and human capital, to be captured in the fixed effects and the heterogeneous trends together with any omitted factors. Our estimation results, using the real value of oil production, rent or reserves as a proxy for resource endowment, indicate that oil abundance is in fact a blessing and not a curse, exhibited through both the long-run and the short-run effects."


University of Glasgow (Department of Economics Discussion Papers)
#2009-33: Colonialism, European descendants and democracy
by Luis Angeles
(November 2009)
"This paper advances that the share of European descendants in the population is a major determinant of democracy in former colonial countries. We test this hypothesis using cross-section and panel regressions with 60 developing and developed countries that were once colonies. We …nd that the share of European descendants can explain more than half of the di¤erence in measures of democracy between the least and the most democratic countries in our sample. We control for other potential determinants of democracy and test for endogeneity bias using instrumental variables."


University of Oxford (Department of Economics Discussion Paper Series)
#466: Two and a Half Theories of Trade
by J. Peter Nerey
(December 2009)
This paper discusses the place of oligopoly in international trade theory, and argues that it is unsatisfactory to ignore firms altogether, as in perfectly competitive models, or to view large firms as more productive clones of small ones, as in monopolistically competitive models. Doing either fails to account for the “granularity” in the size distribution of firms and for the dominance of large firms in exporting. The paper outlines three ways of developing more convincing models of oligopoly, which allow for free entry but do not lose sight of the grains in “granularity”: heterogeneous industries, natural oligopoly, and superstar firms.
#467: Directed technical change, the elasticity of substitution and wage inequality in developing countries
by Alberto Behar
(December 2009)
We develop a model of endogenous skill-biased technical change in developing countries. The model reconciles wildly dispersed existing estimates of the elasticity of substitution between more and less educated workers. It also produces an estimating equation for the elasticity, which allow us to produce overdue estimates for developing countries. With four types of data, elasticity estimates for developing countries are consistently about 2. In a skill-biased technical change framework, this estimate makes sense of what appears to be little or no correlation between relative skill supply and wage inequality.


Toulouse School of Economics (Working Paper Series)
#588: How Should the Distant Future be Discounted When Discount Rates are Uncertain?
by Christian Gollier and Martin L. Weitzman
(November 2009)
"It is not immediately clear how to discount distant-future events, like climate change, when the distant-future discount rate itself is uncertain. The so-called “Weitzman-Gollier puzzle” is the fact that two seemingly symmetric and equally plausible ways of dealing with uncertain future discount rates appear to give diametrically opposed results with the opposite policy implications. We explain how the “Weitzman-Gollier puzzle” is resolved. When agents optimize their consumption plans and probabilities are adjusted for risk, the two approaches are identical. What we would wish a reader to take away from this paper is the bottom-line message that the appropriate long run discount rate declines over time toward its lowest possible value."


University of Warwick (Economics Department Working Papers)
#922: A Nonparametric Analysis of the Cournot Model
by Andres Carvajal and John K.H. Quah
(November 2009)
"An observer makes a number of observations of an industry producing a homogeneous good. Each observation consists of the market price, the output of individual firms and perhaps information on each firm's production cost. We provide various tests (typically, linear programs) with which the observer can determine if the data set is consistent with the hypothesis that rms in this industry are playing a Cournot game at each observation. When cost information is wholly or partially unavailable, these tests could potentially be used to derive cost information on the firms. This paper is a contribution to the literature that aims to characterize (in various contexts) the restrictions that a data set must satisfy for it to be consistent with Nash outcomes in a game. It is also inspired by the seminal result of Afriat (and the subsequent literature) which addresses similar issues in the context of consumer demand, though one important technical difference from most of these results is that the objective functions of rms in a Cournot game are not necessarily quasiconcave."


Yale University (Department of Economics Working Papers)
#74: Does Land Abundance Explain African Institutions?
by James Fenske
(November 2009)
"I show how abundant land and scarce labor shaped African institutions before colonial rule. I present a model in which exogenous suitability of the land for agriculture and endogenously evolving population determine the existence of land rights, slavery, and polygyny. I then use crosssectional data on pre-colonial African societies to demonstrate that, consistent with the model, the existence of land rights, slavery, and polygyny occurred in those parts of Africa that were the most suitable for agriculture, and in which population density was greatest. Next, I use the model to explain institutions among the Egba of southwestern Nigeria from 1830 to 1914. While many Egba institutions were typical of a land-abundant environment, they sold land and had disputes over it. These exceptions were the result of a period of land scarcity when the Egba first arrived at Abeokuta and of heterogeneity in the quality of land."

New MU Economics Papers: December 2009


I thought I'd start a new series on promoting new working papers of the Department of Economics at the University of Missouri. Think of it as one of my initial contributions to the department. First up, for the month of December:


A Non-Experimental Evaluation of Curricular Effectiveness in Math (WP 09-13)
by Cory Koedel and Rachana Bhatt
(December 2009)
"This paper uses non-experimental data to evaluate curricular effectiveness. We show that non-experimental methods can be used to obtain causal estimates of curricular effects at just a fraction of what it would cost to produce analogous experimental estimates. Furthermore, external validity concerns that are particularly cogent in the context of curricular evaluations suggest that a non-experimental approach may be preferred. Our results provide important insights for educational administrators and policymakers. In the short term, we find large differences in effectiveness across some math curricula. However, like many educational inputs, the effects of math curricula do not persist over time, a result that would be quite costly to attain using experimental data. Across curricula adoption cycles, publishers that produce less effective curricula in one cycle do not lose market share in the next cycle. One explanation for this result is the dearth of information available to administrators about curricular effectiveness."

December 16, 2009

Paul Samuelson (May 15, 1915-December 13, 2009)




One of the greatest economic thinkers of all time has already left us. He will definitely be missed, students and fellow economists alike. I'm sure you've already seen the many online news articles that celebrate his accomplishments in life. He was the first John Bates Clark winner, and the first American Nobel Laureate in Economics. For me, I think his greatest contribution is helping create the "Neoclassical synthesis," the current mainstream field of economics that incorporates both neoclassical principles with Keynsian ones.