Monday, May 26, 2008
Saturday, May 24, 2008
Economics of Love Part III - Will you marry me?
This summer I am going to attend three weddings. Ok, this is not an interesting fact, I know. But this is the reason why I started writing these posts about what I called the Economics of Love. In the end, what motivates people to enter the market for partners is the final intention to get married sooner or later (more or less explicit for women, but I think also latent for men). Why, then, do people want to get married, I asked myself?
Economists started to think about the Economics of Marriage almost 40 years ago with the seminal contributions of Gary Becker with his JPE article, “A Theory of Marriage”. Whenever I speak to non-economists about this literature, they look at me as if economists were immoral nerds. This attitude is widespread and maybe reflects the simple scepticism about the idea that economics can explain any realm of life, as Lazear explained in Economic Imperialism.
To understand the main contribution of that paper and the literature that followed, one needs to know that, at the time of writing, in the 70’s, many women were still out of the labor force. Thinking about the family as a small firm producing non marketable goods, let’s say warm coffee brought to you in bed when you are still sleeping, assistance when you caught a flu and you’re down, Becker’s insight was that, if the man was the provider of financial resources while the woman was the provider of childbearing and domestic activities, a marriage could only mean one thing: gains from specialization. This would have entailed advantages for both partners. You can say this is not a romantic argument for marriage, but still, it’s economically sound.
Since then, societies have undergone enormous changes and transformations. The most important ones are the woman slow but continuous emancipation and increasing government intervention. By providing explicit insurance schemes, like pensions and health care, the governments have reduced the incentive to build a family, which was traditionally the informal provider of such services. Governments have thus also increased the opportunity cost of women to stay out of the labor force while raising their returns from investing in education. In concomitance, formal markets have started producing goods that have reduced the comparative disadvantage of men in doing domestic activities. The combined effect of these transformations has been a constant, declining relevance of legal marriages. Since there are fewer gains from specialization, there are as well reduced incentives from getting married under the economic viewpoint of Becker.
What is driving then my friends’ decision to get married? Paradoxically as it may sound, the argument advanced is that, by these very same changes, today, marriage can only be a spontaneous decision driven by pure, romantic love. As you commonly observe, people tend to hang out with people with more or less the same background: economists with economists, lawyers with lawyers, Brad with Angelina…In a couple, a man and a woman do not gain by sharing resources anymore; they gain by sharing common values, interests, ideas. In the economists ‘jargon, a couple is not a unit of production anymore but a unit of consumption. People “merge” because they like to consume the same goods, and they like to do it together. This is what is called “Hedonic Marriage”, which basically means, you enjoy a marriage since you think you really are “two of a kind”.
The final remark is the following: if marriage is becoming a “hedonic” institution, when will we observe a marriage happening? When will people decide to get married? It is clear that such a decision is not only influenced by pure “love”, but also by people’s attitudes toward this institution, which are somehow determined by their relative cultural background. Depending on the type of society you come from, you may still enjoy the “hedonic” aspect of sharing your life with someone else, without feeling the need to get “married” in a legal sense. Vice versa, you may be forced to marriage by a society where pressure to get married is higher, without feeling completely involved. We will see in Part IV that these factors have important implications for currently observed phenomena of delayed marriage, cohabitation, and declining divorce rates.
Economists started to think about the Economics of Marriage almost 40 years ago with the seminal contributions of Gary Becker with his JPE article, “A Theory of Marriage”. Whenever I speak to non-economists about this literature, they look at me as if economists were immoral nerds. This attitude is widespread and maybe reflects the simple scepticism about the idea that economics can explain any realm of life, as Lazear explained in Economic Imperialism.
To understand the main contribution of that paper and the literature that followed, one needs to know that, at the time of writing, in the 70’s, many women were still out of the labor force. Thinking about the family as a small firm producing non marketable goods, let’s say warm coffee brought to you in bed when you are still sleeping, assistance when you caught a flu and you’re down, Becker’s insight was that, if the man was the provider of financial resources while the woman was the provider of childbearing and domestic activities, a marriage could only mean one thing: gains from specialization. This would have entailed advantages for both partners. You can say this is not a romantic argument for marriage, but still, it’s economically sound.
Since then, societies have undergone enormous changes and transformations. The most important ones are the woman slow but continuous emancipation and increasing government intervention. By providing explicit insurance schemes, like pensions and health care, the governments have reduced the incentive to build a family, which was traditionally the informal provider of such services. Governments have thus also increased the opportunity cost of women to stay out of the labor force while raising their returns from investing in education. In concomitance, formal markets have started producing goods that have reduced the comparative disadvantage of men in doing domestic activities. The combined effect of these transformations has been a constant, declining relevance of legal marriages. Since there are fewer gains from specialization, there are as well reduced incentives from getting married under the economic viewpoint of Becker.
What is driving then my friends’ decision to get married? Paradoxically as it may sound, the argument advanced is that, by these very same changes, today, marriage can only be a spontaneous decision driven by pure, romantic love. As you commonly observe, people tend to hang out with people with more or less the same background: economists with economists, lawyers with lawyers, Brad with Angelina…In a couple, a man and a woman do not gain by sharing resources anymore; they gain by sharing common values, interests, ideas. In the economists ‘jargon, a couple is not a unit of production anymore but a unit of consumption. People “merge” because they like to consume the same goods, and they like to do it together. This is what is called “Hedonic Marriage”, which basically means, you enjoy a marriage since you think you really are “two of a kind”.
The final remark is the following: if marriage is becoming a “hedonic” institution, when will we observe a marriage happening? When will people decide to get married? It is clear that such a decision is not only influenced by pure “love”, but also by people’s attitudes toward this institution, which are somehow determined by their relative cultural background. Depending on the type of society you come from, you may still enjoy the “hedonic” aspect of sharing your life with someone else, without feeling the need to get “married” in a legal sense. Vice versa, you may be forced to marriage by a society where pressure to get married is higher, without feeling completely involved. We will see in Part IV that these factors have important implications for currently observed phenomena of delayed marriage, cohabitation, and declining divorce rates.
Wednesday, May 21, 2008
Commitment Contracts
If you really want to finish your paper before this week-end, and stop delaying it because you are too lazy (or making the rational decision, you can buy a "Commitment Contract" from Stickk.
Stickk, a company created by two Yale economists, Dean Karlan and Ian Ayres, forces its customers to think about their future selves by selling "Commitment Contracts," which require the completion of a specified task that you might otherwise put off (finishing a paper, quitting smoking, losing weight). When you sign the contract, you hand over a sum of money and get it back only if you keep your commitment by a particular date. So, rather than having a vague and distant motivation for finishing that dissertation, there's the much more immediate cost of seeing your $1,000 disappear. So is Stickk's business model to bet against our ability to resist procrastinating? Not quite. Stickk makes its money from advertising, not from its customers. If you fail to live up to the terms of your contract, your money goes to a randomly selected charity. Or, if you want some extra motivation, you can have your commitment payment go to an "anti-charity" of your choosing. They cater to all tastes—both Americans United for Life and the Pro-Choice America Foundation are possible recipients. This paragraph was taken from www.slate.com
Stickk, a company created by two Yale economists, Dean Karlan and Ian Ayres, forces its customers to think about their future selves by selling "Commitment Contracts," which require the completion of a specified task that you might otherwise put off (finishing a paper, quitting smoking, losing weight). When you sign the contract, you hand over a sum of money and get it back only if you keep your commitment by a particular date. So, rather than having a vague and distant motivation for finishing that dissertation, there's the much more immediate cost of seeing your $1,000 disappear. So is Stickk's business model to bet against our ability to resist procrastinating? Not quite. Stickk makes its money from advertising, not from its customers. If you fail to live up to the terms of your contract, your money goes to a randomly selected charity. Or, if you want some extra motivation, you can have your commitment payment go to an "anti-charity" of your choosing. They cater to all tastes—both Americans United for Life and the Pro-Choice America Foundation are possible recipients. This paragraph was taken from www.slate.com
Thursday, May 15, 2008
The Economics of Love-Part 2: Courtship
The model can explain the observed stylized facts cited above: both the equilibrium age difference between men and women, but also the differences observed across countries. Where labor market opportunities for women are higher (developed countries), the age difference should be smaller: as women also compete for the best partners, as their role become more similar to that of the men, thus becoming less specialized in childbearing, their earning potential also becomes a signal to the partner. The age gap in the couple would still be higher in developing countries, where this proximity is genders’ roles is far from achieved.
Tuesday, May 13, 2008
Foreign Aid and remittances
Man, not only are remittances from the US to developing contries worth way more than official development assistance, they're also worth more than private capital flows! Makes it an intresting memoire topic!
Wednesday, May 7, 2008
Are Instrumental Variables useful for policy making?
A few weeks ago, Bernard Hoekman, a World Bank “expert”, presented a paper on trade in services and growth here at IHEID. He started with a critique of instrumentals variables (IVs) in the recent literature on institutions and growth, quoting a paper by Dixit. I thought that he had no idea what he was talking about, being a World Bank employee, and as this literature is much praised in the academic world. His critic was that instruments for institutions or openness, such as settler mortality, origin of the legal system, Protestantism, or geographic ones such as ruggedness, climate or distance to the equator, were not helpful for policy making, being things you cannot affect. That is definitely not the point of an IV I thought. He must be all wrong.
But then yesterday, Verdier was making the same comment in the PhD Micro Seminar, which lead to a unsatisfying class discussion. This must be a World Bank paradigm I thought. One important guy says something, everybody repeats it, without understanding, it gets distorted, and it spreads out of the World Bank into the entire economics world, as a new, but false, paradigm.
To test my hypothesis, I looked at the Dixit paper, called “Evaluating Recipes for Development Success”, published in the World Bank Research Observer, in 2007. His critic was that these IVs, even though they identify causality, do not tell you how to affect your instrumented variable. In the literature, the policy recommendation is to create good institutions, as they are the key to growth. However, IVs do not tell you how to change institutions. This is the point made by Dixit. But that is not due to IVs at all. If you want to affect something more precise than institutions, such as bureaucrats’ salaries, put that variable in your regression!
The IVs certainly don’t tell you to affect geography or settler mortality, nor that a country’s future is completely pre-determined. (see Jared Diamond for a geographic deterministic approach). “Of course, this is not the interpretation the researchers intend; they intend many of their history and even geography variables to have only indirect effects on economic outcomes through some other proximate determinant of success or to be mere econometric instruments used for identifying the direction of causation”, Dixt writes. Indeed, IVs are used only to extract the exogenous component of your explaining variables, so that you can econometrically evaluate the causation effect.
So the problem with this literature is that it doesn’t tell you how to enhance institutions or openness, it just tells you this is what you have to do. This critique, however, has nothing to do with IVs, it has to do with your choice of explaining variables. Dixit wasn’t clear and he was misinterpreted.
But then yesterday, Verdier was making the same comment in the PhD Micro Seminar, which lead to a unsatisfying class discussion. This must be a World Bank paradigm I thought. One important guy says something, everybody repeats it, without understanding, it gets distorted, and it spreads out of the World Bank into the entire economics world, as a new, but false, paradigm.
To test my hypothesis, I looked at the Dixit paper, called “Evaluating Recipes for Development Success”, published in the World Bank Research Observer, in 2007. His critic was that these IVs, even though they identify causality, do not tell you how to affect your instrumented variable. In the literature, the policy recommendation is to create good institutions, as they are the key to growth. However, IVs do not tell you how to change institutions. This is the point made by Dixit. But that is not due to IVs at all. If you want to affect something more precise than institutions, such as bureaucrats’ salaries, put that variable in your regression!
The IVs certainly don’t tell you to affect geography or settler mortality, nor that a country’s future is completely pre-determined. (see Jared Diamond for a geographic deterministic approach). “Of course, this is not the interpretation the researchers intend; they intend many of their history and even geography variables to have only indirect effects on economic outcomes through some other proximate determinant of success or to be mere econometric instruments used for identifying the direction of causation”, Dixt writes. Indeed, IVs are used only to extract the exogenous component of your explaining variables, so that you can econometrically evaluate the causation effect.
So the problem with this literature is that it doesn’t tell you how to enhance institutions or openness, it just tells you this is what you have to do. This critique, however, has nothing to do with IVs, it has to do with your choice of explaining variables. Dixit wasn’t clear and he was misinterpreted.
A letter from UBS
About a week ago, my father, worried about the financial trouble at UBS, ask me, his “economist” son, if he should take out the money he has there. “Yes”, I answered. Obviously, I was kidding. It’s all gonna turn out fine I thought.
Well, not so fast. We all received that letter from UBS’ Wealth Management & Business Banking to let us know that they had the situation under control. Are they fearing a serious bank run à la Northern Rock? If anything, this letter will make people even more worried, as Sebastian explained.
The rational behaviour, after receiving a letter like this, would be to go the bank, withdraw all your money, and put it in another bank. This would obviously be the non-cooperative outcome, leading to a series of unfortunate events. This letter is meant to achieve the optimal outcome, the cooperative one, where people leave there money there and it gradually becomes business as usual for UBS.
As Sebastian pointed out, this is Switzerland, not England or the US. I don’t see people running to the bank like crazy. People seem to trust their bank, or their government, who would take the situation under control so no one would be affected. Where else could I put my money anyway? Credit Suisse? Gimme a break!
Well, not so fast. We all received that letter from UBS’ Wealth Management & Business Banking to let us know that they had the situation under control. Are they fearing a serious bank run à la Northern Rock? If anything, this letter will make people even more worried, as Sebastian explained.
The rational behaviour, after receiving a letter like this, would be to go the bank, withdraw all your money, and put it in another bank. This would obviously be the non-cooperative outcome, leading to a series of unfortunate events. This letter is meant to achieve the optimal outcome, the cooperative one, where people leave there money there and it gradually becomes business as usual for UBS.
As Sebastian pointed out, this is Switzerland, not England or the US. I don’t see people running to the bank like crazy. People seem to trust their bank, or their government, who would take the situation under control so no one would be affected. Where else could I put my money anyway? Credit Suisse? Gimme a break!
Tuesday, May 6, 2008
The Economics of Love- Part 1: Dating
Finding the perfect mate is one of the crucial attainments in someone’s life. We look for a partner pulled by different motives. Depending on circumstances, we are sometimes egoistically driven by possessiveness and the quest for personal satisfaction; sometimes it is the altruistic need to give birth (or adopt) a child that leads us into the “business” of dating. As difficult as this process can be, people invest a lot of energy and effort in selecting his/her “best half”. Does the perfect match really exist? Some studies find that people often marry somebody from their same environment, like people with whom you have grown up, or people you have met at work. While still motivated by attraction and love, this piece of evidence contrasts the romantic view of unconditioned, unconstrained, unbounded love: it seems to point out instead that people select rationally those who fit better their priors about how a mate should be, and “hedonically” adapt to it. But what actually are these priors about preferred mate across gender? Are there some consistent differences between men and women? The answer to this question is problematic since it is always possible to find some “relevant attributes” that are compatible with the observed outcome. So if we look at the list of all married couples in the world to find out what are the most recurring attributes would ass little insight. The ideal setting would be one where people randomly met, have the opportunity to know his/her partner’s attributes and then finally express a preference. This is what you normally have during a speed dating night: you are confronted with a certain number of potential partners, have the opportunity to talk to them for a reasonable period of time to make an informed judgement and then decide whether or not you want his/her email address and meet again in the future. Some economists used this set up on a big sample, collected the results and gave the answer in a paper published on the Quarterly Journal of Economics: men value physical attractiveness while women value intelligence. Nothing really new on this ground. The next findings were that men don’t like women who are more intelligent or more ambitious than they are, while women like men who have grown up in wealthier neighbourhood. These findings are consistent with explanations taken from Evolutionary Psychology, according to which men select the partner according to women’s limited reproductive capacity, while women select men according to their ability to provide aid when it is time to raise their offspring. If these are the preferences, then in equilibrium, as earning potential increases linearly with age, we should expect to see women married to older men. This would be the outcome of a “rational” selection of the mate and, extremes aside, this is indeed the most common pattern found in modern societies. Is this outcome also the one bringing the level of highest individual well-being? Once your partner is chosen according to the above criteria, what you need is to find also empathy and coincidence in the level of sexual satisfaction. And here comes the problem: age gap of the above mentioned type entails a loss of intimate satisfaction. Why so? We will discuss the implications of this phenomenon in the next post, when analyzing the economics of lovemaking.
R. Fisman, S. S. Iyengar, E. Kamenica,
Friday, May 2, 2008
Subscribe to:
Posts (Atom)
