Category Archives: social perspectives

Gender equality and economic growth

Despite the past and current social reform movements across the globe for gender equality, there still seems to be significant resistance to it as suggested by differences in male and female labor force participation rates. So in case you are still a closeted feminist, here is an economic argument to help you come out:

For a sample of Asian countries, Kim, Lee and Shin (2016) find that if gender inequality is completely removed, aggregate income will be about 6.6% and 14.5% higher than the benchmark economy after one and two generations respectively, while corresponding per capita income will be higher by 30.6% and 71.1% in the hypothetical gender-equality economy. This is because fertility and population decrease as women participate more in the labor market.

In addition to the calibration and simulation exercises to estimate the macroeconomic impact of removing gender inequality, the data in the paper highlights some other aspects of the gender inequality puzzle. For example, in almost all the Asian countries studied in the paper, females have higher average years of schooling than men. Yet the male labor force participation rate seems to be way higher than the female labor force participation rate. So why is this the case? What factors shape the distinct incentives that females and males face to participate in the labor market? I think these questions also are good research questions in themselves.

As an aside: Female and male labor force participation rate for China are 75% and 85% respectively while there is hardly any difference between average schooling at 8.1 and 7.3 respectively. As there is a frequent comparison between India and China, it might be worthwhile to see how Indian numbers compare to these. The average years of schooling for females and males in India is 7.59 and 4.81 respectively while the female and male labor force participation rate is 30.3% and 83.1% respectively. So not only that an average Chinese male is twice as educated than an average Indian male but the female labor force participation rate in China is more than double that in India. So any suggestions about India overtaking China anytime soon have to be taken with a fistful of salt!

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Filed under economic growth, gender, labor markets, macroeconomics, social perspectives

Economics of Gun Ownership and Violence!

Some pearls of wisdom from a university President, “I’ve always thought that if more good people had concealed-carry permits, then we could end those Muslims before they walked in and killed them,” he said during the school’s convocation, before teasing the students about his own gun.” You can find the news here.
Notwithstanding the obvious shameless religious fearmongering the statement enthuses, I thought the following might be worth thinking about or at least have students of economics talk about:
In a game with two actions- have a gun or not, is “have a gun” a dominant strategy making gun ownership a Nash equilibrium of a Prisoners Dilemma? More so, once everyone carries a gun, will we automatically never use ours, as argued in the case of nuclear arms race? What do you think?
On the other hand, there is also an argument of negative externality of gun ownership. The recent shooting in San Bernardino lead to a $17 million expenditure on treating the 250 odd victims, out of which $12 million came from tax payers pockets. This makes gun ownership a strong case of negative externality- and we know how to correct those- tax gun ownership heavily. Of course the question is what is the optimal tax rate- certainly a fruitful research question!

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Filed under current economic issues, economics research, social perspectives

On Cows and Central Tenets of Capitalism!

Santosh Anagol has been doing interesting research on several phenomena concerning the Indian economy. In a recent paper, he and his coauthors estimate that returns to owning a cow in India are negative and hence the continued existence of cows violates the central tenets of capitalism.

Daron Acemoglu and James Robinson discuss these findings in their extremely interesting blog here. They argue that social embeddedness could help us understand why cows are still a part of a typical Indian farmer’s portfolio. I think that their arguments certainly makes sense, however, one might also look at new monetarist economics for an answer to this question. For example, Lagos and Rocheteau (2008) analyse an economy with money and capital as competing media of exchange and their model I think could explain this puzzle that Anagol et.al pose.

In their economy, agents over-accumulate capital in a non-monetary equilibrium because the capital asset performs the function of a productive asset as well as a liquid medium of exchange when needed. The introduction and use of money therefore allows the liquidity use to be separated from the productive use and corrects the inefficient over-accumulation of capital. Thus, fiat money plays a welfare enhancing role in this economy. However, that precisely does not seem to be happening in India and that is the puzzle that Anagol and his coauthors are referring to.

So why do Indian farmers seem to be preferring to invest in an asset that has negative returns, despite the availability of a liquid medium of exchange? Here, it is important understand what constitutes return on capital. Lagos and Rocheteau propose that return to capital in such an economy can be thought of being comprised of two parts: a liquidity return referring to capital’s role in exchange process and the intrinsic return associated with the productive use of cows. Anagol’s analysis seems to be capturing only the intrinsic return while cows continue to have a liquidity return (premium) in the minds of Indian farmers. Ideally, this perceived positive liquidity return for cows should not prevail if fiat money does provide the necessary insurance against uncertainty. The fact that it does implies that the insurance provided by access to fiat money is not enough.

Anagol and his coauthors do raise this point but dismiss it citing the proliferation of different forms of microfinance institutions in rural India increasing access to savings. However, research has shown that actual use of these institutions is quite uneven and tends to depend on factors that could be explained using the economics of networks. For example see Matt Jackson’s work here. I think the factors mentioned above still continue to influence the basic uncertainty that farmers face in a substantial way. I am not sure if microfinance would be able to provide enough insurance in case of a crop failure for example. Because provision of funds in such case may require access to a mechanism to transfer funds from non-affected areas to affected areas to meet the demand and microfinance in its current state most likely is not in a position to handle that.

I still think that social embeddedness plays an important role. On the one hand traditional socioeconomic relationships have broken down reducing the access to mechanisms that could serve as partial insurance mechanisms and on the other hand access to modern monetary economy is still hard to come by. Lack of roads, absent storage and refrigeration facilities, ineffective or absent land reforms, inadequate irrigation facilities keeping agricultural output sensitive to rainfall shocks, all imply that the benefits from participating in the market economy only add to the existing uncertainty that these farmers face. Till these issues are addressed Indian farmers will continue continue to hold cows despite their negative intrinsic return.

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Filed under indian economy, macroeconomics, markets and efficiency, money search, social perspectives

Moving back home- Determining the household size!

I am great fan of Greg Kaplan’s paper `Moving Back home’ in which he motivates moving back with parents as an insurance mechanism against labor market risks. I think, apart from explaining consumption and savings responses of low income households, it highlights one of the most important economic determinants of household size for not only the US but also for other countries. When no other insurance mechanisms are available, people tend to huddle up economizing on costs of living and minimizing labor market risk through skill set diversification (much like portfolio diversification!). This explains, for example, why traditional societies like India had joint family systems for a very long period of time to the extent of becoming a defining feature of Indian society. The important thing to realize is that this system may not be here for long. The  general increase in incomes, economic opportunities, and capacity to shield oneself from economic risks will reduce the need for a joint family.  This is already evident in the increasing nuclearization of families across urban India. Moreover, the size of the households also might change over the business cycle!

A recent paper with José-Víctor Ríos-Rull and Sebastin Dryda,  extends the idea of moving back home with parents to build a model of household size determination that is amenable to equilibrium business cycle analysis with aggregate technology shocks. The authors then use this model to explain the discrepancy between the micro evidence on the Frisch elasticities and the ones implied by the macro models. Interesting stuff!

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On Powerful Macroeconomic Concepts: Consumption Smoothing

The idea of consumption smoothing is a very powerful one and seem to underlie a variety of economic as well as social phenomenon. In what follows I discuss a few examples to illustrate this. Consumption smoothing implies that the people prefer a smoother consumption path over a relatively choppy or fluctuating one. The ability to smooth consumption differs across countries and within countries across income classes. For example it has been documented that private consumption expenditure in developed countries is less variable than the real GDP at the business cycle frequencies, while in the developing countries it is more variable than the real GDP. This difference can be explained by differing access to credit markets as well support from governments in terms of welfare spending. You can read more about this here and here.

A couple of research papers on India also highlight how consumption smoothing can help explain patterns of migration and marriage as well as the probability of survival of a girl child in rural India. For example, Rosenweig and Stark (1989) find evidence among rural households in India that marriages are arranged between families that come from areas with different income risks. This allows for inter-household transfers of good and services and helps households to tide through rainfall shocks. Such arrangements are important in the absence of formal agricultural insurance products and difficulties in credit provision. Rainfall shocks are not uniformly distributed over the region and hence such flow of goods and services associated with such marital arrangements helps families smooth consumption in difficult time periods.

In another study on India, Elaina Rose shows that one can explain excess female mortality in rural India with the help of consumption smoothing. Using data from almost 4000 rural households, Rose finds that the ratio of probability that a girl survives until school age  to the probability that a boy survives to this age is related to rainfall shocks in childhood. This ratio shows improvement for a cohort that experiences a positive rainfall shock in the first two years of life.   This means that when there is an increase in income or purchasing power of a household because of good rainfall, the probability of a girl child surviving improves as households can afford to allocate more resources to the girl child. The opposite happens when there is a negative rainfall shock. The general  importance of rainfall shocks in fluctuations in Indian GDP is discussed here.

However dismal these findings, they have important implications for government policy. As Rose argues, becuase excess female mortality in rural India is associated with inability to smooth consumption  through other means, promoting institutions that provide alternative mechanisms to smooth consumption might do far good in improving survival of the girl child than any other policy. In case you doubted the importance of insurance and other financial products that provide a hedge against income fluctuations, you will find som solid argument here!

 

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Filed under current economic issues, indian economy, macroeconomics, social perspectives

Economic Oportunities and Fertility Behavior

While Indian policy makers attack the population growth problem using variety of incentives, it looks like the economic incentive trumps all others. In a recently published paper in the Quarterly Journal of Economics, Robert Jensen finds that increased awareness of prospects of gainful employment made the women in the treatment village to be less likely to marry and have kids than those who were not aware of such opportunities (control village). Those married were also more likely to limit the number of kids in order to pursue a steady career.

The economic reasoning behind the behavior displayed by these women is simple. An increase in the economic opportunities increased the opportunity cost of getting married and having kids leading to a substitution away from them. A good example of rational behavior from rural India. You can find the paper here.

Reference:

Robert Jensen, Do Labor Market Opportunities Affect Young Women’s Work and Family Decisions? Experimental Evidence from India The Quarterly Journal of Economics (2012) 127(2): 753-792

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Networks and Macroeconomics

No other field challenges your beliefs like macroeconomics. It will just not allow you to rest unless you decide to give up and fall into the trap of what Ricardo Cabellaro calls ‘the pretense of knowledge’. In a very convincingly argued case against the pitfalls of reading too much into the precision and addictiveness of the Dynamic Stochastic General Equilibrium Modelling framework, he introduces us to some interesting, alternative ways of looking at the macroeconomy.

These models try to capture the nature of economic complexity that is easily eschewed by the DSGE framework in favor of precision and neat quantitative results. According to Caballero, “ the nodes of such economic models are special for they contain agents with frontal lobes who can both strategize and panic”. Networks are important and such agents introduce much of unpredictability in the linkages.

Do agents always understand the complete networks and linkages? Apparently not. In fact  “the importance of this lack of understanding is at its most extreme level during financial crises when seemingly irrelevant and distant linkages are perceived to be relevant”.  Novelty and uncertainty play an important role in determining the size of reaction as well.

He also introduces us to literature that deals with developing a policy framework which is robust to small mistakes from the policy maker. Hansen and Sargent’s extremely readable “Robustness” is an important contribution to this literature.

I don’t really have the expertise to comment on what this means for the fate of the whole DSGE world and whether grad students can get away with not learning it. However, I am definitely convinced that the research cited by Cabellaro certainly offers a fresh perspective of linking individual behavior to macro behavior. Randomly browsing the net for his cited references, I came across a course on networks offered by Daron Acemoglu of MIT. The introduction in his course syllabus is worth reproducing here:

Networks are ubiquitous in our modern society. The World Wide Web that links us to and enables information flows with the rest of the world is the most visible example. But it is only one of many networks within which we are situated. Our social life is organized around networks of friends and colleagues. These networks determine our information, influence our opinions, and shape our political attitudes. They also link us, often through important but weak ties, to everybody else in the United States and in the world. Economic and financial markets also look much more like networks than anonymous marketplaces. Firms interact with the same suppliers and customers and use web-like supply chains. Financial linkages, both among banks and between consumers, companies and banks, also form a network over which funds flow and risks are shared. Systemic risk in financial markets often results from the counterparty risks created within this financial network. Food chains, interacting biological systems and the spread and containment of epidemics are some of the other natural and social phenomena that exhibit a marked networked structure.

So, while working on the dissertation, when I was just starting to think that I finally might have made it at least somewhat near the frontier, here comes a group of very intelligent economists pushing it even further!

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Filed under current economic issues, macroeconomics, Macroeconomics and the crisis, social perspectives