The goal of fiscal policy is at the macroeconomic level to steer the economy towards efficiency and, depending on the country, to smooth somewhat economic fluctuations. It has long been debated whether this is desirable or possible at all, given the large delays in implementing public expenses. But changes to tax policies are quicker to put in place and implement. At the microeconomic level, the focus is more on the long term, again try to attain better efficiency as well to optimize some definition of fairness across economic agents, however this may be defined in the respective countries. These micro and macro aspects have largely been regarded as separate. This does need to be so.
Eduardo Engel, Christopher Neilson and Rodrigo Valdés look at the particular fiscal policy of Chile. This country is characterized, like many emerging economies, by wild fluctuations in economic activity. In this case this is triggered by changes in commodity prices, in particular for copper. The most important implication is that government revenue varies wildly (a macroeconomic impact) between 1 and 8% of GDP, which changes Chile's ability to redistributes across heterogeneous households (a microeconomic impact). Adhering to a balanced budget rule would have a dramatic effect, in terms of aggregate welfare it would be like renouncing to half of the copper revenue. The reason is that households' incomes is also correlated with copper revenue, and a countercyclical policy is then optimal. And to be the most effective, the poorest households are helped in hard times, both because they have the highest marginal utility from consumption and because they have the highest propensity to consume.
Chile has been pursuing so far something that is close to a balanced budget rule: expenses are related to a permanent income measure of income. This means expenses are relatively constant, except for the last years, where expenses grew significantly despite a reduction in copper prices. This appears to have worked well, in particular because the poor have been the target of this largesse, not the rich. That was stimulus spending done right. This paper shows how this can be done even better.
Showing posts with label welfare. Show all posts
Showing posts with label welfare. Show all posts
Tuesday, July 5, 2011
Tuesday, June 28, 2011
Energy spending and household poverty
There is broad agreement that energy, especially polluting energy, is too cheap, calling for higher energy taxes. The problem is that such taxes are believed to be highly regressive, as poor households spend a larger share of their income on energy for transportation, heating and cooling. Of course, this could be alleviated by an appropriate redistribution of the proceeds, but to do this properly one first needs to understand well the energy spending of poor households.
Tooraj Jamasb and Helena Meier do this for the United Kingdom. There, households that spend more than 10% of their income on energy are considered "fuel poor" and deemed as having difficulties heating their home. I have always been suspicious of such definitions, as one may choose to spend more to heat at higher temperatures, for example, without being considered at risk. But this definition may indeed capture a good portion of the households of interest. While Jamasb and Meier find the usual conclusions (fuel poor households are poor, have children or are retired, spend more time at home), they also put high hope in smart meters. By showing current energy consumption, they hope that these meters will trigger behavioral changes and in particular help so far ill-informed households manage better the available energy and look for energy efficiency. As so often, good information goes a long way in managing scarcity.
Tooraj Jamasb and Helena Meier do this for the United Kingdom. There, households that spend more than 10% of their income on energy are considered "fuel poor" and deemed as having difficulties heating their home. I have always been suspicious of such definitions, as one may choose to spend more to heat at higher temperatures, for example, without being considered at risk. But this definition may indeed capture a good portion of the households of interest. While Jamasb and Meier find the usual conclusions (fuel poor households are poor, have children or are retired, spend more time at home), they also put high hope in smart meters. By showing current energy consumption, they hope that these meters will trigger behavioral changes and in particular help so far ill-informed households manage better the available energy and look for energy efficiency. As so often, good information goes a long way in managing scarcity.
Thursday, May 19, 2011
Transfers to mothers may hurt children
It is conventional wisdom in policy circles that if you want a policy intervention to benefit children, transfers have to be paid out explicitly to the mother. The understanding is that mothers care more about their children than men, and thus are more likely to use the funds for them, directly or indirectly. There is really not reason to this backfire, but as two recent papers show, it can, in fact.
Matthias Doepke and Michèle Tertilt build a series of non-cooperative bargaining models of the household and show that things can go wrong with targeted transfers or women empowerment in general. Indeed, for transfers to have an impact on the intra-household allocation of public goods, there needs to be some kind on friction. The specifics of this friction have a large impact. For example, if women are hard-wired to prefer spending on children, then transfers targeted to them may lead to over-spending on children and under-spending on other public goods that also benefit children (say, shelter), reducing child welfare. Or: if the difference between men and women is in the market wage, women will naturally tends to more time intensive activities in the household, such as child rearing. Empowering women leads them to spend less time at home, hurting the children. If empowerment implies that women have access to more private goods (such as bars or entertainment), they will focus less on public goods that also benefit children. While these examples seem a bit convoluted, they highlight that things are not so simple.
Olivier Bargain and Olivier Donni show in another series of models with altruistic parents that targeted transfers may not work as well as targeted price subsidies. They demonstrate that price subsidies have an income effect and a substitution effect, something we teach undergraduates. But they reinterpret the substitution effect as a "targeting effect." Naturally, transfers only lead to an income effect. Thus subsidies are better at improving children welfare, but they are more expensive as they apply to everyone. So it all depends on elasticities, and depending on the situation, transfers or price subsidies could be preferred.
Matthias Doepke and Michèle Tertilt build a series of non-cooperative bargaining models of the household and show that things can go wrong with targeted transfers or women empowerment in general. Indeed, for transfers to have an impact on the intra-household allocation of public goods, there needs to be some kind on friction. The specifics of this friction have a large impact. For example, if women are hard-wired to prefer spending on children, then transfers targeted to them may lead to over-spending on children and under-spending on other public goods that also benefit children (say, shelter), reducing child welfare. Or: if the difference between men and women is in the market wage, women will naturally tends to more time intensive activities in the household, such as child rearing. Empowering women leads them to spend less time at home, hurting the children. If empowerment implies that women have access to more private goods (such as bars or entertainment), they will focus less on public goods that also benefit children. While these examples seem a bit convoluted, they highlight that things are not so simple.
Olivier Bargain and Olivier Donni show in another series of models with altruistic parents that targeted transfers may not work as well as targeted price subsidies. They demonstrate that price subsidies have an income effect and a substitution effect, something we teach undergraduates. But they reinterpret the substitution effect as a "targeting effect." Naturally, transfers only lead to an income effect. Thus subsidies are better at improving children welfare, but they are more expensive as they apply to everyone. So it all depends on elasticities, and depending on the situation, transfers or price subsidies could be preferred.
Friday, December 31, 2010
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.
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.
Monday, September 20, 2010
How big are welfare stigma?
There is some literature that has tried to establish how large the stigma of participating in welfare programs are. Indeed, the fact that not all those that can obtain welfare benefits actually take them is an indication that feel bad about it, as long as they are aware of the relevant programs.Just how bad do people feel about this? The problem is that another factor comes in: time costs. Getting welfare benefits typically takes time: getting to the welfare office, waiting, filling forms and getting interviewed. This implies that the econometrician has a hard time figuring out the psychological costs of welfare participation. Indeed, time and psychological costs have very different policy implications. Time costs have a good reason: to select against welfare cheaters who are more likely to be discouraged by lost time. Psychological costs, however, are lower for the cheater. Also, discovering that the latter costs are high for the intended recipients is detrimental to the success of a program.
Colleen Flaherty Manchester and Kevin Mumford build a model of labor supply with an additive, one-time cost to welfare program participation in the utility function. Using structural estimation, they infer what the time cost as well as the psychological cost are, using the example of food stamps and WIC (healthy food checks for small children and pregnant mothers-to-be) in the US. They conclude that time costs amount to 0.5 hours a week for food stamps and 3 hours a week for WIC. The psychological costs are larger, about 3 hours for each program, but incurred only in the first week of participation, by assumption.
I am a big fan of structural estimation because it gives us the right quantitative framework for policy experiments. But the inferences in this case seem rather heroic to me. Indeed, there is no direct observation of the time cost. It is inferred from estimating a labor supply equation on a population where many do not work, for reasons beyond observables, and for them virtual wages are inferred. And the psychological cost amounts to a residual, and accordingly is estimated with a very large standard error. With all these caveats, I am surprised that there is no data that would measure the actual time lost through participation in those programs. This would considerably tighten estimates.
Colleen Flaherty Manchester and Kevin Mumford build a model of labor supply with an additive, one-time cost to welfare program participation in the utility function. Using structural estimation, they infer what the time cost as well as the psychological cost are, using the example of food stamps and WIC (healthy food checks for small children and pregnant mothers-to-be) in the US. They conclude that time costs amount to 0.5 hours a week for food stamps and 3 hours a week for WIC. The psychological costs are larger, about 3 hours for each program, but incurred only in the first week of participation, by assumption.
I am a big fan of structural estimation because it gives us the right quantitative framework for policy experiments. But the inferences in this case seem rather heroic to me. Indeed, there is no direct observation of the time cost. It is inferred from estimating a labor supply equation on a population where many do not work, for reasons beyond observables, and for them virtual wages are inferred. And the psychological cost amounts to a residual, and accordingly is estimated with a very large standard error. With all these caveats, I am surprised that there is no data that would measure the actual time lost through participation in those programs. This would considerably tighten estimates.
Wednesday, September 8, 2010
It is difficult to measure poverty
Measuring poverty is very difficult. First, it is a relative concept and requires the definition of a standard or threshold. Second, as people are usually not normally distributed, any single measure misses some aspect of the distribution. Third, the item whose distribution is measured may not be the appropriate one to represent poverty. Most of the time this is income, but temporary low income is very different from permanent low income, and in both cases, purchasing power may differ dramatically on location, social policies and period. All these difficulties have lead to a plethora of poverty measures. In fact, if you look at the program of any economic inequality conference, there will be plenty of papers on new measures by authors hopeful that their names will stick to a new index or coefficient.
Walter Bossert, Satya Chakravarty and Conchita d'Ambrosio come up with a new measure that emphasizes the persistence of poverty. They are very careful in making their measure following three axioms: the measure corresponds to static poverty in the one period-case, a measure is worse is poverty spells are longer ans spells out of poverty are shorter, and two decomposability axioms too complex to describe here.
The measure they propose is a weighted sum of per period poverty measures, where weight are proportional to the current poverty spell. Using the European Community Household Panel, they find that their measure does not change rankings much whether poverty spell weights are used or not. But I bet they would change quite a bit for the US.
Walter Bossert, Satya Chakravarty and Conchita d'Ambrosio come up with a new measure that emphasizes the persistence of poverty. They are very careful in making their measure following three axioms: the measure corresponds to static poverty in the one period-case, a measure is worse is poverty spells are longer ans spells out of poverty are shorter, and two decomposability axioms too complex to describe here.
The measure they propose is a weighted sum of per period poverty measures, where weight are proportional to the current poverty spell. Using the European Community Household Panel, they find that their measure does not change rankings much whether poverty spell weights are used or not. But I bet they would change quite a bit for the US.
Monday, June 28, 2010
Making Sen's capacity approach functional
Amartya Sen has provided an important framework that helps define the basic needs that human should be able to get. His capabilities and functionings approach has been very helpful in establishing how to measure human rights, and especially economic and social rights can be achieved. There is a large literature that helps to channel policy given current rights achievements.
Martin Binder and Alex Coad point out that all elements in Sen's approach (the capabilities) could in fact be endogenous to each other, in other words, one component could be a precondition to the other. For example, some functioning could depend on particular resources, or the reverse, or some functionings could be resources for others. one's health may depend on income, but income may also depend on health. This is rather important when one should decide what policy one should concentrate on. But it is not obvious how to establish such a hierarchy. To do this, they apply a panel vector autoregression to the British Household Survey Panel. Thus allows to extract the relevant leads and lags.
Clearly, income is a resources for many functionings, but "being happy" is also a resource for income, especially for males, and for other functionings like "being healthy," "being nourished" and "moving about freely." Mobility is also a resource for higher material well-being. Thus, ensuring people a happy can help ensuring other dimensions of welfare are more easily achieved.
Martin Binder and Alex Coad point out that all elements in Sen's approach (the capabilities) could in fact be endogenous to each other, in other words, one component could be a precondition to the other. For example, some functioning could depend on particular resources, or the reverse, or some functionings could be resources for others. one's health may depend on income, but income may also depend on health. This is rather important when one should decide what policy one should concentrate on. But it is not obvious how to establish such a hierarchy. To do this, they apply a panel vector autoregression to the British Household Survey Panel. Thus allows to extract the relevant leads and lags.
Clearly, income is a resources for many functionings, but "being happy" is also a resource for income, especially for males, and for other functionings like "being healthy," "being nourished" and "moving about freely." Mobility is also a resource for higher material well-being. Thus, ensuring people a happy can help ensuring other dimensions of welfare are more easily achieved.
Tuesday, January 19, 2010
Borrowing constraints and (seasonal) famines
Imagine that local food crops have very strong and predictable seasonal fluctuations. The obvious way to smooth consumption and avoid famines before new crops is to store food. Suppose now that this is for some reason not possible. Then, you should trade food with another region that has countercyclical crops, or at least storable crops. What if even that is not possible? Then it should be seasonal migration that should bring people where there is food. And what if that does not happen? You have the rural northwestern districts of Bangladesh.
Shyamal Chowdhury, Ahmed Mushfiq Mobarak and Gharad Bryan performed there a randomized intervention by giving a monetary incentive for seasonal migration. While this would obviously improve outcomes, they varied the conditions for the payout to see what would work best: cash or credit, mandating group or individual migration, changing group size, imposing destinations, etc. For once a randomized intervention study tackles the efficiency of the intervention, a welcome change.
While seasonal migration in the control group was 13%, it was 40% in the intervention group, a significant difference, and much more efficient than just informing about wage opportunities elsewhere, which only triggers a 2% increase in migration. The fact that these payments have such a large effect highlights that the true problem is the liquidity constraint these people are facing.
That said, all this depends on the size of this cash payout. With a very large payout, it would not be surprising to see a large response. The financial incentive corresponded to US$11.50, or about 4 days worth of wages in the destination regions. That does not seem very high, and one could hope that with the normal improvement of conditions over time, this problem should be relatively easy to overcome.
Shyamal Chowdhury, Ahmed Mushfiq Mobarak and Gharad Bryan performed there a randomized intervention by giving a monetary incentive for seasonal migration. While this would obviously improve outcomes, they varied the conditions for the payout to see what would work best: cash or credit, mandating group or individual migration, changing group size, imposing destinations, etc. For once a randomized intervention study tackles the efficiency of the intervention, a welcome change.
While seasonal migration in the control group was 13%, it was 40% in the intervention group, a significant difference, and much more efficient than just informing about wage opportunities elsewhere, which only triggers a 2% increase in migration. The fact that these payments have such a large effect highlights that the true problem is the liquidity constraint these people are facing.
That said, all this depends on the size of this cash payout. With a very large payout, it would not be surprising to see a large response. The financial incentive corresponded to US$11.50, or about 4 days worth of wages in the destination regions. That does not seem very high, and one could hope that with the normal improvement of conditions over time, this problem should be relatively easy to overcome.
Friday, January 8, 2010
How much to save for retirement
The conventional wisdom is that one should live in retirement with an income of about 70-80% of pre-retirement income. It is less than 100% because the tax rate is lower, because Medicare takes care of some expenses, and because employment related expenses disappear. But these 70-80% are really a rule of thumb that should clearly be differentiated in various ways.
John Karl Scholtz and Ananth Seshadri do this using life cycle models. The easy parts: if you previously had a particularly high income, a lower share can do easily, in part because taxes drop much more. Same if you had many children as they are, hopefully, out of the house by retirement. The more complex part: one should draw a life-cycle model where the goal is to equalize the discounted expected marginal utility of consumption across time, where health, incomes and lifetimes all are uncertain.
Scholtz and Seshadri find replacement rates that differ widely, with a median of 68% (or 57% considering the five highest years of income) and range of 47% to 90%, depending on the household category. For example, married couples need a higher replacement rate because of the higher expected lifetime of the survivor compared to a single person. Also, changes in taxation rates are very important for determining the marginal utility of consumption, especially if tax rates will be increasing instead of decreasing like in recent years. Finally, shocks to earnings are very persistent, thus whether they happen at the start or the end of a career can change dramatically the replacement rate.
John Karl Scholtz and Ananth Seshadri do this using life cycle models. The easy parts: if you previously had a particularly high income, a lower share can do easily, in part because taxes drop much more. Same if you had many children as they are, hopefully, out of the house by retirement. The more complex part: one should draw a life-cycle model where the goal is to equalize the discounted expected marginal utility of consumption across time, where health, incomes and lifetimes all are uncertain.
Scholtz and Seshadri find replacement rates that differ widely, with a median of 68% (or 57% considering the five highest years of income) and range of 47% to 90%, depending on the household category. For example, married couples need a higher replacement rate because of the higher expected lifetime of the survivor compared to a single person. Also, changes in taxation rates are very important for determining the marginal utility of consumption, especially if tax rates will be increasing instead of decreasing like in recent years. Finally, shocks to earnings are very persistent, thus whether they happen at the start or the end of a career can change dramatically the replacement rate.
Wednesday, December 2, 2009
Do rising top incomes mean higher growth?
Does more inequality increase growth? Theoretically, the relationship is ambiguous. Let us take to effects to illustrate this by focussing on the incomes of the richest. If these increase, the aggregate savings rate gets higher as the richest have typically a below average marginal propensity to consume. The higher savings rate leads to more capital accumulation, and thus higher wages for everyone and higher GDP. However, the same rise in top incomes puts more pressure on increasing redistribution, and we know that more taxation leads to more inefficiencies, say through diversion of resources into tax avoidance and through lower incentives to work. Which effects dominates, and there are others, is an empirical matter.
The literature is largely inconclusive on this. Cross-country regressions are particularly ill-suited for this, because the level of inequality in an economy can have many reasons that maybe correlated is some way with growth. Time-series studies are also problematic because of the possibility of a Kuzents curve: As an economy develops, on can expect inequality to rise and then fall. And in both cases, the measurement of inequality is always problematic.
Dan Andrews, Christopher Jencks and Andrew Leigh claim to do this better by focussing on just the top incomes (easier to measure than, say, a Gini coefficient) and by exploiting the pannel feature of their data. They conclude that a rise in top incomes, at least after 1960, has a positive impact on the growth rates in 12 OECD countries. Specifically, a 1% increase in the top income share leads to a 0.12% increase in the growth rate. If this income change is permanent, the growth rate change is permanent as well. On theoretical grounds, I find this hard to believe and that may be a result of the rather short period they are looking at (40 years in 5 year intervals). Imagine what this means in the context of a Solow growth model: The permanent shock means that the aggregate savings rate is higher. That leads to a higher capital level, but not a higher steady state growth rate. It looks like there is still a lot of work left in this literature.
The literature is largely inconclusive on this. Cross-country regressions are particularly ill-suited for this, because the level of inequality in an economy can have many reasons that maybe correlated is some way with growth. Time-series studies are also problematic because of the possibility of a Kuzents curve: As an economy develops, on can expect inequality to rise and then fall. And in both cases, the measurement of inequality is always problematic.
Dan Andrews, Christopher Jencks and Andrew Leigh claim to do this better by focussing on just the top incomes (easier to measure than, say, a Gini coefficient) and by exploiting the pannel feature of their data. They conclude that a rise in top incomes, at least after 1960, has a positive impact on the growth rates in 12 OECD countries. Specifically, a 1% increase in the top income share leads to a 0.12% increase in the growth rate. If this income change is permanent, the growth rate change is permanent as well. On theoretical grounds, I find this hard to believe and that may be a result of the rather short period they are looking at (40 years in 5 year intervals). Imagine what this means in the context of a Solow growth model: The permanent shock means that the aggregate savings rate is higher. That leads to a higher capital level, but not a higher steady state growth rate. It looks like there is still a lot of work left in this literature.
Thursday, November 12, 2009
Are school lunch subsidies useful?
I have always found it puzzling that so many American children qualify for school lunch subsidies. It seems that in the richest country of the world at a time where the world was never this rich, no children should go hungry. Yet many apparently are. And it seems that these school lunch programs are doing them good, both in terms of putting something in their stomach and something healthy in their regimen. Which is important in the context of the obesity "epidemic."
This is what I understand from the paper by Larry Howard and Nishith Prakash. In particular, they observe that pure fruit juice, fruit and salad intake increases for those who are subsidized. This implies in particular that parents are not substituting away from these foods when they are supplied in school. Encouraging. Now, what about removing hamburgers, pizza and fries from school cafeteria menus for everyone?
This is what I understand from the paper by Larry Howard and Nishith Prakash. In particular, they observe that pure fruit juice, fruit and salad intake increases for those who are subsidized. This implies in particular that parents are not substituting away from these foods when they are supplied in school. Encouraging. Now, what about removing hamburgers, pizza and fries from school cafeteria menus for everyone?
Monday, October 12, 2009
Low labor market attachment and disability insurance, some expected relationships
Insurance fraud is a constant problem, and we have addressed this in the case of employment insurance before. Now it is the turn of invalidity insurance. We occasionally read stories in the press about gross fraud by healthy people, but what about those at the margin? Of course, they are impossible to measure individually, but maybe something can be measure collectively.
Joshua Angrist, Stacey Chen and Brigham Frandsen look at Vietnam Veterans. The latter benefit from dedicated disability insurance, if they use such a facility more frequently then non-veterans, it must be because of war-related conseuqnces, right? Angrist, Chen and Frandsen use the 2000 census, which has birth date information, to identify who likely went to Vietnam, as birth dates were linked to draft status. It turns out that invalidity declared in the census is no more likely for Vietnam vetarans. Well, allmost all, because those with low skills, who typically have lower employment prospects, report higher invalidity incidence than comparable men who did not go to Vietnam. The authors argue that this cannot be due to a higher incidence of war injuries for low skilled soldiers. So it can only be that they view disability insurance as a good alternative to employment.
Joshua Angrist, Stacey Chen and Brigham Frandsen look at Vietnam Veterans. The latter benefit from dedicated disability insurance, if they use such a facility more frequently then non-veterans, it must be because of war-related conseuqnces, right? Angrist, Chen and Frandsen use the 2000 census, which has birth date information, to identify who likely went to Vietnam, as birth dates were linked to draft status. It turns out that invalidity declared in the census is no more likely for Vietnam vetarans. Well, allmost all, because those with low skills, who typically have lower employment prospects, report higher invalidity incidence than comparable men who did not go to Vietnam. The authors argue that this cannot be due to a higher incidence of war injuries for low skilled soldiers. So it can only be that they view disability insurance as a good alternative to employment.
Thursday, August 20, 2009
Why are so many elderly widows living alone?
It used to be the case that most elderly people, once widowed, would live with one of their children. Very few do so now, and one can have several conjecture for the reasons thereof: societal changes, government sponsored care for the elderly, better retirement pensions, emancipation of the children or the elderly, etc.
Carlos Bethencourt and José-Víctor Ríos-Rull find that the increases in incomes of the elderly can explain the most in this change. Indeed, their income has increased twice as fast as that of their children in the 1970's and 1980's. They come to this conclusion after estimating a rich model that takes into account household economies of scale, the game that parent and child play when investing in the home (they may have different preferences) and differences in income. Many specifications come to basically to the same conclusion: it is the elderly who want to avoid living with their children, and they started doing so as soon as they had sufficient income. Thus the story is not about ungrateful children who push their parents away.
Carlos Bethencourt and José-Víctor Ríos-Rull find that the increases in incomes of the elderly can explain the most in this change. Indeed, their income has increased twice as fast as that of their children in the 1970's and 1980's. They come to this conclusion after estimating a rich model that takes into account household economies of scale, the game that parent and child play when investing in the home (they may have different preferences) and differences in income. Many specifications come to basically to the same conclusion: it is the elderly who want to avoid living with their children, and they started doing so as soon as they had sufficient income. Thus the story is not about ungrateful children who push their parents away.
Thursday, January 22, 2009
Income makes happy after all
Do higher incomes make you happier? Are countries with higher incomes on average happier? Richard Easterlin made a career trying to document and answer these questions. His answers are known as the Easterlin paradox: within a country, people are happier with higher incomes, but across countries no such relation exists. This has very important implications: it means people only care about their relative standing within a country, but not their absolute income. Consequently, it is useless to implement growth enhancing policies.
Betsy Stevenson and Justin Wolfers revisit the aggregate evidence with new panel data that encompasses more countries, in particular developing economies, and find that the Easterlin paradox does not hold: richer countries are indeed happier on average. While one has always to be weary of survey data, especially when people are asked about subjective measures of their happiness, the results here are robust to all sort of variations in specifications and data sets.
Whew, we can focus on growth promotion again.
Betsy Stevenson and Justin Wolfers revisit the aggregate evidence with new panel data that encompasses more countries, in particular developing economies, and find that the Easterlin paradox does not hold: richer countries are indeed happier on average. While one has always to be weary of survey data, especially when people are asked about subjective measures of their happiness, the results here are robust to all sort of variations in specifications and data sets.
Whew, we can focus on growth promotion again.
Monday, December 22, 2008
Transfers: cash or in-kind?
Should government transfers be provided in cash or in-kind? Simple economics clearly states cash is better for welfare. Just think about how cash raises the budget constraint leading to higher indifference curves. With an in-kind transfer, however, you (potentially) impose a constraint on the basket of goods, thus (potentially) reducing utility compared to he cash case. This argument is reminiscent of the deadweight loss of Christmas, discussed a year ago on this blog.
Janet Currie and Firouz Gahvani have a nice survey of reasons to provide transfers in-kind, and the circumstances where they apply. The parternalistic argument is the most obvious and applies when the government wants the recipient to consume specific goods. This would be called for when one wants to make sure children are adequately fed or are followed by health professionals. This violates consumer sovereignty, but it the whole point in this case.
But there are other reasons beyond paternalism. Social programs are often targeted, and in the presence of imperfect information for recipient identification, offering in-kind transfers leads to self-selection. for example, only needy people will show up at a soup kitchen or health clinic providing free services. Also, offering social housing in small apartments offers better selection among recipients than cash allowances. Of course, some needy people may be erroneously screened out. Note, however, that targeting does not necessarily imply overprovision of in-kind goods like paternalism does.
Cash transfers do not encourage poor people to do something about their future, as future cash payment depend on them being poor. Providing in-kind transfers takes care of this problem by forcing them into consuming goods that will help them out (education, health screening, etc.).
Finally, another circumstance where in-kind transfers make sense is when the target recipient is a member of the household that has no decision taking power. Children are such an example in most societies, and women in many as well.
Janet Currie and Firouz Gahvani have a nice survey of reasons to provide transfers in-kind, and the circumstances where they apply. The parternalistic argument is the most obvious and applies when the government wants the recipient to consume specific goods. This would be called for when one wants to make sure children are adequately fed or are followed by health professionals. This violates consumer sovereignty, but it the whole point in this case.
But there are other reasons beyond paternalism. Social programs are often targeted, and in the presence of imperfect information for recipient identification, offering in-kind transfers leads to self-selection. for example, only needy people will show up at a soup kitchen or health clinic providing free services. Also, offering social housing in small apartments offers better selection among recipients than cash allowances. Of course, some needy people may be erroneously screened out. Note, however, that targeting does not necessarily imply overprovision of in-kind goods like paternalism does.
Cash transfers do not encourage poor people to do something about their future, as future cash payment depend on them being poor. Providing in-kind transfers takes care of this problem by forcing them into consuming goods that will help them out (education, health screening, etc.).
Finally, another circumstance where in-kind transfers make sense is when the target recipient is a member of the household that has no decision taking power. Children are such an example in most societies, and women in many as well.
Monday, December 15, 2008
Optimal bureaucratic hassle
This week-end I had a conversation with a person complaining about the seemingly useless bureaucracy and hold times to obtain social assistance, and in that particular case unemployment insurance. He then went on railing against those inefficient bureaucrats. But what if they did that on purpose?
I am not saying that those civil servants have a manic pleasure at seeing all those applicants despair in their impatience. They rather follow rules within a system that purposely makes people wait and spend time applying for privileges. The bureaucratic hassle is essentially a discrimination tool. Indeed, those who really need help are those that have plenty of time on their hands (think unemployed) and can afford, even if they do not like it, to go through this hassle. But those, for example, who already have a job and try to defraud the unemployment insurance system will not want to go through the hassle, or at least they will be discouraged to do so.
Monitoring who can and who cannot obtain government services that are destined to the needy is difficult. Part of the bureaucracy is about monitoring, but it also has this added side effect that it allows people to self-select. Those who do not need help will not bother.
I am not saying that those civil servants have a manic pleasure at seeing all those applicants despair in their impatience. They rather follow rules within a system that purposely makes people wait and spend time applying for privileges. The bureaucratic hassle is essentially a discrimination tool. Indeed, those who really need help are those that have plenty of time on their hands (think unemployed) and can afford, even if they do not like it, to go through this hassle. But those, for example, who already have a job and try to defraud the unemployment insurance system will not want to go through the hassle, or at least they will be discouraged to do so.
Monitoring who can and who cannot obtain government services that are destined to the needy is difficult. Part of the bureaucracy is about monitoring, but it also has this added side effect that it allows people to self-select. Those who do not need help will not bother.
Thursday, October 23, 2008
Social security and immigration policy cycles
At least since the work of Kjetil Storesletten, we know that it is possible to find an immigration policy that can make social security sustainable. But is such a policy politically feasible, taking xenophobia aside?
Edith Sand and Assaf Razin address this question with a very simple overlapping-generations model. Obviously, old people prefer having lots of (young) immigrants as well as high tax rates that will both sustain their pensions (we are talking about a pay-as-you-go plan). Young people clearly prefer low tax rates on their income, but it is unclear what they prefer in terms of immigration policy. They like high immigration quotas because it implies that there will be more when they are old, as immigrants have higher fertility rates. But they also like lower rates for the following reason: immigrants once old have the right to vote, as their descendants. Due to their fertility, this may shift the median voter from the old to the young and thus reduce future pensions. To top all this, immigrants depress wages (what the young do like) but increase the return of capital (what the old like).
All this implies that there can be immigration policy cycles. If the country is primarily populated by old people, it will let in a lot of immigrants. But once the young are in majority, borders are closed, until the old get sufficiently numerous. Guess where we are headed.
Edith Sand and Assaf Razin address this question with a very simple overlapping-generations model. Obviously, old people prefer having lots of (young) immigrants as well as high tax rates that will both sustain their pensions (we are talking about a pay-as-you-go plan). Young people clearly prefer low tax rates on their income, but it is unclear what they prefer in terms of immigration policy. They like high immigration quotas because it implies that there will be more when they are old, as immigrants have higher fertility rates. But they also like lower rates for the following reason: immigrants once old have the right to vote, as their descendants. Due to their fertility, this may shift the median voter from the old to the young and thus reduce future pensions. To top all this, immigrants depress wages (what the young do like) but increase the return of capital (what the old like).
All this implies that there can be immigration policy cycles. If the country is primarily populated by old people, it will let in a lot of immigrants. But once the young are in majority, borders are closed, until the old get sufficiently numerous. Guess where we are headed.
Friday, August 29, 2008
Single mothers and Stackelberg games
Even when eligible, not everyone chooses to receive payments from welfare. This may be by ignorance or by choice. In the latter case, welfare payments may obliterate other incomes, or vice-versa. A particularly interesting problem is that of single mothers reporting (or not) paternity.
Indeed, reporting who the father of the child induces most of the time procedures by the state to obtain child support from the father. If the mother is a welfare recipient, most US states capture most of this child support. It becomes thus a strategic decision for the mother: report the father and see little in child support, or seek child support informally (and possibly not strain a relationship with the father).
Jennifer Roff shows that this can be formulated as a Stackelberg game where the mother is the leader. She shows in particular that the outcome of this game can have perverse consequences when states capture more of the child support payments: mothers report fewer fathers, and the total captured amounts are lower. Also, awarding high child support payments decreases expected payments as mothers expect fewer fathers to comply, mostly because because of low paternal incomes. In other words, it does not necessarily pay to play tough.
Indeed, reporting who the father of the child induces most of the time procedures by the state to obtain child support from the father. If the mother is a welfare recipient, most US states capture most of this child support. It becomes thus a strategic decision for the mother: report the father and see little in child support, or seek child support informally (and possibly not strain a relationship with the father).
Jennifer Roff shows that this can be formulated as a Stackelberg game where the mother is the leader. She shows in particular that the outcome of this game can have perverse consequences when states capture more of the child support payments: mothers report fewer fathers, and the total captured amounts are lower. Also, awarding high child support payments decreases expected payments as mothers expect fewer fathers to comply, mostly because because of low paternal incomes. In other words, it does not necessarily pay to play tough.
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