Why three medals at the Olympics?

It is interesting to follow Olympics in various countries. While everywhere there is focus on domestic athletes, big countries, say the US, only consider gold medals to be worth mentioning, while in small ones, say Denmark, even Olympic diplomas (ranks 4-8) make major news. This brings up the question: why reward more than the winner?

Pavlo Blavatskyy demonstrates that giving a single prize elicits a lot of effort from a few athletes. Giving several prizes reduces the effort of those few, but this may increase the overall effort as more athletes participate.

Given, as I suggested above, only gold medals are worthwhile in big countries, I wonder whether we can see more effort from the top athletes from big countries, while we see more effort from small country citizens among diploma-worthy athletes. An empirical test of this would be difficult, though. Indeed, a prediction of this theory would to find proportionally more athletes from small countries in ranks 2-8. But larger country athletes could simply be missing from because a fellow citizen won.

Who will win the Olympics?

Now that the Olympic Games are about to start and the patriots start counting medals, let us ask what determines the success of a country at these events? Obviously, size matters, in particular for team events (and this is why I frustratingly root for the little countries). Bernard and Busse show that economic development also matters. This is not surprising, as a country need to reach some development level to devote resources to sustain a competitive sports program.

Lui and Suen confirm this. Kuper and Sterken as well and argue that the home field advantage has become less important over time. Glen Roberts argues that a cold climate helps as well. Moosa and Smith add health expenditures. Stefan Szymanski claims that medals counts are very predictable and that any discrepancy should be attributable to cheating, an argument that Jacob and Levitt have used successfully in other research.

Of course, Olympic success can be a function of how much sports and in particular competitive sports enjoy public support. Rathke and Woitek make exactly this argument using stochastic frontier analysis which measures how far a country is from its potential. Tcha and Pershin find that, much like in international economics, high-income countries specialize less in particular sports.

Gambling for savings

We all agree that playing the lottery is a very poor way to save for retirement. One can rationalize it under some circumstances, but it is generally frowned upon. It turns out that 40 percent of UK citizens play a lottery to save for retirement. And this is encouraged by the government.

They invest in Premium Bonds, a financial vehicle known around the world as lottery-linked savings (LLS). LLS programs are especially popular among low-income households and, in the case of developing economies, with people outside the banking system. How do they work? Bonds are issued that yield a rather normal return, but periodically a lottery is drawn among all bonds yielding some additional return, sometimes substantial. So it is like buying a bond and a lottery with the same ticket.

Do people who buy LLS bonds buy them for the savings or for the gambling? Peter Tufano answers this question by using time series of Premium Bond sales in the UK, comparing them to various betting schemes, other ways of saving, economic activity and marginal tax rates (PB winnings are not taxable). The outcome: the size of the largest prize matters, even though it represents only 2% of the expected return. PB sales respond positively to overall gambling activity, but also to relative yields with other financial vehicles. But the terms of the PBs do not affect their redemption, indicating that they are mostly a regular savings vehicle.

Are LLS bonds a good way to introduce low-income households to savings? The British experience seems to indicate so. But they are prohibited in many countries, including the Unites States, as they violate lottery laws.

The careers of the educational elite

The life cycle, the educational outcomes and the labor market of US households have been amply studied. Results are generally well established, for example that the gender gap has considerably narrowed, that the college premium has continued to rise and that female labor supply has increased a lot but is now stagnating. Claudia Goldin and Lawrence Katz have undertaken a new kind of analysis, studying the outcomes of Harvard graduates.

Why would we care? This is only a very small fraction of the population, not representative at all, and way out in the tail of the distribution. For one, they are over-represented among the decision-makers in the United States, and thus their personal experience influences their perception of what happens to others. Second, the education of the elite is typically heavily subsidized (privately or publicly), thus it is important to understand whether it is worth it.

This is an ongoing project, so not all questions have been answered yet. But the Harvard And Beyond Project website already offers a glimpse of some of the answers Goldin and Katz may have. Here are some results I found interesting.

1. The vast majority have pursued graduate degrees after their BA at Harvard. This proportion has increased for females and has remained stable for males. In the most recent cohort (1990 graduates), two thirds went for a graduate degree. In other words, for most, even a degree from the most prestigious program is not sufficient.
   
2. Harvard graduates earns a lot 15 years after graduation. For those with full time jobs, the median is at $112,500 for women and $187,500 for men. The gender gap is considerable, even after controlling for labor supply.
   
3. They marry later and have much fewer children than the general population.
   
4. They barely have any non-employment spells. Even among women who had children, over half never had an non-employment spell of more than six months. Penalties in earnings are severe for time off, especially among MBAs.
   

Thus if we have made much progress to reduce gender gaps and pregnancy penalties in the general population, the same cannot be said for the elite.

Why are retirees not buying annuities?

Retirees face a major uncertainty when they have to decide how much to spend from their assets: how long they are going to live. You do not want to spend too much in case you end up centenarian, but it would also be a waste to live thriftily when one ends up dying early. Luckily, the market provides a solution and has done so for centuries: annuities, which provide a constant stream of income as long as one is alive. This represents substantial welfare gains. Yet, very few people take advantage of this.

The literature has been puzzling over this for a while, see Jeffrey Brown. For one, public pension plans already provide some constant income. But this still leaves a lot of gain from annuities. Inflation risk is not a problem as annuity products are offered that are indexed, even even some that provide long-term care benefits. Bequest motives have been ruled out as well, as is risk-sharing within families.

Note also that in a lot of the life-cycle modeling with uncertain lifetimes, researchers use annuities to represent the dynamics of assets during retirement and death, because it is simple to model and because it is plain rational to buy annuities. The fact that this is not borne by facts is worrisome for some results coming out of this research.

In a recent NBER paper, Brown, Kling, Mullainathan and Wrobel may have found a solution to the annuity puzzle: it is all about how annuities are sold. If it is clearly labeled as a consumption insurance, then people are willing to buy it, as consumption risk is minimal. If it is sold as an investment, people realize it is very risky (as an investment): one may lose a lot if one dies early. This does not look like a rational reasoning, but the authors have conducted experiments that confirm that how annuities are framed matters crucially.

Then why would companies selling annuities frame it as an investment product? The authors conjecture that this is simply what they are used to. Maybe this research will show them how to change their marketing.

Economists and frustrating laymen

Reading this article in the Guardian on how some experts in biology just cannot seem to manage to make their point against laymen, I kept wondering whether economists have the same problem. Everyone is a self-proclaimed expert in Economics, both because of the confusion between policy goals (the realm of politicians) and policy means (the realm of economists) and because everyone is part of the "Economy."

Now, let me make sense of this long sentence. What are economists good at? Seeing the big picture, finding in which ways things interact in a general equilibrium sense, figuring out how incentives work. Thus, they are more detached from the nitty-gritty and can see the complexity of things, unintended consequences, and externalities. The layman is generally not equipped for this. This is why you need to be trained as an economist to figure out the consequences of policy, for example.

Yet, too often, economists do not manage to convince public and authorities about policy. Think about rent control, labor market over-regulation in Europe, gas taxation in North America, red tape in developing economies, or the overall lack of understanding about the role of market forces. When I speak with non-economists, I am regularly stunned by their reasoning and their unwillingness to understand the "true" Economics, mostly because it does not suit them, not because there would be a logical flaw. Quite frustrating, especially considering that these people then vote.

I am all for people to vote on policy goals. But when it comes to how those goals are to be reached, leave the methods out of the policy debate and let the experts take care of it. If you want to build a dam, you do not let people vote whether it is going to be made of concrete or earth, you let experts decide. And so it is when it needs to be determined whether a particular medical drug is safe or not. Or whether one should put fluoride in city water.

Set a goal for pollution reduction, then let experts take over. Set a goal for educational outcomes, and let experts figure out whether school vouchers are the way to go. Set a goal for dependence on Middle-East oil, then let experts get us there. Set a goal for school achievements, let experts get us there.

Enough for this rant. I promise to be more academic in the next posts.

Poetry in Economics

Do not worry, I am sticking to prose for this post. This about a paper with the same title by Hugo Mialon. He looks into how economists choose the titles of their papers and finds that 28% of titles include some form of rhetorical device. He also finds that this leads to four more citations for the paper.

While I agree that a title can tease someone into reading some work, there is a big step to generating a citation. Citations are not for titles, but for content (hopefully). Now, would the citer never have read the paper if it were for the title? Poetic titles often hide the true content of a paper, thus a case can be made for missed citations because of the title.

Then why does Mialon find four more citations for poetic titles? He focuses on article published in the top three journals. These papers are read anyway, poetic title or not. I think his result would be reversed when looking at working papers, where a poetic title is really hit or miss. His sample only has the hits.