The shoe-leather cost of inflation is minimal

One popular way to justify the introduction of monetary frictions in macroeconomic models is to assume that there is some cost associated to changing cash holdings, ATM fees or more generally "shoe-leather" cost. Whether these cost matter at all is controversial and settling this requires a two-pronged approach: first find empirically how large these costs are, and second demonstrate that the costs are large enough to matter in a reasonable model.

Alessandro Calza and Andrea Zaghini estimate the shoe-leather cost for the US. This is by far not the first time this is performed, by it can be worth it as data change, and in this case one can suspect that transaction costs indeed have gone down over a few decades. But there is one critical aspect that they take into account: most on US M1 is not held domestically, and this share has increased to currently 60%. Ignoring this seriously biases estimates, first because it overstates domestic demand and second because the shoe-leather cost stemming from inflation is largely borne by foreigners. At an inflation rate of 10%, the cost amounts to negligible 0.05% of total income. At lower inflation rates, it is even negative thanks to foreigners giving up real resources to acquire US money. In other words, you cannot build a monetary theory on this,

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.

Is chocolate milk hip?

Sports and energy drink have become popular in the past decades or rather dubious grounds, as the recover and boost effect claimed in ads are in many cases false. See for example Vitamin water and Gatorade. In fact, plain water has much better recuperating properties than most of these sports drinks. And so does apparently chocolate milk, which has prompted marketing campaigns in the US with many athletes as spokespersons.

Senarath Dharmasena and Oral Capps, Jr. try to find the determinants of the demand for chocolate milk using a Heckman two-step demand model. Unfortunately, no regression results are presented, but the authors hint at a few interesting results. A quarter of all US households consume chocolate milk, with an average of 12 liters a year per household. Then they claim a number of household characteristics are significant, but with no indication in which way they are. For example, education of the household head is significant, and Hispanic household head as well. It would be interesting to know whether the relationship is positive or not. And as the authors ask in their title whether chocolate milk is the new-age sports drink, I am intrigued as how they could have answered this question. There is nothing in the paper itself about it.

Why am I reporting on such a thin paper? Because it always struck me how Europeans view adults drinking milk and especially chocolate milk as childish, while is it perfectly accepted in the US. I was wondering whether this difference could be seen in an empirical demand equation. Not in that one, though.

Charter cities and colonialism

Growth is very unequal across the world. In some areas, the experience has been very frustrating, foremost in Africa, others have been booming, foremost dense areas like Singapore, Hong Kong, or Taiwan. From there, growth has spilled over to neighboring areas, the best example being Guangzhou next to Hong Kong. These areas all have in common that they are autonomous from the surrounding areas, either by history or by design. This has lead Paul Romer to push for charter cities as a new development concept in other areas: give a preferably coastal city autonomy from the rest of the state in its management, allow it to trade freely in goods with the rest of the world, and allow free movement of people. As these charter cities grow, they will eventually help the backcountry to grow as well.

This idea is met by some resistance, though. One is that this is once more the people from the North trying to impose a radical change in the way business is done. This sounds like colonialism all over again, but as Voxi Heinrich Amavilah points out, the concept of charter cities is precisely about imposing anything, letting the locals run the show as they wish. Also, the rents from trade remain local, as the locals are free to trade, whereas under colonization foreigners took the rents. I think the idea has merit, especially for areas where a failed state is a major impediment to progress.

Compartmentalized thinking in personal finances

Even before the crisis hit in the United States, there was talk about how foolish it is to get balloon mortgages, with low teaser rates for a few years. Yet people where going for them, either because they had expectations of strong income growth, or because they were time inconsistent or very impatient. Or people do not understand the true cost of the loan.

Johan Almenberg and Artashes Karapetyan document a phenomenon that is in some ways similar in Sweden. Mortgage interest is deductible from taxes for personal loans, but not when a co=op takes a loan. Yet people seem to favor financial situations that shift debt from personal to co-op loans. On average, the equivalent of US$540 a year are left on table. This can be explained by what is termed salience of debt. People only care about the costs they directly see, and the interest payments of the co-op are not itemized in the fees. The authors survey co-op apartment owners on how they think about their finances. It turns out people a very aware of their personal finances, but completely ignorant of the co-op finances. They never considered the trade-off between personal and co-op debt. That last point may indicate that ignorance may be more important than salience, though. This is reinforced by the fact that market price do not seem to reflect the tax difference.

Students hate good teachers

Teachers often find student evaluations rather frustrating. They are contradictory, short-sighted and sometimes insulting, especially when students did not put much effort in the class in the first place. Student evaluations are also biased towards teachers who are physically more appealing. And students, with their lack of experience and expertise, are not in a good position to evaluate an expert. What more could be said against student evaluations?

Michela Braga, Marco Paccagnella and Michele Pellizzari find that better teachers get worse evaluations. The way they measure teacher effectiveness is by looking at how students do in subsequent classes. They find that teachers matter, and substantially as the teacher can explain 43% of the standard deviation in subsequent grades. But the good teachers get a worse student evaluation, which is frightening, because administrators are getting the wrong message.

From the tables, I gather that higher ranked faculty teach better, but older and researchers with higher H-indexes do worse, which is rather contradictory. I wonder whether taking into account the obviously high correlation between some of the independent variables would take care of this, or other controls, like the attractiveness mentioned above.

Are PhD dissertations lagging the research frontier?

A doctoral or PhD dissertation is supposed to be work that pushes the research frontier further. Obviously, not all dissertations are created equal and it is to be expected that some will push more that others. But they are all supposed to push. Well, do they? This is something that is quite difficult to measure as one needs to know where the research frontier lies and what the contribution of a dissertation is. For each dissertation, only few people can do this, and it is thus impossible to have an aggregate picture, unless you use a clever trick.

Sheng Guo and Jungmin Lee take publications in top Economics journals as the research frontier and look in which JEL categories they fall. They compare this to the JEL codes for US Economics dissertations and find a strong correlation controlling for the number of jobs available in the field. If you lag the publications by two years, the regression is just as good, which hints that dissertations react to the research frontier rather than the opposite (which is unfortunately undocumented), especially when you consider that with the long publication delays in Economics, the journals are in fact a few years behind the research frontier.

My interpretation here is not quite that of the authors, who really want to understand how students choose their field of study, given that they want to be on the job market with research on a hot topic. But when they start working on it, they do not know yet what will be hot. I am not sure this is quite such a conundrum, as seminars and conferences already give quite a good picture, and working papers as well. But it still looks like dissertations follow the trends instead of creating them.