More on the Happiness Externality

Tyler Cowen alludes to the happiness externality:

Poor, poor Tyrone. No wonder he is so unhappy. He thinks he is surrounded by so many other unhappy people.

As I suggested in my previous post, I think it's important to appreciate that Tyrone only needs to be surrounded by a few to become unhappy himself.

Income and Happiness: A Theory

To my knowledge, there is very little evidence that shows that happiness increases with income. The evidence tends be the following:

1. People in rich countries are not happier than people in poor countries.
2. There are lots of stories of people who have gotten rich and remained/become very troubled.
3. Within countries, there is a little-to-no relationship between income and happiness.
   
4. Economic growth doesn't make people happier in a given country.

Many take this as evidence that there is little to no relationship between income and happiness. Yet this is completely counterintuitive since everyone thinks they'd be better off if they had more money. Daniel Gilbert, in Stumbling on Happiness, explains this inconsistency by arguing that humans are terrible at making predictions. I think Gilbert's story is a subplot to the main story.

As an undergrad, a psychology professor told my class about an experiment in which someone in a bad mood was inserted into a room full of other people. The room was infected very soon afterwards. Even those who didn't interact with this person were adversely affected. The punchline? There are happiness externalities. Further, the negative happiness externalities are more powerful than the positive ones. It's easier to destroy happiness than to create it.

Also, think about the times you've tried to cheer up a friend who was feeling down. More often than not, I'd bet the night ends with you both in a bad mood. Also, think about the last time you walked through a rough area of a city. I bet, like most folks, you kept a solemn expression on your face. Think that didn't affect your mood?

This idea can explain why getting rich doesn't make people that much better off. They still have just as many poor (independently unhappy) folks around bringing their mood down.

This also explains why rich countries aren't happier than poor countries. Or why economic growth doesn't bring happiness. With economic growth comes greater inequality. That is, rich countries still have lots of poor (independently unhappy) people.

Is this idea consistent with the fact that relative income matters? I think so. Just because I want to have a rich happy neighbor doesn't mean that I don't want to be even richer than he is.


Related Links:

• Tyler Cowen discusses a recent debate on America's pursuit of happiness that included himself, Will Wilkinson, Jeffrey Sachs, and Betsey Stevenson. Hopefully it will be posted online soon.
• A 2006 JEP review of the happiness literature Kahneman and Krueger. Sorry, couldn't find one that's ungated.

Update: I didn't realize it at the time, but this post is totally influenced by Malcolm Gladwell's The Tipping Point which I had just barely started reading the night before. Now that I'm further in the book, the influence is obvious.

"It's not you, it's me"

I think an economist is forced to both agree and disagree with this standard breakup line.

The false part (that everyone knows is false) is the "it's not you" part. Clearly rejection is less likely if one is more attractive (in whichever way you like to define it), all else equal.

That said, the "it's me" part is true! One only breaks up with their partner if they believe their outside options are more attractive than sticking together. Ones outside options are a function of their own qualities. Thus, one can be rejected because their partner has really good alternatives (opportunity costs). This implies that rejection need not lead one to change how they feel about themself.

This analogy translates to all sorts of rejection. And this is not a bad outlook to have. It's better than thinking "the line" is completely false, anyways.

In which competition fails to lower prices?

"In Portland, the first major street family came into being in 1998 with the Nihilistic Gutter Punks....The NGP family soon claimed between seventy and a hundred members. The family grew too large to squat together, and smaller families began to splinter off the main group....As the youths split into smaller factions, the families developed increasingly severe initiation rites. New members of the Sick Boys were beaten into the family and, at times, were told to inject eighty units (a large syringe) of methamphetamine into the neck, a shot that is now known as a Sick Boy. The female members of the Sick Boys were called Sick Bitches, and they had to commit assaults and robberies in order to earn the right to wear "Bitch Bangs," or the short fringe of hair that female street youths sometimes keep when they shave the rest of their hair off. If they wanted to tie objects in their Bitch Bangs, the Sick Bitches had to commit more assaults. The harsher the initiations, the more the street kids clamored to join...."

This excerpt (with emphasis added) is from the very interesting and well-written All God's Children (which is currently 80% off at amazon.)

The first bolded sentence is interesting. Thinking about the street families as suppliers in a service industry trying to attract customers (kids) we would expect increased competition to make prices (initiation) fall. But the opposite happened. Now, it's obvious that the suppliers would want to increase their price but it's harder to explain how they could get away with it. Why wouldn't a no cost family spring up and attract all the kids who have yet to join a family?

I can think of two explanations that I think are plausible. One, street families are an example of a mythical (?) giffen good in which demand increases in price. This is the position the author takes in the second bolded sentence. I don't really buy it. I think correlation is being mistaken for causation. Demand for street families was already booming. That kids continued to join after the initiations became more severe does not mean that the harsher initiations caused demand to increase. That said, it's plausible since street families are clearly about status. Nevertheless, I think another explanation is more likely. That is, despite the increase in the number of firms (the splintering of the street families), market power of the suppliers was actually increasing due to increasing demand.

Both of these hypothesis seem testable with the right data. Perhaps the world needs an economics of street families to accompany the economics of drug-running gangs? Interestingly enough, one of the experts on street families, Bill McCarthy, is here at Davis in the sociology department. Perhaps I'll have an opportunity to ask his opinion at some point.

This is not the first time this month I've thought sociologists may hold the answers.

EDIT: A Rambling Grad Student has thoughts on this puzzle.

The determinants of fanatical product support

A rambling grad student offers a few reasons why such things as trucks, operating systems, and video game systems develop fanatical product support while other things such as couches do not. He lists 5 candidate explanations:

1. Price: The big ticket items are more likely to develop fanaticism - works for trucks and electronics, but furniture costs a lot, too . . . why does no one even claim LaZBoy roks and Pottery Barn sux?
2. Social visibility: Maybe people are more likely to be fanatical with high profile visible goods - but that kind of fails when it comes to computers and video game systems.
3. The people that buy them: Maybe people that consume these particular goods are just the kind of folk that feel the need to identify themselves with one side or the other (or at least the type that are willing to broadcast their product choice and publicly berate all other choices)
4. Longevity: Maybe the longer timeframe investments warrant more fanaticism to justify purchase . . . but the cycle time on electronics is far too short for that rational.
5. Amount of user interaction: Electronics and trucks both have high user interaction time. Maybe items with a lot of product/user interaction require greater mental justification, and thus support higher amounts of fanaticism.

#5 is by far the most interesting and clever hypothesis.

Nevertheless, I think the answer is a twist on #1. That is, fanatical product support is driven by price relative to income. I imagine that those who are fanatical about trucks first purchased their truck when its cost was a large share of their income. More generally, it's probably stronger for people with low income. The same for videogame systems and computers--it develops for young folks with little disposable income. This also explains why no one cares about couch brand names. When it comes time to buy a couch, it tends to be a drop in the bucket.

I'm sure you have many personal counterexamples to this explanation. I also know plenty of folks who are well-off yet fanatical product supporters. This is easily explained by a gravity-type model. Once a bunch of people have sorted into their respective camps, there is pressure for others to join rather than to remain agnostic.

Should I be writing shorter sentences?

This post about writer's sentence length and sales has been making its way around a few of the blogs I read. Highly recommended. The conclusion (based on a rather small sample) is that shorter sentences sell more books.

Since I've been in the writing process of paper writing lately, I wondered if I shouldn't be writing shorter sentences. Of course, writing for economic journals is different from popular writing. At the same time, the same principles might apply. A quick google search turned up this paper by Laband and Taylor. They look at the impact of a number of quality measures, including words per sentence, on subsequent citations for a sample of articles from The Journal of Political Economy and The Review of Economics and Statistics. They found almost nothing. The one characteristic that matters is paper length--longer papers are cited more. You might think that, even if it doesn't matter within journals, writing characteristics may make a difference to what journal a paper gets published in. The linked paper cites another paper by Laband who looks at submissions to JPE and finds no effect. Still, it might matter at other journals and the sample is small and from over 20 years ago. Nevertheless, I'm inclined to believe the results until something better comes along. And it's too bad--I prefer (to write and read) short papers.

Post-talk thoughts

Today I presented my work for the first time since my oral exam in June in our department brownbag series. Surprisingly, I was more nervous for this one than my oral exam. Probably because I feel like the paper is now close to being finished. More specifically, I've been working on it for long enough that I've done most of what I can think to do--this means I can rarely respond to questions with "I haven't gotten to that yet."

Despite my nerves, the presentation went really well. I got a lot of positive feedback and a lot of suggestions that I think will improve my paper a great deal. That said, I thought I would feel a great relief after it was over but I don't. I still feel the same anxiety since all the good suggestions mean I still have a lot of work to do. But I'm excited to dive back in. I hope to have a draft ready to "go public" soon.

Why aren't prostitutes paid like stadium vendors?

Tonight I watched a documentary called American Pimp. It was fairly interesting although it was difficult to watch the pimps talk so easily about manipulating women. I think I was made most uncomfortable by the fact that I sometimes felt that they were kind of charming. (That was an awkward sentence. Unintentional symbolism? Yup, that's it.)

Anyways, the most interesting thing I learned was the percentage that prostitutes get of their revenue. Zilch. (I'm not sure how exactly they're paid but that much was clear.) This seems like a bad business plan since it gives little incentive to the women to generate additional revenue. That is, in theory the pimps could make more money by giving the prostitutes a cut so that they work harder. Stadium vendors, for example, get paid based on how much they sell. What is different about prostitution so that this business model doesn't apply?

Perhaps the answer is that it's not different and the industry is due for a shake-up from an economics savvy pimp. But street prostitution has been around so long that I doubt a flawed strategy has persisted. Especially when the alternative is so obvious. Thus, I do think it's correct to ask why the commision-based model doesn't apply.

I'm tempted to relate the situation to the one described by Levitt and Venkatesh of crack dealers working for peanuts in hopes that they can work their way up the organization. But there is no up for these women. Or perhaps "up" is an occasional night out with their pimp. (Okay, I'm getting more depressed now.)

Alternatively, pimps may not need to offer a carrot (percentage of revenue) if their sticks (psychological and physical punishment) are effective enough to get their prostitutes to work as hard as they can. I think this is more likely the case. The pimps can easily monitor their prostitutes effort and punish them if they don't seem to be working hard. Both the cost of monitoring and the cost of punishing are probably low. Monitoring is cheap since the pimps don't have much else to do and the cost of punishing is cheap since the women lack other options. (Well, they could go to another pimp but I wouldn't rule out oligopoly behavior amongst the pimps as far as this is concerned.)

Turning the question around, why aren't stadium vendors paid like prostitutes? I think it's likely that monitoring and punishment are relatively expensive. (And, obviously, punishment is limited.) So, anyone have the data to test this hypothesis? (Perhaps a better question is: what data would you need to test this hypothesis?)

Studying pays off in college

Todd and Ralph Stinebrickner find that being assigned a roommate with a video game system reduces first semester GPA by 0.2 points! OLS estimates show that an extra hour/day of studying is only associated with a 0.049 increase in GPA. Exploiting the fact that being assigned a roommate with a video game system reduces time spent studying, they estimate that studying an extra hour a day improves GPAs by 0.356 grade points.

The first result is hard not to accept since roommates are randomly assigned. The last result relies on the usual instrumental variables assumptions. We should be concerned that being assigned a gamer roommate might affect GPAs for reasons other than less time spent studying and the authors do a number of checks to lessen this concern. Also, the sample is only is only about 200 which leads to imprecise estimates. That said, what a neat paper! Major bonus points to the authors for all their shoe-leather. They themselves began the Berea Panel Survey which included the time-diaries.

Paper links: NBER, non-gated version.

(h/t The Borjas Blog)

Quick Thoughts on A Farewell To Alms

The most striking thing about the book to me is how much is done with a lot of a little. By that I mean that Prof. Clark has amassed a huge variety of bits of data to make his various cases. While it's frustrating that the little bits aren't bigger bits, it's hard to complain considering how far back in history we're looking at.

After arguing against a number of the conventional theories of the industrial evolution [edit: I swear I meant to write "revolution"], he argues modern growth came about because the characteristics that generate economic success were propagated throughout society by the relatively high fertility rates of the wealthy. The main piece of evidence for this hypothesis is from English wills which show that men with more surviving children tend to have more assets to bequeath. He admits that the rich are more likely to have wills but argues that this isn't a large concern since many men with modest occupations are found in the data too. But that's not quite the main concern. Kids are expensive, right? Then men with lots of kids are probably less likely to have assets to bequeath in a will. But this is probably a larger issue for poor men than rich men. So it seems like the poor men with lots of kids are most likely to be missing from the data. Put them back in and the positive relationship between wealth and children might shrink or disappear.

REJECTED

A few days after I sent the following letter to The Washington Post, the topics of published letters included how hot it is in Iraq compared to Washington, 1950s rock and roll, and how bad of a movie critic Stephen Hunter is. Ouch. Here's what I sent in:

-------------------------------------------------------------------------------

Dear Editor,

"High School Seniors Test Well in Economics" (8/9/07, Page D01) cites Bruce Damasio, who trains secondary teachers at Towson University, as writing "most students understood that if the going rate for babysitting increased, people would spend more time babysitting." A pretty basic concept in economics is that price (or wage) changes have both a "substitution effect" and an "income effect." If the wage for babysitting increases, it becomes relatively expensive to not babysit so people want to babysit more. This is the substitution effect that Damasio has in mind. At the same time, those who are already babysitting are all of a sudden made richer by their increased wage which makes them want to enjoy more leisure time and less babysitting. This is the income effect. The total effect on babysitting is actually ambiguous since we don't know which effect dominates. Much worse than Damasio missing this point is that such a flawed question may have made its way onto the national test past so many people who should know better.

-----------------------------------------------------------------------------------

I actually had my students read the newspaper article in class last week. Sure enough, they spotted the mistake.

Also, I should note that it's not clear that such a question did make it's way onto the test--Damasio might just have been using a (bad) illustrative example. It's also probable that the income effect is beyond the scope of high school economics which raises the obvious question "what's up with that?" And I mean that completely seriously--empirical estimates show that hours worked are not very sensitive to wage changes, suggesting that the income effect is indeed important.

Greg Mankiw, Craig Newmark, and Arnold Kling each have some things to point out about these test results.

Baseball discrimination estimates

Will comments on my previous post and does some math to argue that the level of discrimination estimated in this paper is too small to fuss about. (Of course, I'm sure he would agree that a small amount of discrimination is worth stomping out if the cost is small enough so let me focus on the magnitude.)

The paper finds that a pitcher is 0.34 percentage points more likely to get a strike if the umpire is the same race. Yes, this is a small number. Relative to the probability of getting a strike when the umpire is a different race, the gain is a bit over 1%. Still somewhat small but I don't think that's quite the right comparison.

It's important to keep in mind that more often than not, the strike/ball call is obvious. How many pitches in a game are really "close calls" that "could go either way?" My point is that the small estimate is expected since there so few times in a game when the umpire really has an opportunity to discriminate. He's discriminating a lot more on the margin than he is on average.

I'm sure you get the picture but here's an example. Think about a team that only uses pitchers that match the race of the umpire. How much more likely are they to get a strike on marginal pitches? Assume 150 pitches and 20 close calls. Further, assume that the umpire only discriminates on the close calls.

Increased probability of strike = 0.34 =
(# close-calls / total pitches) * (increased prob. of strike on close calls)
+
(# obvious calls / total pitches) * (increased prob. of strike on obvious calls)

Filling in the knowns,
0.34= (20/150)*(increased probability of strike on close calls) + (130/150)*(0)

Solving, we get that the increased probability of a strike on close calls is 2.55 percentage points. If you think there are less close calls per game (which I think there probably are), then the impact on the margin is greater.

EDIT: It's important to note that the 0.34 estimate is barely statistically significant at the 5% level and that they haven't clustered their standard errors. They should probably be clustering on the umpire. And if they did, my guess is that the estimate would probably no longer be statistically significant. So, despite the fact that I think this magnitude can be meaningful, I'm with Will in the skeptics camp as far as the overall effect is concerned. But the non-questec stadium (where umpires aren't monitored so closely) results are quite compelling.

More discrimination in sports

This time in baseball. Very much looking forward to reading the whole paper. The Sports Economist tips us to the main results from the paper's FAQs.

1. What are the main results of the study?
There are three. First, umpires are more likely to call strikes for pitchers who share their race/ethnicity. The second result is an extension of the first: Umpires are more likely to express a preference for their own race/ethnicity only when their behavior is less closely scrutinized: 1) in parks where QuesTec (a computerized system set up to monitor and review an umpire’s ball and strike calls) is not installed, 2) in poorly attended games, and 3) on pitches where the umpire’s call cannot determine the outcome of the at-bat. Finally, game outcomes are influenced by the race/ethnicity match between starting pitchers and home-plate umpires. Home teams are more (less) likely to win a game when their starting pitcher and home plate umpire have the same (a different) race/ethnicity.

I don't doubt that there may be discrimination in MLB. At the same time, I worry about publication bias. I mean, with this study and the NBA study, it really leads you to believe that racism probably pervades all of sports officiating. That's two out of two, right? (Actually, neither are published in a journal yet but both have received considerable attention--you know what I mean.) I'm sure there are more studies on the way, for the NFL at the very least. Someone should do a comprehensive study of soccer leagues as well since so many countries have leagues--it would be interesting to see how the results differ across countries and continents. In any case, hopefully we'll hear about such papers regardless of the result.

Fellow Econ Grad Students

Are you working the right amount?

The basic lifetime labor supply theory says that you should work the most hours when your wages are the highest--this way you can kick back and enjoy leisure when your wages are low.

If you're still in grad school, you might consider that the return to working may be higher right now than any other time in your career since the quality of work that you amass during this time will determine your first job which has been shown to have profound effects on the rest of your career.

The Changing American Family

From Lundberg and Pollack's paper published in the latest Journal of Economic Perspectives.

• "The proportion of children under age 18 who are living with only one parent rose from 9 percent in 1960 to 28 percent in 2005."

• "25 percent of non-Hispanic white births, 48 percent of Hispanic births, and 70 percent of non-Hispanic black births were nonmarital in 2005."

I knew these numbers would be high but seeing them still took me aback. Also interesting

• "Total hours of housework in married couple households fell more than 20 percent between 1965 and 1995 (Bianchi, Milkie, Sayer, and Robinson, 2000) but, though husbands’ hours of housework increased substantially, wives still performed most of the housework at the end of this period. In the 2005 American Time Use Survey, married women reported an average of 16 hours per week of “household activities” compared to less than 11 hours for men."

Might men not wanting to do housework explain some of the decline in marriage? (Of course, the expected amount of housework is endogenous to the decision to get married so this is a difficult question to answer.)

Clark vs. Colbert?

Lety tips us over at the Ambrosini Critique that Greg Clark, the increasingly famous economic historian here at UCDavis, is likely to be appearing on The Colbert Report to promote his highly praised new book Farewell To Alms. I'm pretty sure that her tip is due to inside knowledge. I would *love* to see Clark and Colbert spar. Poll: Who's more likely to say something controversial?

Grandma's generosity is a result of evolution?

I recently learned of "The Grandmother Hypothesis" (thanks Will). Basically, the hypothesis is that women evolved menopause because, beyond a certain age, it's more effective to invest in their existing children (and grandchildren) than it is for them to continue having children to ensure that their genes persist into future generations. The driving force is the fact that childbirth becomes more dangerous as women age. Neat story.

I believe economist Esther Duflo found behavioral evidence for this theory when she studied the South African Old Age Pension Program although I don't think she realized it (or perhaps she thought it not worth mentioning). She finds that payments to grandmothers improve their granddaughter's health (in terms of weight and height) but payments to grandfathers had no effect. (Interestingly enough, neither has an effect on grandson's health.) Duflo argues "grandmothers are likely to have a stronger incentive than grandfathers to invest in children because they will benefit from them for a longer time" since they are expected to live longer. This is a reasonable explanation but the grandmother hypothesis seems a nice alternative.

Politicians are such easy targets

but it's their own fault. (Or is it ours?) Bryan Caplan with a good find:

Another debate gem: Hillary on energy policy.

CLINTON: ...But this issue of energy and global warming has the promise of creating millions of new jobs in America... So it can be a win-win, if we do it right.

It's hard to interpret this charitably. Hillary really seems to believe that the diverting of millions of people to a new task is a free lunch. Has she never read Bastiat?

Sorry, stupid question.

The problem with free blogs

I really like the (EDIT: now former) title of my blog ("Marginal Revelations") because of what it conveys. But it is a ripoff of Marginal Revolution which I have a great deal of respect for. I came up with about 15 or so alternative names this evening. Of course, they were all taken already. And nearly every one of them had only one or two posts! This is not surprising since they're free.

This wouldn't be a problem in the standard theoretical market. These people clearly do not value their blog names very highly so I should be able to buy them from them for cheap and we both would benefit. But this doesn't happen because there is a transaction cost which mainly consists of me figuring out how the heck I would go about doing that.

Sure enough, there are blog services out there that I could pay for (like typepad) and I'm sure I'd be able to find a name I liked. But they're too expensive so I really shouldn't complain. But I'd recommend to Blogger that they institute some sort of inactivity clause that takes blogs away from people who haven't used them after a year or so.

I think I might just change it to something dry but informative like jmlindo.blogspot.com (because "jlindo" and "jasonlindo" are already taken, of course.)

EDIT: And it's official. I've moved to jmlindo.blogspot.com. Obviously, you've figured this out if you're reading this.

Bad Government! Bad!

Protectionism in (pre-reform) Ghana

The Ghanaians were so eager to have domestic automobile production that they imported kits with a complete set of auto parts from Yugoslavia. They then assembled the cars and sold them. But the international price at which they bought the kits was greater than the international price of the fully assembled vehicle!

Corruption and bureaucracy in Peru

Peruvian economist Hernando de Soto registered a small clothing factory in Lima as an experiment and decided in advance not to pay bribes. During the time it took to get registered, government officials asked for bribes ten times. In two cases, he had to break his own rule and pay the bribes, or the experiment would have come to a halt. In the end, it took ten months to register the clothing factory. A similar procedure takes four hours in New York.

These gems are from Chapter 11 of Easterly's The Elusive Quest for Growth. Having finished it, my previous thoughts on the book stand. After Chapter 6, Chapter 11 is easily the second best of the book.