Kids pay a price for staying close to home

Chapter 9 suggests that people have to be compensated for taking harder jobs, e.g., undertakers earn a premium for the work they do.  But the obverse of this is also true, that if you take more pleasant jobs, e.g., because they are close to home, you pay a penalty.  Marginal revolution reports on evidence of what they call "mobility shocks" on kids who were forced to move from a town where a third of the houses were covered by lava:

...estimates suggest that being induced to move by the “lava shock” dramatically raised lifetime earnings and education.

However, parents who were forced to move were slightly worse off.

Anheuser-Busch categorization of beer drinkers

• 38% of beer consumers—the largest segment—are Loyalists. These are the core beer drinkers; they do a lot of their imbibing on premise and tend to socialize around beer and sports 
• 25% are Experimenters. These are people who have a passion for beer and are less price sensitive. They’re looking for unique taste profiles and variety and gravitate toward craft brews 
• 15% are Aspirers. Ethnic groups are more dominant in this segment and they tend to drink imported beers 
• 12% are Trend Seekers. These consumers are all about creating memorable events around social occasions. Food/beer pairings are a popular way for this group to connect 
• 10% are Sippers. There’s a skew toward females in this group, and beer is usually not their first beverage of choice. Sippers are spurring the growth of sweeter, fruity beers.

Link:  2017 study of the US beer market

Housing prices: does tight supply make 2021 different from 2008?

In past posts, we have characterized housing supply restrictions as a homeowners cartel in that they benefit homeowners by limiting what their neighbors can do with their property. MarginalRevolution.com summarizes evidence that regulations are limiting increase of housing supply.  Since supply cannot respond, price adjusts instead.

 

How to sequester carbon cheaply: buy a coal mine!

• Each ton of burned coal produces 2.5 tons of carbon dioxide. 
• A coal mine sells for about $1/ton of coal reserves.  
• It costs about $100/ton to take the resulting carbon dioxide out of the air and sequester it.  

So, rather than burning coal and paying $100/ton to sequester the resulting CO2, why not buy the coal mine and close it, for only $0.40/ton of CO2.  

Am I missing something?

HT:  Marginal Revolution

Will driving data lead to better insurance pricing?

 Chapters 19 and 20 talks about the problems of adverse selection and moral hazard caused by asymmetric info.  This makes car insurance difficult to buy because you know whether you drive carefully, but the insurance company does not.  Better information, e.g., by letting your insurance company monitor your driving via your cell phone location, will reduce prices for good drivers and raise them for bad ones.  

In lieu of good information about driving, insurance companies use proxies like credit score: those with higher credit scores pay lower car insurance rates.  

Now Allstate is leading an industry-wide group who wants track your driving to determine your insurance rates:

With telematics, insurers monitor policyholders’ driving behaviors either through smartphone applications or devices embedded in their vehicles. Insurers slice the tracking data to tailor individual rates. 

While a switch could be unsettling to many people with privacy concerns, it would hold out the possibility of lower rates for vehicle owners who are excellent drivers or don’t drive that much, and who might now be overpaying for the risk they pose.

Bottom line:  delivering this kind of info to insurance companies reduces the information asymmetry (drivers know more about their expected risks than do insurance companies) which can mitigate the effects of adverse selection and moral hazard.  

The Peltzman Spike

Over 40 years ago, Sam Peltzman studied the behavioral changes from the 1968 adoption of a mandatory seat belt law. Before then, seat belts were an option that many new car owners had forgone (like the original owner of my first car, a 1964 VW bug). Engineers had estimated thousands of lives would have been saved had crash victims only been restrained. Their estimates were high. They had not accounted for the additional crashes. Once drivers were safer given a crash, they could drive a little faster and a little more recklessly and still be just as safe as without the seat belt. The net effect of more drivers surviving crashes, but more of them, was a smaller reduction in auto fatalities than had been predicted.

Peltzman's findings were controversial at the time but spawned a slew of research into how safety regulations affect behavior. The story goes that at one presentation, Walter Oi noted that car crashes also cause negative externalities. That is, often you crash into someone else causing harm to them as well as to yourself. The usual remedy for negative externalities is to make the reckless behavior more expensive, not less. Oi suggested that instead of seat belts, we should include a sharp spike on the steering column. The possibility of impaling oneself on "The Peltzman Spike" would focus the mind on avoiding crashes.

Nobel awarded for inferring causality

This year's Nobel prize in econ goes to three economists who developed methodologies for identifying correlation from causality.  

We have blogged extensively about why causality is important to business and how to design experiments or analyses to identify it.  In particular, use the web app to teach regression to understand the two mistakes you can make:  Type I (mistakenly inferring causality) and Type II (mistakenly inferring no causality) errors occur.  Try the learning exercises in this paper:

 A Simple Way to Teach Regression

Vanderbilt Owen Graduate School of Management Research Paper

15 Pages Posted: 10 Jan 2020 Last revised: 5 Aug 2021

Luke M. Froeb

Vanderbilt University - Owen Graduate School of Management

Date Written: August 05, 2021

Abstract

This paper introduces a simple free web app that can teach regression to anyone who can point and click. Originally designed to teach Justice Department attorneys enough about regression so that they could cross examine rival experts, the app ``inverts'' the usual pedagogy: instead of showing users how to run regressions on data, it asks them to click on a graph to ``create'' data to achieve a given outcome, like a statistically significant line. Successful completion of each task is rewarded with immediate feedback that reveals the principle behind the exercise. This paper describes short, intuitive exercises to teach: (i) hypothesis testing, statistical significance and confidence intervals, (ii) the difference between correlation and causality, and (iii) how to diagnose functional form mis-specification. These exercises can be completed in just a few minutes.

Keywords: Teaching Regression; statistical significance; correlation vs. causality

JEL Classification: A2 (Economic Education)

Suggested Citation:

What does a bursting bubble look like?

Like China's property market:

As China enters what many economists say is the final stage of one of the largest real-estate booms in history, it is confronting a staggering bill: More than $5 trillion in debt that developers took on when times were good, according to economists at Nomura Holdings Inc.

That debt is nearly double what it was at the end of 2016 and is more than the entire economic output of Japan, the world’s third-largest economy, last year.

Global markets are braced for a possible wave of defaults, with warning signs flashing over the debt of about two-fifths of development companies that have borrowed from international bond investors.

Chinese leaders are getting serious about addressing the debt, with a series of moves meant to curb excessive borrowing. But doing so without torpedoing the property market, crippling more developers and derailing the country’s economy is quickly turning into one of the biggest economic challenges Chinese leaders have faced in years, and one that could reverberate globally if mismanaged. ...

Some prospective home buyers are balking, forcing the companies to cut prices to raise cash, and potentially accelerating their slide if the trend continues.

Gender and majors, happiness, single-sex education, and for-profit education

 Interview with Claudia Golden:

On why men are more likely to major in economics:

One of the problems that we have, as a field, is that when students — before they even come into their freshman year, and they’re asked what do they want to major in, women will — if they want to major in the social sciences — will put down psychology, and men will put down economics, so we lose them before they even unpack their suitcases.

On happiness:

...people recenter their happiness. You can be in a place in which, if you were plunked down there from somewhere else, you’d be miserable, and yet, you’re there, and you recalibrate yourself, just like people recalibrate themselves when they have a bad health event. It takes a while. 

On single-sex education:

...I had girlfriends, but I enjoyed being around the boys a lot more. I went to Bronx Science, which was about two-thirds boys. When I applied to college, I just could not imagine going to an all-girls school. Now I know the arguments in reverse, and I respect them, but it was certainly not for me. 

On some for-profit education:

[e.g., students who want a quick business degree at a for-profit university] are not as aware as they should be of what they’re getting themselves into. They are often very needy. They’re low-income. They’re first-generation college. Someone is dangling in front of them something that they really want. They desperately want something that’s going to get them out of the hole that life has put them in. That person who’s dangling it is not giving them sufficient information and sufficient amount of time to get out of this contract.  ...

The for-profits that give short courses that give a one-year certification in, let’s say, medical technicians — what we’ve shown in our work, those are not the big problem. 

 

Price vs. Value

 Good post from Merle Hazard on the difference between Value and Price:

Simply put, price is what you pay for an investment, and value is what you get. ...Given that "price" and "value" are different, it is possible that the market quotation for an investment, its price, may be higher or lower than value. 

...Investors tend strongly to fall into one of two camps. 

Most primarily see publicly traded stocks, for example, as something akin to baseball trading cards. They are focused on price, not the underlying economics. ... If you have to sell in a hurry, it is impossible to deny that you are in the hands of others.

On the other hand, value believers see stocks as real pieces of real businesses, with an intrinsic worth independent of what others say. ... ...the "value" perspective yields the wisdom that a stock represents a real piece of a real business. As an owner, you have certain rights, like voting, electing directors, and getting your share of a dividend or liquidation. In the very long run, shareholders necessarily earn what the business earns.