Economics of Odd Stuff

My fellows here think that economics can help to understand, among others, these following: Why Asians are good at math; why relatively there are more New York celebrities with dogs than Virginia-suburbanites; and how you assign dishwashing chore amongst family members.

Those are some very preliminary thought in a submitted two-pages first assignment. But probably some of them would evolve into a good, and surely intriguing, paper.

In case you want to know my proposal (maybe not), it's the economics of rainmaker --why many Indonesians resort to believe in rainmaker and Americans CNN's weather report (or something like that).

Tail You Lose (Big Time)

In one article in their special report on the future of finance, The Economist, describe why the quants' model failed to foresee the recent crisis as follows:

In markets extreme events are surprisingly common—their tails are “fat”. Benoît Mandelbrot, the mathematician who invented fractal theory, calculated that if the Dow Jones Industrial Average followed a normal distribution, it should have moved by more than 3.4% on 58 days between 1916 and 2003; in fact it did so 1,001 times. It should have moved by more than 4.5% on six days; it did so on 366. It should have moved by more than 7% only once in every 300,000 years; in the 20th century it did so 48 times.

And the Catch-22 is

On the one hand, you cannot observe the tails of the VAR curve by studying extreme events, because extreme events are rare by definition. On the other you cannot deduce very much about the frequency of rare extreme events from the shape of the curve in the middle.

And

Modern finance may well be making the tails fatter, says Daron Acemoglu, an economist at MIT. When you trade away all sorts of specific risk, in foreign exchange, interest rates and so forth, you make your portfolio seem safer.

To make the point clear, look at the graph on that article.

One of my old teachers, when discussing economic model for developing countries, once said that sometimes the real story lies in the outliers. I think he made a good point, and I should add the modern advanced finance too.

Hajj pilgrim and randomized experiments

Randomized experiments seems to keep moving the frontier. From micro credit to deworming to teacher's absenteeism to corruption. Recently, a study on the impact of hajj pilgrim and tolerance behavior was conducted using the method, by Kennedy School's Ashim Khwaja and his colleagues.

This is how they did the randomization (in which I am interested more):

For the study, three economists interviewed 1,600 Pakistanis, half of whom had been on the hajj in 2006 and half of whom had applied for visas to go but were rejected. Respondents answered 200 questions in face-to-face interviews that lasted hours. The interviews took place five to eight months after the pilgrims came home.

And this is the result:

Muslims who undertake the hajj "return with more positive views towards people from other countries," are more likely to say "that people of different religions are equal," and are twice as likely as other religious Muslims to condemn Osama bin Laden, the study found.

Looks like economists can now have job opportunities in the Ministry of Religion...

These things do happen...

You have carefully calculated your sample size based on some criteria (power calculation, impact size, budget, etc.). You have randomly assigned your samples into treatment and control groups. Your counterpart, in this case District governments, have agreed to commit to the random assignment.

Then, one morning, your local government contact called you:

How are you? Been a while since the last time we talked. By the way, sorry to inform you, but we have decided to give treatment to village X. I know, initially it was a control village. But we thought that the village is in a desperate need to get treatment. So, in fact, we have already started treating village X.

And this was not the first time you received that kind of surprise phone call. And out there, many still believe that a big donor like the Bank is a kind of super institution that is able to dictate governments here and there to get what it wants.

Note: anyway, in randomized trial, there are ways to deal with this; you can choose to apply the Intention to Treat analysis, or the Treatment of the Treated.

Why Culture Matters

After being scolded by the baristas for doing a crappy job, the Manager dug up her emails to recover the yet-to-be-posted article submitted by one of our favorite guest hosts, Roby. You see, Roby complained that his submission about “toilets and culture” was never posted here on the Café with nary an acknowledgment from the management, which shows just constipated (sorry, can’t help it) our “review” process is (hint: it involves email forwarding and little else).

The Manager finally found the said submission, originally received by the Café in December 2007. The only problem is, instead of “toilets and culture” the post was more about “table manners and culture”. There may be confusion between things that are going in one end and going out the other end, that’s understandable (happens to the Manager all the time). In any case, the post is indeed very relevant to A.P.’s toilet contribution. So here it is, without further ado, an excellent rejoinder.

- Kate, the remorseful Manager

Why Culture Matters

by Roby

It is common to put culture and the concept of economic man in a diametrical term. Taking the risk of oversimplification, the debate can be summarized as follow. The cultural argument argues that people behaviors are largely determined by cultural scripts, not by rational cost-benefit calculations. On the other hand, economic argument insists that individual decisions are independent of cultural factors.

Here I would like to argue that the picture of economic men is still plausible in cultural analysis and culture is a necessary prerequisite for rational calculations.

The key here is to see culture as a toolbox. That is as a set of tools that are accessible for solving problems. People face problems in their daily lives and use whatever they have in their toolboxes to solve the problems. Once they have picked a tool, they can use it in a highly rational way. This rational calculation, however, is only possible when a person has chosen a tool.

For example, imagine a group of people who use their hands when they are eating and another group who use utensils. Now because of health concern, we want to make those who use their hands to switch to use spoons and forks. Economists tend to jump to the conclusion that the whole problem can be solved by finding the right incentive. As they soon found out, however, the former group did not switch even though they completely understood the health benefit of using spoons and forks.

The problem here is that the first group does not consider spoons and forks as eating tools. For them, eating using spoons and forks is as absurd as, say, eating bugs. They just don't do that - despite the fact that bugs have nutritional values. Therefore, persuasion, bargaining, socialization and inspiration can be as much useful as incentive.

If we see culture as tools, then the rational calculation only applicable to available tools. We cannot perform cost-benefit analysis on the tools that are not part of ones' toolbox. Therefore rationality is local instead of global. It is in this sense culture matters for economic analysis. On the other hand, cultural analysis would benefit by applying rational choice to understand behavior in a given context.

Of toilets, faeces and open defecation

Yes, I've been absence for a while from this cafe. Unlike Sjamsu, I haven't been performing in The Police and Queen nights. Unlike Aco, I haven't been winning any awards. Unlike Ujang, I was happy that Liverpool has beaten MU and Chelsea.

I have been traveling recently to some places, mainly to East Java, for a rural sanitation project in eight kabupatens. I visited some villages, and in many villages I found that only 1 every 9 or 10 households that have in-house toilets. They do most of their business in the river or bushes. Of course, it is easy to think the relations between open defecation, health problems, human capital, and productivity. We may also hypothesize that poverty is the reason why they don't have in-house toilets.

However, most of them have brick or concrete houses, sometimes with ceramic floors. And almost every household have at least one cell phone. So cost (supply) can not be the constraint -- demand looks to be a bigger problem. This may be due to 'culture-related' sanitation behavior, lack of awareness, or whatever reason. The point is, if you just simply build public toilets or subsidize people to build one in their house, such intervention may not work. People will just go back to the river or bushes.

This is where I agree to our friends Tirta (and Roby, among others), that psychology and understanding the nature of social interaction is important. In fact, the project in which I am involved aims to create demand for proper sanitation. What we do is, open community meeting, we ask the villagers to: 1) draw their local map, 2) ask them to identify which houses have toilets, and where do the rest go for defecating, 3) invite them to do some mental exercise in counting how much faeces they are producing in a day, week, month and in a year. After that, we ask them who wants to build toilets equipped with septic tank.

If 1-3 don't work, we then ask them to go to the spots where the villagers do their usual business. If this also don't work, the strategy is to take real, fresh, faeces in front of them then discuss the possible transmission of virus and bacteria to human's body. (Well, if this also doesn't work, then, from the perspective of the project, we're in a deep shit...).

Of course, this efforts may or may not work. Despite all the campaigns, maybe only a few people want to build toilets in the end. Even though many people build their own toilets, their health situation may not improve. This is why we are doing an impact evaluation (in fact, I am involved in the evaluation side of the project, not the shitty activities one). After collecting the baseline data, in a few months up to a two-year period, we will be collecting some data on the health status. Then we will compare the data in the 'treated' and 'control' villages. We'll see the result in 18 months...

Whose Job Market?

Among the topics presented on this year’s job market were studies of the prison parole system in Georgia, (several) of HIV/AIDS in Africa , of child immunization in India, of the political bias of newspapers, of child soldiering, of racial profiling, of rain and leisure choices, of mosquito nets, of malaria, of treatment for leukemia, of the stages of child development, of special education, of war and democracy, of the effects of TV coverage on democracy, of bilingualism and democracy, and many others. (Among the leading departments, only Stanford’s graduate students appear to be working almost exclusively on traditional topics.)

The question: whose job market is that? a. criminologist, b. epidemiologist, c. political science, or d. none of them.

Yes, it's none of them. It's the US economist's job market in the year of 2007 --according to Angus Deaton of Princeton in his Letter to The Royal Economy Society of Britain last year.

I'm sure some cynics would give a snort and dub it as an economics imperialism, but I'd say it's cool. Very cool, indeed

HT: Marginal Revolution

Why Science Matters (and Conspiracy Theory Doesn't)

I like this heartwarming passage about science:

But here’s the thing. The reason science really matters runs deeper still. Science is a way of life. Science is a perspective. Science is the process that takes us from confusion to understanding in a manner that’s precise, predictive and reliable — a transformation, for those lucky enough to experience it, that is empowering and emotional. To be able to think through and grasp explanations — for everything from why the sky is blue to how life formed on earth — not because they are declared dogma but rather because they reveal patterns confirmed by experiment and observation, is one of the most precious of human experiences.

And the opposite of it is called, well, conspiracy theory ---the game of blaming everything to neo liberals, marxists, foreign power, own weaknesses, capitalism, socialism, infidels, (....insert whatever you want...).

Alas, it seems that even many of our educated class, self-declared scientist, and supposedly respectable media just love it.

Soap operas are not always bad

We've heard many bad things about TV programs. From inducing violent behavior to promoting mysticism or obscenity. Recently, the Indonesian Broadcasting Commission blew their whistle to a famous reality show because 1) the hosts consistently throw sarcastic jokes, and 2) it starts at Maghrib prayer time with limited commercial break, so it doesn't give time for Muslims to perform their prayer (yeah, right!).

A recent work by Robert Jensen and Emily Oster shows that exposure to TV programs may have a positive impact on attitudes toward women in India. Using fixed-effects panel data regression during a period when cable TV services was rapidly expanding in rural India, they found "significant increases in reported autonomy, decreases in the reported acceptability of beating and decreases in reported son preference... [and also] increases in female school enrollment and decreases in fertility (primarily via increased birth spacing)." In terms of indicators, school enrollment and fertility are obviously observable. The other three are behavioral indicators. One can't observe it directly but will have to rely on the reported data.

The Survey on Aging in Rural India (SARI) data, which the paper is relying on, does have the information. On women's autonomy, the survey asked if the female respondents needed permission from their husbands to go to the market or visit friends/relatives. There is another question on who makes some important decision in the household, which deals with household decision making. On perceptions regarding domestic violence, the survey asked whether female respondents think that a husband is justified to beat his wife if if he suspects her of being unfaithful; if her natal family does not give expected money, jewelry or other things; if she shows disrespect for him; if she leaves the home without telling him; if she neglects the children; or if she doesn't cook food properly. Then, preference over gender of the children is measured by the question "Would you like your next child to be a boy, a girl or it doesn't matter?"

Although the authors did not specifically test which/what kind of TV programs are more effective, they mentioned that soap operas are the most popular ones among the rural women.
So, soaps could be the agent of change, then... Bukan begitu, Estella? Jangan tanya padaku, Esposito...

Crisis, Religious Intensity, and Violence

I want to know, using the method that I know --in case you don't know, it's economics--, why there seems to be a rise in urban Islam fundamentalism after the crisis in Indonesia, that at times sparks social violence. And I come across two papers of this very interesting, yet under-appreciated, economist, Daniel Chen of Harvard.

He wrote (in pdf) that:

Empirically, I demonstrate economic distress stimulates religious intensity by exploiting the fact that rapid inflation caused relative prices to favor growers of staples, namely rice, and hurt sticky wage-earners, particularly government employees, whose salaries are set by federal law. I find that households experiencing a $1 decline in monthly per-capita nonfood expenditures are 2% more likely to increase Koran study and 1% more likely to switch a child to Islamic school. Moreover, participation in other social activities did not increase while labor supply increased, which seems inconsistent with an opportunity cost view of religious intensity.

Instead, using a difference-in-differences strategy, I show that households that increased Pengajian during the crisis have less unmet demand for alms and credit for meeting basic daily needs in the following time period. The effect of economic distress on religious intensity essentially disappears in places where credit is available. And religious institutions appear to facilitate consumption smoothing among villagers, suggesting religious intensity functions as ex-post social insurance.

And here is (in another pdf) the catch-22.

I present an analysis of data from the Hundred Villages Survey and data from the Database on Social Violence in Indonesia 1990-2001. OLS estimates show a large positive relationship between religious intensity and social violence. Because most religious intensity measures are relatively time-invariant and are pre-crisis measures and because villages are unlikely to
build schools, seminaries, or religious buildings in anticipation of social violence, reverse causality is unlikely to explain this association. In fact, a strong relationship between pre-crisis measures of religious intensity and social violence begins after the crisis. In addition, stronger forms of religious intensity are more strongly associated with violence.

These two papers are worth to read completely (skip the math, if you want). And by the way, back to my initial question, on why it is more urban than rural extremism that we observed lately, the first sentence of the first quote partly tells it: economics distress hit the sticky wage earners, the urban feature, more severely.

p/s: you should see the syllabus of his teaching, too

(Ir)rationally Fun Book

Tim Harford's latest book is probably one of the best popular books introducing rational choice (aka cost-benefit analysis) economics. But for a healthy dose for perspective from the other camp, that is, behavioral economics, I would really recommend the just-released Dan Ariely's Predictably Irrational.

The book is a good fun read -- so good that I missed the bus because I was so absorbed reading the first chapter and failed to proceed to cashier timely.

I enjoyed the way Dan set his creative experiment and most of the time got his points describing human predictably irrational behavior. My favorite chapter is on placebo effect --not to mention his practical joke about MIT's T-shirt that reads "Harvard: Because not everyone can get into MIT".

But somewhat I am bit wary with some of his suggested policy recommendation that gives a glimpse of paternalism. This is one example:

If you accept the premise that market forces and free market will not always regulate the market for the best, then you may find yourself among those who believe that the government (we hope a reasonable and thoughtful government) must play a larger role in regulating some market activities, even if this limits free enterprise. Yes, a free market based on supply, demand, and no friction would be the ideal if we were truly rational. Yet when we are not rational but irrational, policies should take this important factor into account.
--page 48

The problem: how can we find a rational government? More often than not, government is less rational than people under free market.

Against Rogue Pros

How many of you are damn sure that whenever you go to those fancy hospitals and health clinics in Jakarta, without medical insurance in hand, you are not ripped off by those, favorite, doctors? That, somehow, you feel that your headache is not that bad, but then you find yourself ended up into unecessary expensive procedures as well as pricey medicines? That you are sure that caesarean section is indeed in dire need, and not the way obstetricians make extra money off you? And, --this is is the worst--, that they really know what's going on inside your body?

But since you have no expertise in medical science, the only option for you is to shut your mouth up, and let the experts decide your fate. Worse still, they are the one who not only diagnose, but also will be paid for further treatment.

The same thing goes for laptop repair, or car mechanics. And this guy, Henry Schneider of Cornell, took the challenge to prove whether car mechanics, in 40 Connecticut garages, don't swindle their costumers. The result: only 20 percent pass the test.

I hope somebody's gonna hire economists to do the same undercover research for health services here in Jakarta, or Indonesia, instead of relying on anecdotal evidences and finger-pointing game on doctor's malpractices. Schneider's paper and model is not technically too complicated to replicate for our case.

I am looking forward to it.

The economics of witchcraft

A cute paper by Emily Oster (a former TA of my Econometric class at Harvard, now at Chicago), published when she was a student. An excerpt from the paper:

This paper explores the possibility that the witchcraft trials are a large-scale example of violence and scapegoating prompted by a deterioration in economic conditions. In this case, the downturn was brought on by a decrease in temperature and resulting food shortages. The most active period of the witchcraft trials coincides with a period of lower than average temperature known to climatologists as the “little ice age.” The colder temperatures increased the frequency of crop failure, and colder seas prevented cod and other fish from migrating as far north, eliminating this vital food source for some northern areas of Europe (Fagan, 2000).

On witch hunting -- here's a documentation of my visit to Salem, Mass. A place famous (or notorious) for the 17th century witch hunt hysteria.

It's non-party time!

A few weeks ago Aco, in exegesis, was ranting about 'independent candidate.' I agree with him on one thing: the term 'independent candidate' is oxymoronic. But I am less pessimistic with the idea of allowing a candidate to run without having to be nominated by political parties. Let's call her or him non-party candidate.

Aco wrote:

Whoever you are, you can't run a populace alone. You would need support, cheer, organization, funding and all that. And that my friend, is called, 'party'.

To begin with, modern democracy is representative democracy. Political parties are, supposedly, the bridge between the people (constituents) with representatives. A simple way (well, not too simple perhaps) to explain the situation is using the principal-agent setting. Parties act on behalf of their constituents, who have a set of objectives. But parties have also their own objectives to maximize. To align both sets of objectives, a certain incentive-punishment mechanism needs to be developed, which we call 'election.'

Another way to look at the role of parties is to draw an analogy with real estate agents. Like realtors, parties help minimizing the search cost for a candidate, as well as help marketing a candidate to the potential buyers.

However, in any principal-agent settings there are potential drawbacks. Due to a broken incentive structure, agent may not maximize principal's objectives. In a worse situation, agent may fully ignore the principal. Of course, we can fire sack or realtors, company executives or football managers. That can happen if the market of realtors, executives or managers is competitive enough.

What if it is not? What if parties become, or establish, a cartel-like political structure? Like any cartels, political cartel extracts consumer's (voter's) surplus and limiting choices by creating a barriers to entry for newcomers (or for new ideas). What can be done? In any economic textbook, the solutions for cartels are: a) issue regulation that dissolves cartels; b) create competitive pressure, by promoting domestic competition and/or free trade.

This is the situation in which, I shall argue, independent non-party candidate can be a solution (note that I am not claiming it is the solution). Yes, it may work, it may not. There are theories to justify either. Nevertheless, we can do empirical research on it: just compare regions (provinces or districts) where non-party candidates won, versus whose winners are traditional, party candidates. First, of course we need to define the dependent variables. It can be economic growth, corruption, speed in poverty reduction, some health or education measures, and so on. If we have enough data set, we can do a regression, controlling for region fixed effects.

Yes, there may be endogeneity. The economic, social and political situation in a region may lead to independent candidate winning (or losing, or even not bothering to run) the election. But there are some empirical strategies can be considered, like what Benjamin Jones and Ben Oken did in their forthcoming paper on leadership and economic growth (by way of Dani Rodrik).

As my concluding note: let's not making this independent non-party candidate a big fuss. Just make it possible, let the market (voters) decide whether they should trust them, or retain the hope for political parties. I believe, in the end people would choose party candidates. See the fate of non-party candidates in established democracies everywhere.

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Spit and Blood

...and Other Bodily Fluids We Want from You

While Aco and Anna were being amused in Japan, my middle finger was being pricked for blood by a research psychiatrist whose main field of research include depression and social dysfunction...

We often say that economists are not too interested in learning what people say or what people feel. We are more interested in observing what choices people actually made - revealed preference is an example of this approach. How much then, do you think, one should value the answer to the question "Are you very happy, pretty happy, or not very happy" in surveys? Not very much, if you're an economist. You'd want to be able to observe things that show people really are happy, some objective measures.^*)

The similar is true when we want to study health status of individuals. Self-reported measures of health status (e.g. "How would you rate your overall health?"), while valuable, are subjective, prone to error, and often misreported. So we would look for "hard" evidence in the form of objective health measures to complement the self-reported measures. Robert Fogel, in one of his famous studies, look at long-term trend in height of individuals to study health, nutrition, and economic growth. There is now a large literature in economics that utilizes anthropometric data such as height and weight in various forms (Body Mass Index, weight-for-height Z-scores, waist circumference, etc.).

In recent years, economists as well as other social scientists have looked at other sources of "hard evidence": saliva, blood drops, urine, and practically any other bodily fluids they can have their hands on. These are of course some of the things that people in biology, medicine, and epidemiology have been studying in their respective fields. But several development have transformed activities that previously could only be conducted in a laboratory setting in such ways that they can now be done in the context of large scale population-based research.

First, the cost of doing so has never been cheaper. Equipment to measure blood pressure, blood hemoglobin level, cholesterol levels, are becoming smaller and cheaper. Methods to analyze blood sample from a dried drop of blood have been developed - no need to collect a whole tube- enabling researchers to incorporate blood sample collection into their large scale surveys. Second, researchers are realizing that so long as they follow strict ethical guidelines, people are willing to provide blood, urine, or saliva.**) In contrast, people are more guarded about their earnings, savings, or wealth. And this is true not only in developing countries but also in developed countries: people are generally more willing to spit for you than they are in telling you how much money they make last year.

Third, scientists have been able identify some biomarkers that can be linked to various health and behavioral outcomes. For example, the level of cortisol, a hormone that is released by our body in response to stress, could be useful for those who are interested in learning how negative events influence one's health. Asking "Are you stressed out?" could be useful too, but having objective measure as well would certainly be better. We can obtain cortisol levels by analyzing saliva (preferably collected at different times of day, because of its diurnal variation). C-reactive protein, a protein that is released during inflammatory episodes can be measured from a small spot of dried blood. There is now a body of evidence linking C-reactive protein levels with elevated risk of hypertension, cardiovascular disease, and diabetes. In this Cafe a while ago, Aco mentioned an economic paper that looks at cotinine level in blood. By collecting these objective measures of health, social scientists now have better access to study the relationship between health and socioeconomic status and the two-way nature of the relationship.

So there I was, my middle finger being pricked for blood by this research psychiatrist whose main field of research include depression and social dysfunction..

We were both eager participants of a workshop designed to equip social scientists with tools on how to integrate biomarkers into our research. There were psychiatrists, psychologists, demographers, sociologists, economists, and anthropologists in the room (note: some biological anthropologists are at the frontier of this interdisciplinary research) .

Part of the fun -besides exchanging bodily fluids- is to learn about the new terminologies and compare them to things we have in our own discipline. Take homeostasis, for example, the property of our bodies to internally maintain a stable condition regardless of changes in outside environment. Example: our body has a "thermostat" that regulates internal temperature that keeps our body from becoming too hot - we sweat. Economists would perhaps associate homeostasis with a steady state equilibrium. And there's allostasis, the process of maintaining stability or homeostasis through changes in physiological or behavior. Example: having endured prolonged exposure to heat, we will not only be sweating, but our kidneys will start to reduce urine output, eyes begin to dry out and so forth. Economists: think of allostasis is the process of moving from an old to a new equilibrium level, if there are multiple equilibria. And the fun goes on.

A look back at older posts and comments in this Cafe would reveal that many of the Cafe's visitors (Tirta, Roby, just to name a few) are already well-versed in inter-disciplinary crossovers. I, dear readers, still have a lot to learn.

*) There is of course a strand of literature in economics that increasingly take subjective measures of well-being seriously. See, for example, the paper by Kahnenman and Krueger in the Journal of Economic Perspectives, 2006 (20:1) on the topic. And yes, I know about Bhutan's Gross National Happiness project.
**) The ethical part of this body of research is something that cannot be taken for granted. Just last week, there was an article in the New York Times about a group of Amazon Indians who were aggrieved when they found out (from the internet!) that blood samples that were collected from them years ago are now being sold to researchers around the world.

Do modern markets really harm the traditional ones?

Errata. I wrote "the treatment group consists of traditional markets opened between 2003-2006 which are located within 5 km from a modern market." The correct passage should be "sellers in traditional markets which are located within 5 km from a modern market(s) opened between 2003-2006." Sorry.

One one occasion, a student confronted my statement that market competition does not necessarily means the weak will have to face the strong in one battlefield. This student used the traditional vs. super/hypermarket as the evidence. To be honest, although I thought his statement (as well as others who shared this view) was still debatable, I could not provide any scientific evidence to refute his argument.

But a recent study of our colleagues at SMERU Research Institute now provides the empirical evidence. Their study shows that although it is true that sellers in traditional market has been loosing profits, it can not be attributed to direct competition with modern super/hypermarkets. The report is not yet available online (thanks to Dr. Sudarno Sumarto for letting me quote and discuss their work). But it has been quoted by a local news magazine.

They interviewed fresh food sellers in traditional markets in Greater Jakarta and Bandung area. The sample was then divided into two groups:

• Treatment group consists of traditional markets opened between 2003-2006 which are located within 5 km from a modern market.
• Control group consists of markets located in the same districts with that in the control group where no modern market exists within 5-km radius, but according to the regional site plan, there will be a super/hypermarket opening nearby in 2007. This last criteria is important to isolate the placement effect (the fact that a modern market is opening soon means that the location is equally attractive to modern markets).

In addition, the markets in both groups must not have been renovated after 2003 (the benchmark year in this study).

The difference-in-difference result (see below) showed that from 2003-2006, sellers in both group are losing profits. Interestingly, those in the control group (who faced no direct competition with modern markets) experienced bigger decline in percentage term. However, the difference is statistically not different from zero (but still provides no evidence that the modern markets harmed the traditional ones). The bottom row shows that in terms of earning, the control group experienced bigger decline. This may suggest that to cope with declining profits, traditional sellers tend to maximize sales rather than profit. Still, the difference is not statistically significant.
To put it in another words, this study shows that with or without modern markets, traditional markets are declining. If financially strong modern markets are not the main culprit, then what are? According to the qualitative part of the study, many sellers view street vendors (those selling similar products outside the marketplace) as more of the problem, as well as bad management.

Before we either believe or bash this study, there are some caveats needs to be taken into account:

• First, the question of external validity: can the sample represent the population? (SMERU has acknowledged this in their study).
• Second, as our friend Arya Gaduh pointed, although they had tried to correct the placement-endogeneity bias by only considering locations where a modern market is opening, the problem may still exist. The decision to open in 2007, not earlier, may perhaps reflect location preference.
• Third, our co-blogger Sjamsu raised the issue of selection bias. Could it be that those who were interviewed only represents the 'winner,' while the 'losers' have already exit the business?
• Fourth, the study was limited to fresh-food sellers. Sjamsu also referred me to a study conducted by a consulting firm that fresh food sellers are still the winner as they still have a comparative advantage: freshness. They start selling early in the morning (when modern markets are still closed). And, in the urban/suburban areas, even the most of the mid-high income still buy fresh food from the traditional markets (or ask their pembantu to do that). So perhaps the result was skewed towards the 'winners.'

Nevertheless, SMERU study has provided us a very valuable empirical evidence. More than just anecdotal or 'romanticizing' the David vs. Goliath epic in market competition.

Addendum. As presented, the numbers in parentheses from the table above are standard deviations calculated from the sample. The authors did not present the standard errors for the mean values and the DiD coefficients. However, in the appendix section of the report, the authors presented the standard error and t-statistics for the DiD coefficients. The t-statistics are 0.76 (changes in profit) and -0.32 (changes in earnings). So statistically speaking the DiD coefficients are not different from zero. The authors estimated several models, adding some controls in the regressions. The coefficients changed slightly, but the results are consistently not significant.

Ahmad Dhani the researcher

Perhaps the biggest challenge for a researcher is to show causality – that X is causing Y. Most of the time, at best we can only claim that the two are correlated. Even if we do some fancy econometric techniques, we need to be careful in making claims about the coefficients. Usually, we phrase our conclusion as “higher/lower X is associated with higher/lower Y.” We tend to avoid saying things like “higher/lower X is causing higher/lower Y” due to reverse causality and omitted variable biases.

(Even if we just claim an association, we also need to be careful. Otherwise, we’d say things like "people born under the astrological sign of Leo are 15% more likely to be admitted to hospital with gastric bleeding than those born under the other 11 signs," as this article quoted.)

If" we want to claim causality, we need to think about counterfactual: “what would have happened to Y if X had not existed or happened.” Think about X is a policy or any kind of intervention, and Y is the outcome. Let’s say that X is classical music, and Y is baby’s IQ. Some people said that classical music increases (that is, causing in a positive way) baby’s intellectuality. Truly, I don’t know how true the research was; perhaps it was, perhaps it wasn't. The point is, all the researchers need is to provide a counterfactual: that babies who did not listen to classical music have lower IQ scores that those who have been exposed to classical music.

But simply comparing two babies (or two populations of babies) will not solve the problem. We may think that parents’ taste of music is correlated with wealth. Hence babies who were exposed to classical music are more likely to come from wealthier parents who can feed them with better nutrition or supply them with more IQ-stimulating games. This is what we call ‘omitted variable bias.’

A perfect research would be making a clone of a newborn baby, treat them equally the same except for the exposure to classical music. Then measure their IQ after several years. Note that a research involving human cloning will not pass the ethical committee, at least until now. The next best thing we can do is to perform the so-called randomized experiment (like these guys, as well as this friend of us have been doing).

But Dhani (the musician, not our friend Dhani the real researcher) had a different idea. In his latest appearance in an infotainment (indeed, watching infotainment is better than listening to football commentator during the match break. By the way, Dhani appeared with his three boys but without Maia), he said that his boys must like rock music, because it is a ‘man’s music.’ His conclusion was based on a ‘study’ over some ‘sample’ – his so-called ‘sissy, queer’ (bences-bences) friends. His ‘sample,’ he claimed, do not like rock music. So look at the result. (The presenter asked Dhani’s kids whether they listen to Dave Koz, which answer was ‘no.’ Dhani then added, “Of course they don’t listen to him – they like Iron Maiden instead…”).

I enjoy Dhani’s music. I respect him as a musician. I never like his male-chauvinist antics and remarks. And definitely he is not a researcher.

Putnam confirmed

In "Making Democracy Works" (1994), Robert Putnam shows how civic community matters in governance and democracy. He made Northern vs. Southern Italy has his case. Then, in "Bowling Alone" (2001) he wrote that civic participation has been declining in the U.S. TV and radio were to blame for that.

Scholars have been disagreeing over his work. I will leave the disagreement for another discussion. One interesting question to ask would be "how true is the claim that TV and radio contributed to declining civic participation?"

An interesting paper by Ben Olken tried to answer that using survey data from more than 600 villages in Centarl and East Java. The methodology is very interesting. He looked at the number of TV channels can be reveived in each village. Based on Putnam's work, he hypothesized that the more channels can be received, the lower the level of civic participation. Since Putnam also argued that level of civic participation correlate with governance, more channels should also negatively correlated with quality of governance.

But a simple linear regression suffers from reverse causality and omitted variable bias. There may be other factors correlated with channels reception and participation as well as governance. To deal with this problem, Olken exploited the exogenous factor that affects channel reception: geography of each village. Villages surrounded or near the mountain will receive less channels (perhaps only TVRI and RCTI). So he uses the information on several determinants of channel reception in each village (geography, topography, relative position from nearest transmitter etc.) as the instrument.

The IV regression results were fascinating. Number of channels is negatively correlated with participation in social groups (community meeting, gotong-royong, arisan or religious groups), trust (other measure of social capital), and "missing expenditure" (as proxy for corruption and governance).

So, Putnam's theory is confirmed then?

Methodology | Social capital

Corrupt at home, corrupt abroad?

"...even when stationed thousands of miles away, diplomats behave in a manner highly reminiscent of officials in home country..."

Do diplomats bring the corruption "culture" of their home countries when they move to New York City? There seems to be evidence that the answer is "yes", at least according to Ray Fisman and Edward Miguel in their their paper on corruption (via PSD) using data on parking violations committed by thousands of diplomats in New York City. The study finds that diplomats from countries highly perceived as corrupt (using the Corruption Perception Index created by Transparency International) also have significantly higher number of unpaid parking tickets.

Why parking tickets? Scarcity of parking spots in NYC is legendary and each diplomatic mission to the UN is only given two spots for their cars, regardless of the size of the mission. Cars with diplomatic license plates can be ticketed for parking violations but the diplomats who are the registrants of the cars are immune from any legal punishment if they choose not to pay the tickets. Economic prediction then would tell us that no one will make any payment since everyone can get away with it. One can then argue, as did the authors, that the number of unpaid parking violations represents the revealed preference on "corruption" of the diplomats (or the mission). And guess what, apparently diplomats who come from countries perceived as least corrupt tend to have the least number or even zero unpaid parking tickets. On the other hand, diplomats from countries high in the CPI ranking revealed their preference to, er.. not paying the tickets.

[Quiz: How many of you are actually familiar with our own traffic infraction procedures? Do you know about the blue and red forms? Here's an amusing "how-to" guide to do it the right way - and by that I mean the least corrupt way, not necessarily the cheapest way.]

So what country has the highest number of parking violations per diplomat between November '97 to November '02? It's Kuwait, with 246 unpaid parking tickets per year per diplomat (they have 9 diplomats in 1998). You would think after what the US did for them in Desert Storm....

At the other end of the list is Turkey, with zero unpaid parking tickets for their 25 diplomats (remember zero means either they committed no violations or they paid for all the violations they made). There are around 20 other countries also with zeroes but Japan deserves a mention because they have 47 diplomats stationed in New York.

Okay, what about Indonesia? We're number 24 (pop the champagne!), with an annual average of 36 unpaid parking tickets per diplomat. Considering there were 25 Indonesian diplomats in New York City in 1998, the number suggests that our diplomats racked up around 900 unpaid parking tickets per year (Three cars get ticketed every single day? One car three times a day? Any helpful readers from NYC? Just curious).

In the paper the authors control for various things including the size of the mission, the country's per capita income, as well as the number of cars registered per mission, but the strong correlations between corruption in home country and the number of unpaid tickets are still there. They went as far as to conclude:

"This strongly suggests that one's background and experiences, what we might call culture, does indeed contribute to bad behavior"

Earlier, we were having a discussion on corruption, provoked by a.p.'s post about whether corruption is necessarily a bad thing. I and others thought that a lot of things a.p. were alluding to in that post were probably only relevant in a second-best world. Norm and culture didn't really enter our discussion, although Treespotter did suggest that disregard for law and order in one area may spill to other areas. Now this paper is saying that diplomats seem to bring their home countries' norms along with them when they come to New York City.

Another interesting result of the paper is that diplomats from countries whose population have unfavorable attitudes toward the US (based on the Pew Index) also tend to have significantly higher number of parking violations; a result interpreted by the authors as evidence that sentiments play a role in the decision to pay the tickets. Proportion of Muslim population does not appear to be significantly related to unpaid parking violations, just in case you are curious about that. I was.

Back on the domestic front, there's a number of important empirical papers on corruption written by Ari Kuncoro of LPEM/FEUI. One of those, a paper on the relationship between bribes and regulation at the local level has been published in the BIES. He has several other papers, some of them you can find at the NBER working paper website. And of course the paper by Ben Olken on corruption in road building also worth a mention.

empirical corruption

False Positives

A recent article in the journal Demography (November 2005) discusses, in an interesting way, the relationship between longetivity (how long you live) and non-morbid obesity (body mass index over 25 but less than 40, the threshold for morbid obesity). Instead of focusing on obesity of individuals and how it affects their mortality outcomes, Gronniger, a researcher at the US Congressional Budget Office (don't ask me why) looks at whether an individual has a family member who is obese (he calls this familial obesity) and see how it influences the individual's own mortality outcome. Yes, it sounds implausible that someone else's obesity should adversely affect your health, at least we would not think there is a direct effect.

But that is precisely the idea. If the risk profile coming from estimation using individual obesity measure was to be intrepreted as the 'correct' profile of how obesity influences your longetivity, replacing the measure with familial obesity should give a different risk profile, one with less or maybe even negligible effects of (familial) obesity. Lo and behold, not only was familial obesity statistically significant, the risk profile from using this measure turned out to be similar to the one using individual obesity measure. In other words, the adverse health effect of having someone who is obese in your household is similar to actually being obese yourself. Gronniger argued that this suggests that the estimates using individual obesity measure are actually capturing a lot of household characteristics that are correlated with, but being unobserved, falsely attribruted to, obesity. Familial obesity effectively acts as a proxy for these unobservables. He then concludes that many previous studies that ignored these unobservables may have overestimated the mortality risks of non-morbid obesity.

This approach, identifying false positives, are not unique, we do see it from time to time. Indeed, the paper refers to a well-known study by DiNardo and Pischke (Quarterly Journal of Economics 1997) who studied the effects of various office equipments on wage and productivity. Their study was motivated by a previous study by Krueger (QJE 1993) who argues that the use of personal computers has change the wage structure in the US, after finding that controlling for workers characteristics, those who use personal computers earn 15 to 20 percent more than those who don't. DiNardo and Pischke argue that the observed differential was more likely a reflection of the difference between the types of worker (i.e., selection problem, by now a standard objection) but they show it in a clever way. They use a micro data from Germany and run their estimation using data on personal computers use and also found a wage differential, just like in the US study. Then they performed similar estimation using calculators, telephones, pens, and pencils, and found similarly-sized wage differentials! Their paper was cheekily titled "The Returns to Computer Use Revisited: Have Pencils Changed the Wage Structure Too?"

The examples above show us what those of you who have been frequenting this Cafe already know: we are a skeptical bunch when it comes to claims about causality (this, I believe, is also one of Roby's pet peeves). In the absence of a truly random experiment, it is difficult in social science to show empirically the relationship between one variable and another without running into all sorts of statistical problems, even more so to establish causality. And I think this is not some technical details that only those in research need to worry about. In recent policy debates, we hear policy makers, scholars, and pundits make a lot of sweeping conclusions, a number of which ought to be put under more scrutiny, for examples: "the increase in gas price causes the increase in the number of malnourished kids", "the increased availability of porn causes an increase in rape cases in Indonesia", and so on. Just listen to what the social issue du jour is and you'll hear similar statements. I'm not saying they're false. Most of the times we don't know the answers. Yet. Finding false positives is not the only way to answer these questions, but it may direct us closer to the truth. Like they say, a little dose of skepticism is always healthy.


Empirical