Tuesday, 25 February 2014

Does the ultimatum game show that fairness is important in economic transactions?

Everyone seems to think so, but I'm not so sure.  Wikipedia describes the game thus:

The ultimatum game is a game often played in economic experiments in which two players interact to decide how to divide a sum of money that is given to them. The first player proposes how to divide the sum between the two players, and the second player can either accept or reject this proposal. If the second player rejects, neither player receives anything. If the second player accepts, the money is split according to the proposal. The game is played only once so that reciprocation is not an issue.#

Typically in a lab the first player is given £1.  Rational economic agents would propose to keep £1. In fact most propose 50:50, that fact being the case again rational economic man.

Two things bother me, as someone who does not work in this area, about this conclusion.

First, in the ultimatum games, there is a pretty objective fairness, measure 50:50.  But often in real barganining situations, the notion of what is fair is not clear: try to sack someone for example, and they will tell you you are not fair and maintain that they are fair.

Second, in many bargaining/allocation issues, there is a lot of lobbying to influence the allocation Think of the time that's spend trying to minimize cuts within organizations by departments, or government departments lobbying for money.  As Milgrom and Roberts point out, organizations often devise rules that look like fair rules but are really rules to cut out lobbying which is wasteful.  There is none of this in ultimatum games.

Friday, 21 February 2014

Is there low investment in UK? Not if you include intangible investment.

Is there very low investment in UK? Not if you include intangible investment.  Haskel and Westlake in the Economist Free Exchange.

Tuesday, 18 February 2014

Is low UK Productivity Due to Low Investment? No says the data

No.  here's the latest ONS MFP numbers, released Jan 2014. Figure21 shows the contibution from capital deepening have fallen since 2008, but are not enough to explain the fall in labour productivity.

The accompanying table suggests this:

Figure 2: Whole Economy: Decomposition of  Labour Productivity growth

Percentage points

Contributions from
Year Labour Productivity Growth Capital deepening Labour composition MFP growth 
2000 4.0 1.4 0.5 2.1
2001 1.0 1.1 0.1 -0.2
2002 2.2 1.4 0.5 0.3
2003 3.8 1.2 0.7 1.8
2004 2.8 1.3 0.1 1.4
2005 1.4 0.5 0.6 0.3
2006 2.1 0.6 0.4 1.1
2007 2.6 0.6 0.5 1.6
2008 0.0 1.2 0.4 -1.6
2009 -3.6 1.2 1.0 -5.8
2010 1.5 0.3 0.9 0.2
2011 0.7 0.4 0.7 -0.3
2012 -1.7 -0.6 0.8 -1.9

2000-07 2.5 1.0 0.4 1.0
2008-12 -0.6 0.5 0.8 -1.9

Tuesday, 4 February 2014

Difference in differences

 A very nice example of difference in difference estimation from John Cochrane's blog, 3rd February 2014. 

Sunday, 2 February 2014

Various links

1. Why aid fails. Acemoglu and Robinson have an excellent post on this depressing subject.  http://whynationsfail.com/blog/2014/1/28/why-aid-fails.html.  (and bank bailouts are the equivalent extractive institution in the West as Chris Dillow points out).

A depressing excerpt from Acemoglu
In the meantime, more than a quarter of the countries in sub-Saharan Africa are poorer now than in 1960 — with no sign that foreign aid, however substantive, will end poverty there. Last year, perhaps the most striking illustration came from Liberia, which has received massive amounts of aid for a decade. In 2011, according to the OECD, official development aid to Liberia totalled $765 million, and made up 73 per cent of its gross national income. The sum was even larger in 2010. But last year every one of the 25,000 students who took the exam to enter the University of Liberia failed. All of the aid is still failing to provide a decent education to Liberians.
I also just finished reading Nina Munk "The Idealist". The Jeff Sachs idea was to spend a lot of money on millenium villages in order that when stopping spending they would be self-sustaining.  They weren't.  As Munk says, even in this case, aid means charity, not development.

I just listened to Nigel Crip, ex CEO of the NHS talking about the importance of "co-development" to developing country health.  He also said that Sachs is at least trying to do something about the situation.   Munk's book though raises a very difficult issue: that doing something might make things worse by aid/development actually crowding out co-development. Two examples. First, the Ethopian government, whilst pleading poverty, spent billions on fighter aircraft.  Second, a plan to supply (I think it was ) water pipes for free ran into the problem that a local water pipe company had emerged and would be potentially put out of business by the implicit undercutting via aid.  Again, very depressing.

2. The equation at the heart of modern macro is wrong....http://noahpinionblog.blogspot.co.uk/2014/01/the-equation-at-core-of-modern-macro.html. From the brilliant noahopinion.