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Facebook meets ICICIDirect?

Cake Financial is a start-up that is trying to bring the concept of social networking to your investment portfolio:

Cake is the free online service that makes it easy to follow the real portfolios and the real trades of your family and friends as well as top-performing members within the Cake community.

The basic idea is that when you and your friends/family sign up with Cake, their actual investments are tracked by cake, and you are informed of who is buying what. Not a “virtual market”, but actual trades made by them with their actual money. Not the exact numbers (for reasons of privacy) but which stocks who invested in, and the percentage returns on their portfolio. The idea is that you can use this information to improve your returns on investment.

Which is worse: A dog or an SUV?

Arnold Kling asks this thought-provoking question:

Which do you think takes a bigger toll on the environment, owning a dog, or owning an SUV? My bet would be on the dog. I’m thinking of all of the resources that go into dog food.

You could argue that children also consume a lot of resources, but that is different. A dog does not have the potential to discover a cure for cancer. A dog is not going to provide for you in your old age.

I personally have nothing against dogs. But it does seem to me that environmentalism inevitably points toward a policy of extermination of pet dogs. Unless environmentalism is simply hatred of industry.

Note: I am not arguing for or against this position. Just wanted to point out that this is something that most people wouldn’t have thought of this. Had you thought about the fact that somebody with no children (and does terrible, terrible things to the environment) is much more environment friendly that someone who is very “green” but has children?

(I found the article via the Cafe Hayek blog.)

Reducing Teacher absenteeism in rural India

Earlier, I had blogged about the use of cameras to tackle teacher absenteeism in rural India’s schools. One commenter asked for more details, and I went digging for the original research paper and found that it is quite interesting and worth writing about.

This data comes from a paper by Esther Duflo, a professor at MIT. The actual teacher program incentive was run by Seva Mandir an NGO. Duflo and her colleagues analyzed the results and reached some interesting conclusions.

What exactly is the question that we are trying answer?

We ask three main questions: If teachers are given incentives to attend school, will they actually attend school more? If they attend school more, will they teach more? Finally, if teacher absenteeism is reduced, will children learn more?

Consider the first question. It is not obvious that increased incentives to teachers will result increased attendance:

[...] the incentives could fail to improve attendance for a variety of reasons. First, teachers may be unable to take advantage of the incentives if they must participate in village meetings, training sessions, election or census duty. These pressures may be particularly high on para-teachers, who are often among the few literate individuals in the village. Second, the incentive schemes may crowd out the teacher’s intrinsic motivation to attend school (Benabou and Tirole, 2006). Finally, some teachers, who previously believed that they were required to work every day, may decide to stop working once they have reached their target income for the month (Fehr and Gotte, 2002).

The last two sentences of that paragraph point towards some interesting research showing how well-meaning schemes can actually be counter productive. (I am lazy so I haven’t included the full references here. If you are interested, go to the original paper and find the references at the end of the paper.)

Anyway, even if we manage to get teachers into the classrooms, that might not mean anything:

Even if incentives increase teacher attendance, it is unclear whether child learning levels will actually increase. Teachers may multitask (Holmstrom and Milgrom, 1991), reducing their efforts along other dimensions. Such schemes may also demoralize teachers, resulting in less effort (Fehr and Schmidt, 2004), or may harm teachers’ intrinsic motivation to teach (Kreps, 1997). On the other hand, incentives can improve learning levels if the main cost of working is the opportunity cost of attending school and, once in school, the marginal cost of teaching is low. In this case, an incentive system that directly rewards presence would stand a good chance of increasing child learning. Thus, whether or not the incentives can improve school quality is ultimately an empirical question.

Again, things are not as simple as one would initially have though. Will all that background out of the way, we get on to the real research:

We study a teacher incentive program run by the NGO Seva Mandir. Seva Mandir runs single teacher NFEs in the rural villages of Rajasthan, India. As in many rural areas, teacher absenteeism is high, despite the threat of dismissal for repeated absence. In our baseline study (August 2003), the absence rate was 44 percent. Faced with such high absenteeism, Seva Mandir implemented an innovative monitoring and incentive program in September 2003. In 57 randomly selected program schools, Seva Mandir gave teachers a camera, along with instructions to have one of the students take a picture of the teacher and the other students at the start and close of each school day. The cameras had tamper-proof date and time functions, allowing for the collection of precise data on teacher attendance that could be used to calculate teachers’ salaries.

Yup, the attendance records were used to determine the salaries of the teachers. So there was a financial (dis)incentive scheme at work:

Each teacher was then paid according to a non-linear function of the number of valid school days for which they were actually present, where a “valid” day was defined as one for which the opening and closing photographs were separated by at least five hours and both photographs showed at least eight children. Specifically, they received Rs 500 if they attended fewer than 10 days in a given month, and Rs 50 for any additional day (up to a maximum of 25 or 26 days depending on the month). In the 56 comparison schools, teachers were paid a fixed rate for the month, and were told (as usual) that they could be dismissed for repeated, unexcused absences.

Well, that is the experiment. Now on to the results:

The program resulted in an immediate and long lasting improvement in teacher attendance rates in treatment schools, as measured through monthly unannounced visits in both treatment and comparison schools. Over the 30 months in which attendance was tracked, teachers at program schools had an absence rate of 21 percent, compared to 44 percent baseline and the 42 percent in the comparison schools. Absence rates stayed low after the end of the proper evaluation phase (the first fourteen months of the program), suggesting that teachers did not change their behavior simply for the evaluation.

Absenteeism halved! And stayed that way.

Now on to another interesting question. How much of the improvement was because of cameras (the monitoring) and how much of the effect was because of the financial incentive scheme? What if the financial incentives were different, or not present at all? That is where the MIT economists broke out their complex math formulae to figure this out:

To answer these questions, we exploit the non-linear nature of the incentive scheme to estimate a dynamic labor supply model using the daily attendance data in the treatment schools. The identification exploits the fact that the incentive for a teacher to attend school on a single day changes as a function of the number of days they attend school in the month, and the number of days left in the month. This is because they have to attend at least 10 days in a month to begin to receive the incentive (by working in the beginning of the month, the teacher builds up the option to work for Rs 50 per day at the end of the month). Indeed, regression discontinuity design estimates show that teachers work significantly more at the beginning of the month than at the end of the previous month, when they had not accumulated at least 10 days of work in that month.

We use this fact to estimate the teachers’ marginal utility of money. We allow serial correlation in the opportunity cost of attending school and heterogeneity in teachers’ outside option, and we use the method of simulated moments to estimate the parameters. Allowing for serial correlation and heterogeneity considerably complicates the estimation procedure, but we show that these features are very important in this application.

And according to their calculations:

We find that teachers are very responsive to the financial incentives: our preferred estimates suggest that the elasticity of labor supply with respect to the level of the financial bonus is 0.306. Furthermore, decreasing the number of days that workers must work until they are eligible for the incentive by a single day increases the expected number of days worked by about 1.29 percent. An unusual feature of this application is the ability to carry out convincing out-of-sample tests based on the randomized evaluation (as in Todd and Wolpin (2007)). When allowing for serial correlation and heterogeneity, we find that our model accurately predicts the difference in attendance in the treatment and the control group, as well as the number of days worked under a new incentive system initiated by Seva Mandir after the experiment.

I don’t think I really understand the meaning of the numbers in that paragraph, but basically, the financial incentives were very important. i.e. You can’t implement this scheme with just cameras alone. Simple threats “that they could be dismissed for repeated, unexcused absences” are not good enough. You need to be able to control their salaries.

But at the end of all this, the fruits of labor are sweet:

Student attendance when the school was open was similar in both groups, so student in treatment group received more days of instruction. A year into the program, test scores in the treatment schools were 0.17 standard deviations higher than in the comparison schools. Two and a half years into the program, children from the treatment schools were also 10 percentage points (or 62 percent) more likely to transfer to formal primary schools, which requires passing a competency test.

See full paper. More interesting than watching Twenty20 these days…

Market crash caused by bull’s butt

In a response to my post on numerology, Sanal Kumar pointed me towards this wonderful news article:

Indian brokers at the Bombay Stock Exchange are calling on the authorities to bring in religious experts to change the direction of a bronze bull statue.

They say the posterior of the bull, placed at the footsteps of the exchange building, points towards the traders which makes it inauspicious.

I’m sure you thought that last week’s market crash was because of weaknesses in the US economy, or the sub-prime crisis or something silly like that. Well, that is why this blog exists - to clear your muddled head of such misconceptions and steer you towards the right path.

See full article.

Before investing in a stock, see a photo of its CEO

A photo tells you quite a lot about a person. Evidence:

Photos of chief executive officers (CEOs) of top American companies can reveal much about them and the firms they manage — including how successful they are, according to a new study.

In research published in the journal Psychological Science, 100 college students who looked at headshots of the bosses of the highest and lowest ranked Fortune 1000 companies were able to identify the most and the least successful CEOs without knowing their name, title or the company they headed.

See full article.

If free market is so great, why do “companies” exist?

One of the fundamental lessons of economics is that in a free market, prices determine what gets produced and by whom. If onions are in short supply somewhere, the prices of onions rise, then more farmers switch to planting onions and the supply problem is met. And this is one of the most efficient ways of organizing production of the world.

But obviously, this is now how things work within a company. You do what your boss tells you to do. If he wants TPS reports, he doesn’t announce this fact to all the employees and give the job to the one who quotes the lowest prices. He simply tells you to do it because “it is your job”.

So how does economic theory handle this apparent contradiction?

This essay tackles this problem. First the problem definition:

So, one day the boss has this crazy thought. He asks himself a question that has never occurred to him before: Why have any employees at all? Why have a building? Why not just sit home, wearing his jammies and bunny slippers, sipping a nice cup of tea, and outsource everything? He can write contracts to buy parts, he can pay workers to assemble the parts, and he can use shipping companies to box and transport the product.

The boss is elated. He never really liked these people anyway. Always asking questions, constantly looking for direction and expecting him to know the answers. He fires all his employees, effective one month from now, and takes bids on all the design, parts manufacture, assembly, and shipping that those people used to do.

On day 31, after all those wasteful employees are gone and the new contracting efficiency regime is in place, the boss has a nice breakfast, pours his tea, and puts his bunny-slippered feet up on his desk at home.

So what is wrong with this picture? Why aren’t all companies in the world structured this way?

If prices and competition do such a terrific job of directing resources (and they do!), then why are there firms? Why are there hierarchical organizations that are internally directed by command and control, rather than the price system? Why not outsource everything? Why don’t bosses sit home wearing bunny slippers?

The problem is the overheads introduced:

Each step, each break in the production process from one artisan to another, would require negotiations, a transaction, payment, and transportation of the product to the next step.

Obviously, that’s silly: no [company] could work that way. The cost savings from division of labor would be swamped by the increased cost of negotiating and carrying out transactions, and monitoring quality.

But that’s only a partial answer. The real question that needs to be answered is:

The task of the economist, then, is to explain two phenomena with just one theory. First, why are firms more efficient than markets at organizing some transactions? Second, if firms are so efficient, why are there any market transactions at all? What determines the margin where the firm stops organizing additional transactions internally, and buys goods or services instead through the market?

Will this mean the end of free-market theory? Will the author succeed in saving economic theory from imminent doom? For answers to this and all other questions, read the thrilling conslusion in the original essay.

McDonald’s = small businesses

Did you know this?

McDonald’s exemplifies the role of small businesses in Americans’ upward mobility. The company is largely a confederation of small businesses: 85 percent of its U.S. restaurants — average annual sales, $2.2 million — are owned by franchisees. McDonald’s has made more millionaires, and especially black and Hispanic millionaires, than any other economic entity ever, anywhere.

Source. 

Choose: Riches 100 years ago or middle-class today?

This post compares the life of a regular guy today with one of the richest people about a 100 years ago. :

If Mark Hopkins or any of his family contracted cancer, TB, polio, heart disease, or even appendicitis, they would probably die. All the rage today is to moan about people’s access to health care, but Hopkins had less access to health care than the poorest resident of East St. Louis. Hopkins died at 64, an old man in an era where the average life span was in the early forties. He saw at least one of his children die young, as most others of his age did. In fact, Stanford University owes its founding to the early death (at 15) of the son of Leland Stanford, Hopkin’s business partner and neighbor. The richest men of his age had more than a ten times greater chance of seeing at least one of their kids die young than the poorest person in the US does today.

And also:

Here is a man, Mark Hopkins, who was one of the richest and most envied men of his day. He owned a mansion that would dwarf many hotels I have stayed in. He had servants at his beck and call. And I would not even consider trading lives or houses with him. What we sometimes forget is that we are all infinitely more wealthy than even the richest of the “robber barons” of the 19th century. We have longer lives, more leisure time, and more stuff to do in that time. Not only is the sum of wealth not static, but it is expanding so fast that we can’t even measure it. Charts like those here measure the explosion of income, but still fall short in measuring things like leisure, life expectancy, and the explosion of possibilities we are all able to comprehend and grasp.

See full article. If you are one of the people who keeps complaining about “progress” as a bad thing, you should read it carefully.

“Stop trying to ’save’ Africa”

Earlier I had pointed to an article by an African economist complaining about how aid to Africa is doing more harm than good. Now Uzodinma Iweala an African author has another interesting article that is in a similar vein, but makes a slightly different point:

Why do the media frequently refer to African countries as having been “granted independence from their colonial masters,” as opposed to having fought and shed blood for their freedom? Why do Angelina Jolie and Bono receive overwhelming attention for their work in Africa while Nwankwo Kanu or Dikembe Mutombo, Africans both, are hardly ever mentioned? How is it that a former mid-level U.S. diplomat receives more attention for his cowboy antics in Sudan than do the numerous African Union countries that have sent food and troops and spent countless hours trying to negotiate a settlement among all parties in that crisis?

See the full article. It makes some rather interesting points.

“For God’s Sake, Please Stop the Aid”

Speigel has a very interesting interview with Kenyan economics expert James Shikwati where he says that aid to Africa is doing more harm than good. Excerpts:

Huge bureaucracies are financed (with the aid money), corruption and complacency are promoted, Africans are taught to be beggars and not to be independent. In addition, development aid weakens the local markets everywhere and dampens the spirit of entrepreneurship that we so desperately need. As absurd as it may sound: Development aid is one of the reasons for Africa’s problems. If the West were to cancel these payments, normal Africans wouldn’t even notice. Only the functionaries would be hard hit. Which is why they maintain that the world would stop turning without this development aid.

And later:

Why do we get these mountains of clothes? No one is freezing here. Instead, our tailors lose their livlihoods. They’re in the same position as our farmers. No one in the low-wage world of Africa can be cost-efficient enough to keep pace with donated products. In 1997, 137,000 workers were employed in Nigeria’s textile industry. By 2003, the figure had dropped to 57,000. The results are the same in all other areas where overwhelming helpfulness and fragile African markets collide.

I know nothing about Africa, or aid to Africa. I don’t have enough information to decide whether to agree with Shikwati or not. But this sure is a contrarian viewpoint - a side to the argument that most people are unfamiliar with. Hence, I believe it is a must read. I love contrarian points of view. Read the full article.