The “Values” Foundation of Economics and Sustainable Outcomes
Madhavi Venkatesan, PhD*
02 March 2018, Thursday
How are consumption decisions made? Does demand drive supply or does supply drive demand or is it a mixture of both? Do consumption decisions implicitly include our values or are our decisions made with an assumption that what we are consuming has already factored in the long-term best interest of human health and environmental well-being? These basic questions are often unaddressed in the study of economics. Instead assumptions related to consumption and production behavior, demand, and supply are embedded as representative of consumer and producer behavioral norms, typically with minimal discussion.
Could implicit assumptions promote observable behavior rather than be indicative of it? If so, could increasing awareness of the role of embedded values in demand and supply influence behaviors of consumers and producers and thereby alter economic outcomes? These questions were addressed as part of an introductory economics course case study. The purpose of the study was to raise awareness of the implications of individual purchasing decisions and to specifically, initiate students in self-evaluation of their individual values and the values embedded in their individual consumption behavior. The results of the study promote the view that increasing awareness of the holistic impact of consumption behavior may be a significant catalyst to promoting sustainability.
This lecture will address the present state of the teaching of introductory economics and will address an unmet need specific to introductory economics course curriculum, bridging the gap between consumption dependent growth and sustainability and explicitly addressing the creation of rational economic agent thinking as an outcome of introductory economics. The lecture discussion format provides a replicable and novel starting point for the introduction of sustainability in the introductory economics curriculum, inspiring the development of students as “sustainable” rational economic agents. Curriculum prompts specific to addressing sustainability in Principles of Macroeconomics and Principles of Microeconomics will be addressed and shared for a university audience.
In the event of a general professional audience, the topic will be adjusted to address how implicit values and limited explicit evaluation of the assumptions embedded in economic theory have resulted in the delegation of consumption demand to supply, resulting in a disconnect of checks and balances related to sustainable outcomes given the marked difference between consumption and production incentives. The lecture will highlight how both consumer awareness and economy-wide alignment are requisite to promote sustainable economic outcomes.
*Dr. Venkatesan is a recipient of the 2018 Fulbright SyCip Distinguished Lecturing Award, and Assistant Professor of Economics and Sustainability at the Department of Economics, Northeastern University, Boston, Massachusetts, and an Associate Director of the Center for Economics Education at Bridgewater State University, Bridgewater, Massachusetts.
Elimination Tournament Design under Psychological Momentum
22 February 2018, Thursday
In multi-round elimination tournaments, players experience “psychological momentum”. We re-consider the design of elimination tournament plan, by taking into account of various types of psychological momentum. The results show that if there is negative psychological momentum, either persistent or not, a double-elimination tournament elicits a higher total effort than a single-elimination tournament if and only if the negative psychological shocks from a player’s failures in preceding rounds do not affect this player’s mental status significantly in the following rounds. Similarly, if there is non-persistent positive momentum, a double-elimination tournament elicits a higher total effort if and only if psychological shocks are not significant. However, if there is persistent positive psychological momentum, then a double-elimination tournament always dominates a single-elimination tournament.
*Bo Chen is an assistant professor from the Department of Finance and Economics at the King Fahd University of Petroleum and Minerals, Saudi Arabia.
How Should Unemployment Insurance Vary Over the Business Cycle?
Serdar Birinci and Kurt Gerrard See*
10 January 2018, Wednesday
We study optimal unemployment insurance (UI) over the business cycle using a tractable heterogeneous agent job search model that features labor productivity driven business cycles and incomplete asset markets, and find that UI policy should be countercyclical. In this framework, besides providing consumption insurance upon job loss, generous UI payments allow individuals to maintain similar consumption levels even during recessions, when they would otherwise have had to accumulate savings by reducing consumption. Moreover, the presence of borrowing constraints disciplines the unemployed’s job search behavior, thus offsetting some of the moral hazard costs introduced by the generous UI payments in downturns. Even when the opportunity cost of employment is set to be high, these channels remain active to preserve the countercyclicality of the optimal UI policy.
*Kurt Gerrard See is visiting from the Department of Economics at University of Minnesota.
Transforming carbon consumption patterns of the new middle classes
Babette Never *
12 December 2017 Tuesday
The unprecedented growth of the new middle classes in middle income developing countries implies a strong growth in both consumption and carbon emissions. If the new middle classes mirror the carbon-intensive lifestyles of the industrialized countries, the remaining carbon space to manage climate change will close much more quickly. But who are these new consumers, what do they actually consume in which sectors and why? Mapping actual consumption patterns and trends among the new middle classes in terms of their emission impact is important to understand what moving out of poverty implies.
To design targeted policies and programmes for low-carbon consumption, it is necessary to understand both what drives consumer behaviour at the household level and what impact consumer groups have on policy. Individual economic motivations as well as lifestyle decisions based on “what’s in” among the respective peer group can matter. Middle class-state relations are often ambiguous in middle income countries, varying between close links and dependency due to government-based jobs, for example, and increasing independent civic participation, for instance among young environmental leaders. This study will tackle these questions from various angles. It will explore the role of behavioural insights to change consumer behaviour in middle income countries, comparing and contrasting it with standard policy instruments.
*Babbette Never, German Development Institute.
“Differential Impact of a Poverty Alleviation Program Targeting Households Living in Ultra-Poverty in the Philippines”
Krisha Lim *
24 November 2017 Friday
Poverty alleviation programs typically target households using broad categories and implement interventions accordingly. International Care Ministries is a non-governmental organization in the Philippines that provides an educational training program called Transform targeting households living in a more precise stratum of poverty referred to as ultra-poverty. Using data collected from participants pre- and post-Transform, we explore whether the impact of Transform on the income of recipients differs due to finer categories of poverty and other factors at baseline. The program appeared to be successful in increasing the income of the poorest thereby helping alleviate persisting inequalities. The analyses showed that baseline income, highest educational attainment of the participant, and geographical type of residence affect the outcome of the intervention. The results demonstrate that thresholds are important in targeting specific populations, and programs can be more successful when interventions are designed for a certain profile of people living below more precise thresholds.
*Krisha Lim, International Care Ministries.
Fuelish or Greenish? Foreign Acquisitions and Energy Intensity in Indonesian Manufacturing Plants
9 November 2017 Thursday
The link between foreign ownership and environmental performance remains a controversial issue. This paper contributes to our understanding of this subject by analyzing the impact of foreign acquisitions on plant-level energy intensity. The analysis applies a difference-in-differences approach combined with propensity score matching to the data from the Indonesian Manufacturing Census for the period 1983-2001. It covers 210 acquisition cases where an acquired plant is observed a year before and at least three years after an ownership change and for which a carefully selected control plant exists. The results suggest that while foreign ownership increases the overall energy usage, due to expansion of output, it decreases the plant’s energy intensity. Specifically, compared to plants that remained in domestic plants, acquired plants reduce energy intensity by 24\% reaching to about 30\% two years after acquisition. We find the opposite effect when we compare energy intensity between plants that were sold to domestic firms and those that remain under foreign ownership. At the aggregate level, we find that the presence of foreign-owned plants, their entry and expansion is associated with industry-wide reduction in energy intensity.
* Arlan Brucal, Research Officer at Grantham Research Institute for Climate Change and the Environment of The London School of Economics and Political Science.
Family Matters – Essays of Families, Firms and Funding in the Philippines 1850-2010
Åsa Malmström Rognes*
25 October 2017, Wednesday
The papers deal with family firms and the development of the banking system around 1900 and the developments after the Asian financial crisis. Both relate to the notion that in financial systems where banks dominate there are more family firms than widely held firms. In the early 20th century the banking system developed and so did family firms but the latter were not dependent on banks. A century later the corporate bond market is growing and providing more funding options. It is still small compared to banking finance and family firms have benefited from this.
*Asa Malmstrom Rognes is a post doctoral researcher at the Department of Economic History at Uppsala University in Sweden.
The Asian Financial Crisis and international reserve accumulation: a robust control approach
Sang Seok Lee*
14 August 2017, Monday
Standard macroeconomic models have difficulties accounting for the surge in international reserves in Asian countries in the aftermath of the Asian Financial Crisis of 1997. We propose precautionary demand for saving generated by model uncertainty as an explanation for this phenomenon. Using Korean data, we estimate a simple permanent income model augmented with model uncertainty, find a structural break at the point of Asian Financial Crisis, and identify a rise in concern for model misspecification. The post-crisis concern for model misspecification implies a reasonable detection error probability. We also show that learning serves as an additional powerful amplification mechanism in our framework.
*Sang Seok Lee is visiting from the Department of Economics at Bilkent University in Turkey.
Assessing the impact of the Philippine Sin Tax Reform Law on the demand for cigarettes
Myrna Austria, and Jesson Pagaduan
02 August 2017, Wednesday
One of the significant legislations during the Aquino Administration was Republic Act 10351, otherwise known as the Sin Tax Reform Act of 2012. Considered landmark legislation, the law addressed the long-standing structural weaknesses of the country’s tobacco tax system. It considerably increased the excise tax on tobacco and cigarettes, simplified the tax structure, removed the price classification freeze and indexed the tax rates to address inflation. Given the large increase in the excise tax, the price of cigarettes also substantially went up. After almost four years of implementation, what has been the impact of the tax reform on the demand for cigarettes in the country?
Employing a two-part estimation model using the Family Income Expenditure Survey (FIES) before (2009) and after (2015) the sin tax reform, this study assesses the overall effect of the reform on the demand for cigarettes. Specifically, it evaluates the impact on cigarette consumption and on the responsiveness of cigarette consumption to price changes. A further and equally important undertaking of the paper is producing new estimates of the total price elasticity of demand for cigarettes and decomposing it into the price elasticities of smoking prevalence and smoking intensity.
This empirical study offers two (2) major contributions on tobacco economics and taxation. First, to our knowledge, this is the first analysis to evaluate formally the impact of the tax reform on the demand for cigarettes in the Philippines after the policy reform was implemented in 2013. The most recent study on the demand for cigarettes in the country was done in 2012 by Quimbo et al. (2012) using the 2003 FIES. Second, this is the first study on the demand for cigarettes in the country that exploits a two-part estimation strategy, estimating separately the components of the total price elasticities, namely the price elasticity of smoking prevalence and the price elasticity of smoking intensity, both of which are key parameters in assessing the impact of the policy reform.
The findings and recommendations of the study will be of invaluable help for the government in designing the next sin tax policy reform. The current administration of President Duterte is proposing a tax policy reform package, one component of which is a health tax package aimed at increasing taxes on sweetened beverages and the sin tax rates on cigarettes and alcoholic drinks.
Minimum wage and poverty: a regional wage model of the Philippines
Caesar Cororaton, Krista Danielle Yu, and Marites Tiongco
26 June 2017, Wednesday
The regional wage model (RWM) is a simulation model calibrated using Philippine regional data. The consumption structure of the model is based on a nested utility-maximizing representative household, while the production on a nested cost-minimizing regional firms. RWM model has a segmented labor market (through regional wage differentials between the formal and informal labor markets) and incorporates downward regional wage rigidities in the formal market. The model allows for movements of labor between the formal and informal markets within a region due to changes in the regional minimum wage in the formal market. The labor movements affect regional employment and wages in both markets. While RWM allows for movements of labor across sectors within a region, the absence of labor migration mechanism in the model does not allow for labor movements between regions (an area for future research). The model however can provide insights on the effects of changes in regional minimum wages on regional income, producer and consumer prices, which are the basis for poverty analysis. RWM is attached to a regional poverty microsimulation model that uses the 2012 Family Income and Expenditure Survey (FIES). The microsimulation allows for the computations of the distributional effects (through changes in the GINI coefficient) and the poverty effects (through changes in the FGT poverty indices) of changes in regional minimum wages.
Relative deprivation and social groups
14 June 2017, Wednesday
A relative measure of deprivation can be derived from all pair-wise comparisons when the deprivation suffered by individuals is the proportional difference in income shares rather than the absolute income difference (Kakwani 1984). This paper extends relative deprivation by disaggregating deprivation by social groups. As Sen (1992) pointed out, human beings are diverse in terms of their characteristics. They differ by age, gender, education level, occupation, and ethnicity, among others. Given these differences, a population can be classified into various social groups with some groups having greater deprivation. These differences in individual characteristics should therefore be accounted for in the analysis of inequality. Identifying such groups is important and specially useful in addressing inequality for the whole society.
*Dr. Nanak Kakwani is a steering committee member of the Poverty and Economic Policy (PEP) Network, under which the Community-based Monitoring System (CBMS) is a subprogram. He is also a visiting research fellow at the Philippine Institute for Development Studies (PIDS) and currently a Visiting Lecturer at the School of Economics.
Potential economic effects of biofuel mandate in the Philippines
08 March 2017, Wednesday
The biofuel law which mandates higher proportion of plant-based fuel in the energy mix will have economy-wide effects because fuels are used throughout the economy. To assess the potential economic effects of the law, the paper uses a computable general equilibrium (CGE) model in order to capture the inter-sectoral direct and indirect effects of higher plant-based/oil-based fuel mix. The simulation results indicate that the biofuel law will generate small but negative economic effects. Outside of the biofuel and the biofuel feedstock sectors, the production of the rest of the economy decrease, especially heavy manufacturing and transportation. As a result, real wages and real returns to capital, the major sources of household
income, decline. Real returns to land use improves because of the improvement in sugar and coconut production, but the increase in not enough to offset the drop in labor and capital income. The decline in household income leads to slightly higher poverty. It also increases income inequality.
The effect of supplemental instruction on academic performance: An encouragement design experiment
25 January 2017, Wednesday
Supplemental Instruction (SI) or PASS (Peer Assisted Study Sessions) has been widely offered to students at tertiary institutions in many countries with the aim of improving academic performance. The SI/PASS evaluation literature is extensive, but it has not adequately addressed potential selection bias. We evaluate an SI/PASS program at an Australian university through a randomized-encouragement-design experiment. A randomly selected subgroup of students from first-year courses (N=6954) was offered large incentives (worth AUD 55,000) to attend PASS which increased attendance by an estimated 0.47 hours each. This first-stage (inducement) effect did not vary with the size of the incentive and was larger (0.89) for students from disadvantaged backgrounds. Instrumental-variable estimates suggest that 1 hour of PASS improved grades by 0.065 standard deviations, which is consistent with the non-experimental literature. However, this estimate is not statistically significant, reflecting limited statistical power. The estimated effect is largest for students in their first semester at university.
*Dr. Alfredo Paloyo is a Lecturer at the School of Accounting, Economics, and Finance at the University of Wollongong in Australia.
On strategy-proofness and the salience of single-peakedness
12 January 2017, Thursday (for graduate students)
Mechanism design: an introduction
13 January 2017, Friday (for undergraduate students)
A salient feature of economic environments is that socially desirable outcomes depend critically on information that is typically only known privately to agents. Strategically sophisticated (rational) agents cannot be counted upon to reveal their private information truthfully if they stand to gain by misrepresenting their private information. Such misrepresentations may lead to substantial departures from socially desirable outcomes. The theory of mechanism design is a branch of economic theory that recognizes that in environments where social outcomes depend on private information, agents must be presented with appropriate incentives to volunteer their information and concerns itself with designing institutions (mechanisms) which deliver this goal. We illustrate with the canonical voting model, where we make apparent the central role of domain restrictions in resolving issues of incentives.
*Dr. Chatterji is a Lee Kong Chian Fellow and Professor of Economics at the Singapore Management University. His research areas include economic theory, general equilibrium theory, mechanism design, game theory, decision theory, and social choice.