Below you will find a selection of research briefs from the department written for a wider audience.
Media and the Learning Process
Everyone remembers the pictures from 9/11, even if you were not there yourself. Today, the mass media and social networks confront us with an unprecedented abundance of images, be it terrorist attacks or other threatening situations. It is well known that indirect experiences of social threats trigger stress or maladjusted fears in us. Philippe Tobler examined whether and how these perceived social threats also influence our decision-making behavior.
Our reaction to social threats is the result of a learning process: in addition to learning directly, i.e. through our own experiences, we also learn indirectly, by observing others’ experiences. Such indirect observations can also be made via the media. Philippe Tobler examined the influence of observational learning on our decisions. His research shows that observational learning influences our decisions to a similar extent as learning through our own experience. In both cases, the influence on decisions occurs through the classical conditioning process, a well-established and simple form of learning. He also finds that seeing the threat, albeit via the media, has a stronger impact on the classical conditioning process, than only hearing about it, for example if somebody describes the threat to us verbally. These findings may help to better understand both adapted and pathological behavior people display after indirectly experiencing threatening events.
How Much Does Maternity Leave Cost?
The myth that an employee on maternity leave is an economic burden for a company might be one of the reasons why women are still disadvantaged in their work life. While the effects of maternity leave on the child’s welfare and the mother’s well-being have been intensely studied, the consequences for the employer are less well documented. Anne Brenøe and her co-authors fill this gap with their research.
As smaller companies are presumably going to be more affected by the loss of a single employee, the researchers used data from Danish companies with less than 30 employees. Their analysis primarily shows that when an employee is absent due to maternity leave, opportunities arise for the other employees: they can temporarily increase their workload and therefore their salary or sometimes have the possibility to take on other tasks. In addition, their job security increases as the probability of being dismissed decreases. But there are also effects that benefit society as a whole, because companies temporarily hire additional employees, which has a positive effect on unemployment. No negative impact on the productivity or profit of the company could be observed, nor on the number of sick days of other employees. Since in Denmark, as in most European countries and also in Switzerland, maternity leave is covered by social security, there are no additional costs, but only opportunities to seize for the other employees and the company.
Social Entrepreneurship Helps Fighting Child Mortality
The WHO estimates that one in 13 children in sub-Saharan Africa will not live to see their fifth birthday. It is particularly frustrating that many of the diseases responsible for this could be prevented easily with modern medicine and technology. It is much less clear, however, how to do it cost-effectively an in a scalable way. Especially in rural areas, which are poorly served by the medical healthcare system, too little is known about cost-effective and scalable protection against malaria, diarrhea and malnutrition.
Conventional aid programs may often fail because the incentives for health workers and administrators are not sufficiently strong. Two NGOs in Uganda have therefore set up a new program that combines basic health education with an entrepreneurial aspect: local healthcare promoters make home visits within their community and provide information on general hygiene measures, give simple medical advice and refer more serious cases to the nearest health center.
In addition, they also sell preventive healthcare products such as mosquito nets, water purification tablets, vitamins, malaria medication, and also everyday household items such as solar lamps or water filters. The profit from these sales provides them with a salary and thus acts as an incentive to visit the households regularly, thereby ensuring that families receive regular visits and are supported during crucial times, such as after childbirth.
David Yanagizawa-Drott investigated the efficiency of this type of social entrepreneurship by means of a randomized field study. He was able to show that infant mortality could be reduced by 27% in children under 5 years of age, by 33% in children under 1 year of age and by 28% in newborns. These positive findings prove that social entrepreneurship can improve healthcare and that such programs are efficient.
The Richer the Pickings, the More Honest the People
What causes people to return a found wallet? The preservation of their own self-image, as an international study has shown. "People want to see themselves as an honest person, not as a thieve. Keeping a found wallet means having to adapt one’s self-image, which comes with psychological costs," co-author Michel Maréchal explains the findings of the study. And, the more money there is in a lost wallet, the sooner it is returned to its owner. Keeping a more valuable wallet is more likely to be considered theft, and the "cost" of correcting one's self-image increases.
The authors of the study handed in more than 17,000 wallets at the reception desks of various institutions (hotels, banks, museums, post offices or police stations). They found large differences between the 40 countries examined: In Switzerland, Norway, the Netherlands, Denmark and Sweden, between 70 and 85 percent of wallets were returned to their owners. In China, Peru, Kazakhstan and Kenya, on average only between 8 and 20 percent. But, in almost all countries, wallets with larger sums of money or valuable contents were more likely to be returned.
Holes in the Dike
Although the financial crisis of 2007 was mainly perceived as a "home-grown" US problem, it is presumed that global factors played a role as well. In the years before the crisis, especially in the second half of the 1990s, an increasing number of international investors were looking for safe investment opportunities in the US. In particular, a large part of China's current account surplus was invested in the United States. It has remained unclear what role these capital flows - also known as the global savings glut - played in the creation of the real estate bubble in the US and how important they were compared to other factors, such as banking deregulation.
To examine this, Mathias Hoffmann and Iryna Stewen (Uni Mainz) looked at differences in the openness of local banking markets in the United States. Contrary to popular perception, until the 1980s the United States was far from being an integrated banking market. Californian banks, for example, were not allowed to take over a bank in Nevada or open a branch there.
In the 1980s the individual states started to remove these obstacles. This gradual liberalization process had long-term implications: even more than a decade later – in the mid-1990s – states that had liberalized their banking markets early had a higher share of nationally operating, geographically diversified banks than states that had liberalized relatively late.
The authors show that the local presence of geographically diversified banks influenced the way capital inflows affected the real estate market. Investments in these banks were considered a very secure investment by global investors and a good alternative to government bonds. Because they were considered safer than their local competitors, these banks were able to absorb a larger share of the capital inflows and expand their mortgage lending more. In regions where the market share of geographically diversified banks was historically high (in states that liberalized early on), the capital glut therefore had a particularly strong impact on the supply of credit and ultimately on property prices.
The study is the first to provide empirical evidence for the role of the global capital glut in the development of the US real estate bubble, the bursting of which led to the global financial crisis. However, the results also show that an interaction between deregulation and the capital glut was necessary to explain the depth of the crisis: the liberalization of the banking markets drilled holes in the dike, but without the "flood" of the global capital glut, the crisis would probably have been much less severe.
The Perks of Innovation
Innovation is usually regarded as something positive: it promotes the productivity of a society and stands for renewal, creativity, progress. However, David Hémous’ research has shown that innovation is also one of the main reasons for top income inequality: The one percent of the population that already claims a disproportionally large income share, becomes even richer.
David Hémous uses data from the different US states between 1975 and 2010 to show the causal relationship between innovation in a state and top income inequality, using the number of patents per capita to measure innovation. He showed that the increase in patenting can explain up to a quarter of the rise in the top 1% income share in the US. He was also able to identify several positive effects of innovation: overall income inequality is not affected and the effect of innovation on top income inequality is only temporary. While innovation augments the inventor’s income at first, eventually its benefits diffuse throughout the economy. Furthermore, innovation is also correlated with social mobility, the probability that children will be moving up in social rank compared to their parents, which also has a positive impact on society. Lobbying by established firms may dampen this effect: the efforts of incumbent companies to set the hurdles for innovations as high as possible has a negative influence on social mobility.
Too Generous Appraisals?
According to an article published in the Swiss Newspaper Tagesanzeiger last November, 96 percent of the Swiss public servants are rated as «good» or «very good» in their annual performance appraisal. This may be surprising, but in organizational economic research it is a known fact that superiors tend to rate their subordinates too mildly. This so-called «leniency bias» occurs, when boss and employee interact on a regular basis and thus build up a personal relationship.
The problem of consistently good evaluations is not the costs of the resulting pay raises, but more so the loss of incentive: if you are sure to receive a positive appraisal, regardless of your own performance, you have very few reasons to make an effort. A second problem is the lack of information: If almost all employees are rated as very good, there is no data on which to base decisions about promotions.
To address this problem the Swiss financial commission made the proposal last year: the evaluation of the federal administration should follow a standard normal distribution: the majority of employees would receive an average rating, whereas particularly good or bad ratings would only be given to a smaller group of persons.
Grading is actually an effective method to prevent ratings from increasing in an inflationary manner. Schools and universities know this method as «grading on a curve». Although big companies such as General Electric and Microsoft have experimented with such forced rankings their implementation has rarely been a success. While grading offers more incentives and better information, employees are at risk of receiving a weaker appraisal if they are part of an overachieving team. This can be perceived as unfair.
Research from the Department has shown that when designing a grading system fairness and incentives have to be balanced carefully. To use a centered distribution over four categories, as proposed, seems relatively random. An easier solution would be to define a fixed percentage of employees who will receive a raise. Superiors then only have to decide on who those people will be. This would only be a minor change to the existing system whereby 80 percent - instead of the current 96 percent - would receive a raise. The company could then propose a list of people proposed to be given a promotion. The only thing that needs to be monitored is that the rewards are not simply distributed on a rotating basis over the years: good work should actually increase the chances for better pay.
The question that remains is: what is the aim of a pay rise? If the aim is an overall increase of salaries within the federal administration, in order to offer competitive with the private sector, then this should be done independently of appraisals. The financial commission has failed with its proposal in the Swiss parliament, so it seems that everything will remain as it is.
Crop Insurances: Payment due at Harvest. A Small Change with a big Impact
For decades Businesses, NGOs and governments have been trying to convince farmers in developing countries to insure their crops. To date, with little success. This is mostly due to the fact that the insurance fee has to be paid at the beginning of the season. However, that is exactly the time when the farmers need money for equipment, seeds, machines and to feed their families until harvest comes. Lorenzo Casaburi and his co-author Jack Willis (Harvard) have found an easy solution to raise the quota of insurances taken. They simply shifted the due date of the payment to harvest time. «By shifting the payment date to harvest time, we could raise the take-up rate of insurances from 5 percent to 72 percent», says Lorenzo Casaburi and adds: «additionally the demand among the poorest farmers increased the most». There is one hurdle left to take: «The farmers have to be able to rely on receiving the insurance benefit. And the insurers have to be sure that the farmers will sell their crop (after having deducted the insurance fee) to them and not to any other buyer». Link to paper
The Future Labor Market is Female
Over the last decades, the labor market has undergone fundamental change. While the demand for manual labor has decreased significantly, the number of workplaces requiring cognitive skills such as creativity, analysis and problem solving has risen.
This is primarily to the advantage of women. While in 1980 roughly 54% of the women with a college degree in the USA could expect to get a well-paid and highly qualified job, this figure rose to 59% by 2016. For men this percentage fell from 66% to 63%. At the same time the share of well-educated women who don’t work, decreased from 27% to 21%, while the share of men rose from 8% to 12%.
The main reason for the success of well-educated women is the change in requirements of highly qualified jobs. Social skills, empathy, communication, and the ability to recognize situations and emotions are increasingly in demand. «Psychological and neuroscientific research has shown that in these areas women have comparative advantages» says Nir Jaimovich, co-author of the study, and summarizes «In order to offer an added value in the digital future, the next generation will not only have to be technically skilled, but above all, be socially competent».
Potential for Risky Behavior is Also in Your Genes
If we compare two people’s DNA, we see that over 99% of it is identical, and less than one percent of their strands vary. These unalike areas are called genetic variants and determine a person's individual characteristics, such as eye color or susceptibility to certain diseases.
An international group of scientists, including Pietro Biroli, Christian Zünd and Ernst Fehr from the Department of Economics, identified 124 previously unknown genetic variants within 99 areas of the human genome, which are associated with a person’s willingness to take risks. “With this study we shed light on the genetic architecture of risk tolerance and can pinpoint where the propensity to risky behavior is located within our genome”, explains Pietro Biroli, who led the study analyses. "This does not mean, however, that we can say on the basis of DNA what risk a person will take in a particular situation. Whereas the link between the genetic variant and the outcome is very direct in the case of eye-color, it is often also influenced by environmental factors, as in this case.
It is one of the largest genetics studies to date, including information from over one million individuals, and is one of the first studies to link genetic variants with behavioral outcomes, which are relevant to social science research.
Would I Lie to You? How the Digital Age is Changing our Honesty.
Imagine your bicycle had been stolen: In Switzerland, you’ll report the loss via ePolice and your insurance claim is recorded through the chatbot of the insurance company – without you having to personally go to a counter or speak to a person. Even in industries that traditionally attach great importance to personal relationships, such as banking or insurance, face-to-face interactions are increasingly being replaced by online forms. But, do we apply the same ethical and moral criteria to our own behavior when we interact with machines, or are we less honest when our counterpart is not human? Michel Maréchal explored this idea in a set of experiments and found that, yes, we are less honest with computers than with people.
In his experiments, participants flipped a coin 10 times and noted down their results. With every coin toss, they could either win 2 francs for "head", but throwing "tail" would give them nothing. In this set-up, very lucky participants could earn up to 20 francs within a short time. The participants carried out the experiment unobserved and without time limit in their own home, and knew that there would be no questions asked regarding their results. Two factors were varied: whether the results were communicated to a person or a machine and whether this was done in writing or orally. The first two of the resulting four experimental groups communicated their results to the experimenter orally via telephone call or in writing via Skype chat. The other two groups transmitted their results to a machine: either via an online form or by calling an interactive recorder. The semantics remained the same across all four groups: all questions were formulated exactly the same and the participants simply had to write or say "head" or "tails".
Dishonesty triples when reporting to a computer
Even if there was no way to check whether the participants were telling the truth or not, we do know what the distribution would look like if everyone had reported their throws honestly: Most participants (approx. 25%) should report 5 successful coin tosses (heads), while 10 successful coin tosses should be extremely rare. However, the results of the study deviated significantly from the statistical average: People cheat. In addition, the reported success rates varied greatly between the experimental groups. The two groups that communicated with a person reported a success rate of 54%, which corresponds to a lying rate of 8%. In the groups interacting with the machine however, rates of lying tripled to 24%. People behaved significantly more dishonestly when interacting with a machine.
Cheaters will choose non-personal interactions
This finding led to a next question: Do dishonest people prefer interacting with machines? A second experiment, which followed the same order as the first was set up. This time however, all participants entered their results in an online form in the first round. The game was then repeated, and the participants could choose between the telephone call and online form. Participants who had reported seven or less successful throws in the first round, i.e. who were more honest, chose the telephone call in the second round. In contrast, the participants who had probably cheated (as they had reported eight or more successful throws) preferred the online form in the second round. This finding could be used by companies and organizations to narrow the circle of potentially dishonest people. The choice of communication channel could work as a screening mechanism.
People are concerned about how others view them. However, when we communicate with a machine, the social control mechanism disappears and our willingness to answer honestly decreases. So, next time the insurance chatbot asks you how much your stolen bike was worth, what will you say?
Link to paper
How a City’s Position in the Global Network of Air Links Shapes Economic Development
Globalization brings people, places and products closer together. Long-haul air traffic is a key factor in this process, as David Yanagizawa-Drott and his co-author show in a recent paper. They analyzed the economic development of cities in terms of their flight connections and found that cities paired with at least weekly direct flights show higher economic growth, more capital flow and direct investment.
In order to test the causality of the effect, aeronautical and regulatory conditions were applied: distances over 6000 km are associated with a significant cost increase for flight operators and are therefore less likely to be connected. "As long as city pairs just over 6000 miles apart do not systematically differ from couples just under 6000 miles apart, we can compare how these cities and city pairs have evolved to filter out the causal effects of direct flights," they write. This effect can be nicely illustrated by comparing two European cities: Zurich and New York (5,913 miles) have a much closer economic cooperation than Milan and New York (6,033 miles), although both European cities are very similar in many other ways.
However, a direct flight connection alone is not enough - the twin city in the less developed region must have a minimum level of business infrastructure and attractiveness. Poor cities will not benefit equally from direct flight connections.
Link to paper
Kidney Donations: Improved Matching System Benefits all on Waiting List
The idea of a matching system for kidney transplants of donor-recipient pairs that are biologically incompatible has already significantly improved kidney transplant rates. Family members or friends who are willing to donate a kidney for a loved one can do so, even if they are not a match with the recipient - a market mechanism allocates all donations to recipients. Now, a voucher system by Marek Pycia and colleagues has further expanded the possibilities.
Until recently, if someone wanted to donate a kidney to a family member or a friend, the recipient would have to receive the kidney at the time of the donation. This timing restriction created a problem for Howard Broadman who wanted to donate a kidney to his grandson. His grandson did not need the kidney yet, but was likely to need one in 10 to 15 years, at a time when Broadman might be too old to donate. Broadman approached Doctor Jeffrey Veal from UCLA Ronald Reagan Medical Center and proposed to donate the kidney for a promise - a voucher - that his grandson will have priority to receive a kidney when he needs one.
Based on this idea, a system of kidney vouchers developed by Professor Marek Pycia with Doctor Veal and others is now being used to organize promises of priority for future kidney transplants. When a donor donates a kidney, a voucher is issued to a named recipient: this voucher offers the recipient the priority to obtain a living donor kidney transplant when they need it. To ensure that a voucher is not traded, only the named recipient can redeem it.
A positive effect of this the matching system is that each new voucher initiates a chain of transplantations in the matching market, in which a first patient receives the kidney donated for a voucher, a second patient receives the first patient’s donor’s kidney, etc. These vouchers overcome the time gap in the contracting environment surrounding kidney exchanges and help initiate more transplantation chains.
So not only patients with vouchers benefit but also average patients face a shorter wait time, as they are no longer depending on their spot on the deceased donor list. Additionally, not all vouchers will actually be redeemed: if the health condition of a patient improves, the voucher is never redeemed and the donation becomes non-directional, which helps alleviate the shortage of living kidney donations.
Small Gifts for Big Business
Giving small gifts to commercial customers increases the value of the following purchases considerably, as a study conducted by Michel Maréchal and Christian Thöni has shown. The fact that even small gifts have the potential to influence purchasing behavior, and thus could create conflicts of interest, has implications for the discussion about guidelines on the value limits on acceptable gifts.
The line between a small gift as an expression of appreciation of a good business relationship and it being an attempt to bribe the recipient is not always clear. Many industries and companies set guidelines regarding the value of gifts that employees may accept. A box of chocolates – yes, a trip to a Formula 1 race – no. Such thresholds are based on the idea that valuable gifts may influence the recipient’s decisions about whom a contract is awarded to.
Even small gifts influence behavior
Michel Maréchal from our Department and his co-author Christian Thöni wanted to know whether small gifts could suffice to have an influence on purchase decisions and conducted a controlled field experiment with sales representatives. The representatives gave some of their customers six tubes of toothpaste with a total value of approximately 10 francs before they started to negotiate. Even this unexciting gift led to an average order value that was twice as high compared to the order from customers who had not received the present. However, the relationship mattered: If the gift was handed over at the first meeting, it had little effect, on the contrary, the order value tended to be even slightly lower. "To appear with a gift right at the beginning of a business relationship is counterproductive", explains Michel Maréchal, "Such a gift is likely perceived to be calculated present. However, if a relationship already exists, the customer can also perceive the small present as a personal thank you for the good relationship.”
Gifts to the boss have the greatest effect
Distributing small gifts can therefore be a profitable strategy for suppliers. Maréchal and Thöni’s research also showed that store managers were most influenced by the gifts. If the manager received the gift, the value of the order tripled, from an average of CHF 61 to CHF 271. Store managers have greater decision-making authority, i.e. they can place larger orders without consultation. "But when you consider that store managers usually also bear the business risk, it is quite surprising that they were willing to order so much merchandise. This increase in value of the placed order could be even higher if the person has decision-making authority, but does not bear any risk", Christian Thöni says.
Rethinking regulations and guidelines for accepting gifts
The research results stimulate the discussion about the effect of setting limits to the value of acceptable gifts. Their findings clearly show that gifts do not have to be expensive to influence people’s purchase decisions. Over time, most business relations become somewhat personal. In this context, the small gifts are interpreted as expressions of personal affection and can then, consciously or unconsciously be reciprocated in business favors. As this effect can be used manipulatively and bias decision making, the debate on regulations and industry guidelines to curb bribery and corruption should consider that small gifts can have a large effect.
Really Uncertain Business Cycles
Since the last recession, the discussion about uncertainty and its influence on economic cycles has become increasingly prominent. The innate idea is that more uncertainty means more risk for companies, so they tend to adopt a wait-and-see approach and delay decisions to hire new labor or invest in new machinery or infrastructure, which can lead to a fall in employment and investment. Nir Jaimovich and his coauthors first document that during economic downturns, various uncertainty measures sharply increase, suggesting that when firms face periods of low growth, they also face heightened uncertainty. Given this novel empirical evidence, Jaimovich and his co-authors analyzed the outcomes resulting from changes in the level of uncertainty in a dynamic stochastic general equilibrium model. They found that increases in uncertainty could lead to recessions and make policies such as wage subsidies temporarily less effective.
Out in the Cold or One of the Gang: Initial Contacts Set the Scene
Ostracism within a group is likely to be an unintentional side effect of our tendency to team up with individuals with whom we have had previous good experiences, and not so much a deliberate exclusion of an individual based on their behavior, Björn Lindström and Philippe Tobler from the Econ Department have found. Initiating and mixing up early interactions increases the probability of being part of the gang.
Ostracism or social exclusion within a group serves to discipline disagreeable, awkward, or freeloading members and thus promote cooperation – at least this was the assumption of previous research in this field. However, ostracism also develops in situations in which there is no need to discipline the behaviors of others, and the victims often seem to have been selected randomly. When asked, the ostracizers are oblivious of their acts, stressing that they had no intention of leaving a person out. Therefore, two researchers from the Department of Economics at the University of Zurich, Björn Lindström and Philippe Tobler, reasoned that ostracism may develop more incidentally than previously assumed. They studied how ostracism develops within groups, how it evolves over time and how it can be reduced.
Positive experiences are repeated
By running a series of experiments, the researchers were able to confirm that social exclusion was not so much an instrument to discipline others, but rather an unintended side effect. This side effect arises when people choose to join up with individuals they have previously had good experiences with as a result of simple learning mechanisms. In other words, if the first random grouping in a social situation works out well, people have a tendency to repeat it. This means, however, that others are excluded from the interaction and thereby incidentally ostracized.
“The tendency to repeat what previously worked out well is a basic aspect of human psychology, which means that we stick to satisfactory groupings,” says Björn Lindström. He gives two examples of the mechanism at work: “Cliques, e.g. of classmates, that exist at the beginning of the school year are usually still the same at the end of the year. Or, at work, it sometimes takes years for us to realize that the person a few offices further down the hall is actually a great guy. He simply wasn’t part of one our first few interactions and then fell off our radar”.
Ostracism can be prevented
In a further experiment, the two researchers showed that the same mechanisms that lead to ostracism can also be harnessed to reduce it – a finding that is of particular importance for teachers and other people involved in group organization and group dynamics. “Teachers may be able to reduce ostracism in their classes by making sure that children experience one-to-one pairings with specific classmates early on, so as to learn about others through interacting with them,” says Philippe Tobler.
For adults who are slightly apprehensive about their next networking event, it might help to understand the importance of an initial positive interaction. “It could be worth making the first move and breaking the ice,” says Tobler. “Then the rest of the event will probably go much more smoothly.”
Björn Lindström and Philippe N. Tobler. Incidental ostracism emerges from simple learning mechanisms in Nature Human Behaviour. May 28, 2018. doi: 10.1038/s41562-018-0355-y
Income per Capita Decisive Factor in International Trade
Standard models of international trade typically assume that the intensity of and gains from trade between two countries is driven by the trading partners' GDP. Recent research by Josef Zweimüller and co-authors shows that looking at the impact of GDP composites (income per capita versus population size) separately goes much further in explaining the probability and volume of bilateral trade. For instance, the probability that a given product is traded increases with a destination’s GDP, but the effect is twice as large when the higher GDP is due to a higher per-capita income rather than a higher population.
Josef Zweimüller and co-authors build a model, which can explain these empirical patterns. Importantly, the model predicts that gains from trade are very asymmetrically distributed between trading partners: while rich countries always gain from a decrease in trade barriers, poor countries gain less or may even lose. The main reason is that consumers with low (per capita) incomes cannot pay high prices for imported goods, so firms abstain from exporting to poor destinations. Simulations show that too low prices in poor countries indeed affect many bilateral trade relations supporting the predictions of the theoretical analysis.
Lemon Technologies and Adoption
A study by David Yanagizawa-Drott and co-authors published in the August 2017 edition of The Quarterly Journal of Economics explains why advances in agricultural development in Africa are slow. New agricultural technologies (fertilizer and hybrid seed) are subject to low adoption rates in local markets in Africa, and farmers are unlikely to buy new products. His research looks into the reasons for this reluctance and finds that the quality of the seed is fairly low and, more importantly, varies greatly. In addition, price is not a reliable indicator of quality. Therefore, farmers cannot infer quality based on price. This also reduces the incentive for a high-quality producer to invest in quality and establish a reputation. In combination, all these effects result in low yields for the farmers, although better quality seed is available in their markets.
Dodging the Taxman: Firm Misreporting and Limits to Tax Enforcement
Dina Pomeranz et al. recently published a paper in the American Economic Journal: Applied Economics on the limits of countering tax evasion in developing countries. Using third-party data to estimate the revenue of a company, tax authorities in Ecuador found that a quarter of the companies significantly underreport their revenues. Confronted with the mismatch, an amended tax return was requested, with which only a few companies complied. However, the corrected tax returns had not only changed regarding stated revenue - compared to the first submission they also reported higher costs. In combination, these two effects led to a relatively small increase in net tax revenue to the state. Pomeranz and her coauthors conclude that using third-party data can help, but will not suffice to reduce the tax compliance problem, as long as the enforcing infrastructure (capacity to follow up on evasion, poor legal regimes, and corruption) is weak.
The Female Brain Reacts More Strongly to Prosocial Behavior
Behavioral experiments have shown that women share a sum of money more generously than men. To gain an in-depth understanding of this effect, Alexander Soutschek, Philippe Tobler et al looked at the areas of the brain that are active when making such decisions. They found that the striatum, located in the middle of the brain and responsible for the assessment of rewards, is more strongly activated in female brains during prosocial decisions than during selfish decisions. In contrast, selfish decisions lead to a stronger activation of the reward system in male brains. Their findings are the first to demonstrate that the brains of men and women respond differently to prosocial and selfish behavior. These physical differences, however, are not necessarily innate or of evolutionary origin, as learning and reward systems work in close cooperation and there are significant cultural differences in the sensitivity of the reward system.
Falling Labor Share in Superstar Companies
Although the decline of labor’s share within the GDP of the United States and many other countries in recent decades is well documented, its causes remain uncertain. In an often-cited working paper, David Dorn and his co-authors show how market consolidation across all sectors has led to the top four companies of a sector significantly increasing their market share and profitability, allowing them to reduce unit and workforce costs. Therefore, the aggregate share of labor (and thus wages) decreases. The research offers empirical evidence of national income shifting from employers towards equity owners and shows how the consolidation has effects on innovation incentives as well as income inequality.
Overcoming Egocentricity Increases Self-Control
Neurobiological models of self-control usually focus on brain mechanisms involved in impulse control and emotion regulation. Recent research at the University of Zurich shows that the mechanism for overcoming egocentricity also facilitates self-control. This opens up new possibilities for therapeutic interventions.
Should I buy a new car now or save the money for retirement? Such situations require self-control in order to resist the immediately tempting offer for the sake of more important outcomes in the future. It is widely accepted that self-control is regulated by mechanisms in the brain area called the “prefrontal cortex”, with the ability to keep oneself at bay when tempted by immediately appealing offers. Now a study from a team at the Department of Economics University of Zurich and the University of Dusseldorf shows that a second mechanism is also important for self-control: Being able to direct attention to one’s future needs.
The team around Alexander Soutschek, Christian Ruff, Tobias Kalenscher, and Philippe Tobler investigated a brain region that usually allows us to take the perspective of another person during social interactions. To their own surprise, they found that this same brain area also plays a crucial role in situations requiring self-control when no other person is present.
The future self is regarded as a different person
In the study, people chose between a smaller payoff given immediately and a larger payoff given in the future, as well as between a payoff that only benefitted themselves and a payoff that benefitted them less but also benefitted another person. The researchers used non-invasive brain stimulation techniques to disrupt activation in the so called “temporo-parietal junction”, a region at the side towards the back of the brain. After disruption of this brain region, people tended to make choices that were both more impulsive (i.e. choosing the immediate payoff) and more selfish (i.e. choosing the payoff for themselves only), and were less able to take the perspective of other persons.
This association between the brain basis of perspective-taking and patience sheds a new light on self-control. «From a neural perspective, the temporo-parietal junction may represent the own future self like another person», Alexander Soutschek explains. «This means that the same brain mechanisms may be necessary to be patient for a future gain and for being able to share with another person». This finding opens up new avenues for treating self-control deficits in disorders like addiction and obesity.
Literature: Alexander Soutschek, Christian C. Ruff, Tina Strombach, Tobias Kalenscher, Philippe N. Tobler. Brain stimulation reveals crucial role of overcoming self-centeredness in self-control. Science Advances, October 19, 2016, doi: 10.1126/sciadv.1600992>
Changing Cultural Attitudes on Female Genital Cutting through Entertainment
Female Genital Cutting (FGC) constitutes a serious health risk for millions of girls and women but remains prevalent in many areas of the world. In a recent paper published in «Nature», researchers from the University of Zurich have found a promising approach to change attitudes within cutting communities. In their study they produced fictional movies including a subplot about a family in the process of discussing whether to have their daughters cut. The results show that the movies had a positive influence on attitudes towards uncut girls and therefore repeated exposure to similar movies could be a discreet but effective intervention to reduce female genital cutting.
Though female genital cutting can lead to serious health problems throughout life, an estimated 125 million girls and women are cut, and every year an additional two million girls are at risk of being cut. Therefore, governments and international agencies have promoted the abandonment of cutting for decades. In the past, many programs promoting abandonment of the practice assumed that attitudes favoring cutting are locally pervasive and deeply entrenched. However, recent empirical research has shown that these attitudes vary greatly. Conflicting attitudes coexist within communities and even within families. The arguments for and against cutting generally fall into one of the following two categories: personal values concerning health, purity and perceived religious obligations or questions regarding the future marriage prospects of cut or uncut daughters.
Taking heterogeneity of attitudes into account
Sonja Vogt, Charles Efferson and Ernst Fehr from the University of Zurich, together with two Sudanese researchers, put the discussion of these conflicting attitudes at the center of their empirical approach. «Instead of pressing values onto the communities and ignoring their cultural heritage, we took the conflicting attitudes on FGC within communities as a starting point», explains Sonja Vogt, one of the lead authors. The researchers created four versions of a full-length movie, the main plot being a heady mix of love, intrigue and deception involving a family living in Sudan. Three of these movies included a 27 minute subplot about girls in the family who were approaching cutting age. In the subplots, the protagonists of the extended family discuss the arguments for and against cutting.
One of the versions focuses on personal values, one on marriageability, and the third on a combination of both. The discussions within these subplots evenly cover both arguments for and against cutting and eventually led to the decision to abandon cutting. Charles Efferson explains: «By presenting conflicting sides of the issue, the movies dramatize how difficult it is for parents to make a decision about cutting, and they allow viewers to make their own judgements».
Challenging and changing attitudes through entertainment
«We saw that all three movies about cutting immediately improved attitudes, but that only the movie addressing both personal values and future marriage prospects had a relatively persistent effect by improving attitudes for at least a week», says Sonja Vogt. Charles Efferson, the other lead author, points out that they could measure a causal relation (instead of mere correlation) between a person seeing one of the movies and a change in attitude towards uncut girls. «This shows that using entertainment to dramatize the arguments can be an effective approach to changing attitudes about female genital cutting», he says.
Sonja Vogt believes that there is further potential in this approach. «Done in an ethical and balanced way, entertainment-embedded public information could increase the possibility of non-governmental organizations and for-profit ventures to cooperate», she says: «including such messaging in entertainment formats could initiate discussion and sustainable change». Efferson sees this as a key advantage of using entertainment: «Entertainment can often reach a much wider audience than educational documentaries. Documentaries run the risk of preaching to the converted».
Literature: Sonja Vogt, Nadia Ahmed Mohmmed Zaid, Hilal El Fadil Ahmed, Ernst Fehr, and Charles Efferson. Changing cultural attitudes towards female genital cutting. Nature. 12 October 2016. doi: 10.1038/nature20100
Mortality Rate of Poor Children in the US is in Decline
Wealthier individuals have a lower mortality rate than poorer people. The common assumption that this effect has intensified in recent years is rebutted by a current study from the University of Zurich. Instead of examining life expectancy at birth, the study looks at the mortality rates by age group in different counties in the USA. The study finds that the mortality rates of disadvantaged children and young adults are falling and are approaching the mortality rates in wealthy areas, while the differences among older people continue to be pronounced.
Life expectancy and mortality are distributed unequally across social classes. That is the conclusion of many studies which point to the increasing differences in the life expectancy of persons in wealthy regions in the USA as opposed to those in poor regions. According to the researchers, income inequality is leading to inequality in health and life expectancy. But a more discerning look at the mortality rates shows quite positive trends. For example, between 1990 and 2010, the differences in the survival chances of children and young adults from different regions in the USA decreased. Nowadays, disadvantaged children have much better survival chances, as Hannes Schwandt from the Department of Economics at the University of Zurich together with Janet Currie from Princeton University demonstrate in the current edition of Science.
Falling infant mortality rates – especially in poor regions
Between 1990 and 2010, the infant mortality rate decreased in all US regions, with the most pronounced improvement taking place in the poorest counties. In 1990, out of every 1,000 newborn males in the poorest regions of the USA, 18.3 died before reaching their third birthday. This figure fell to 9.8 by 2010, a reduction of 8.5. In the wealthier regions, the figure dropped by 4.3 over the same period (from 9.8 to 5.5). According to the authors of the study, this decrease in inequality between rich and poor regions in terms of the mortality rate can be observed up to the age of around 40. For middle-aged people, the mortality rate in poor and rich regions drops approximately by the same degree, with the inequality in mortality increasing again for older people. “The youngest persons in the poorest regions are visibly benefiting most and fastest from welfare improvements, while older people have a health history that is influenced by the past,” explains Hannes Schwandt. He assumes that the inequality in mortality among older people will also decrease in the future in line with improved living conditions.
The mortality rate per age group is relevant
In general, earlier studies on mortality rates were based either on the influence of income or education on survival probabilities in middle or old age or on changes in life expectancy at birth. Those studies either focus on just one section of the population or are based on the cumulative effects of the past, and are valid only for as long as the influencing factors remain constant. “Life expectancy as a figure is not a good predictor for the number of years that a member of a certain group will live. It makes more sense to analyze the development of the individual age-specific mortality rates.” That’s how Hannes Schwandt explains the significance of the approach taken for the study.
Janet Currie, Hannes Schwandt. Inequality in Mortality Between Rich and Poor U.S. Counties Decreased Among the Young While Increasing for Older Adults, 1990-2010. Science, April 21, 2016. doi:10.1126/science.aaf1437
Do Markets Erode Social Responsibility?
In a recently published study, Björn Bartling, Roberto Weber, and Lan Yao give a mixed response to the titular question. On the one hand, they find positive and stable levels of socially responsible behavior in several experimental market studies, conducted in Switzerland and China. On the other hand, their comparison of behavior in market and non-market contexts reveals that market behavior follows weaker prosocial norms than behavior in other contexts.
Adam Smith’s metaphor of the invisible hand illustrates the idea that decentralized interaction of independent actors, through market exchange, leads to efficient allocation of resources. In fact, there is widespread evidence that markets often fulfill this function. However, unregulated market exchange is also often blamed as a source of social ills, including environmental damage, labor coercion, and animal cruelty, and many scholars question whether the inherent nature of markets erodes people’s motivations to exhibit concern for the social impact of their actions.
A remedy for negative impacts of market activity
The presence of product labels such as “carbon-free,” “fair trade,” and “cruelty-free” in consumer product markets suggests a potential influence of concerns for social impact on market activity. These products are often associated with higher production costs for firms and prices for consumers. Nevertheless, consumers may be willing to pay higher prices for products that mitigate social harm. Several studies document this willingness, although these results are typically from hypothetical choice or willingness-to-pay measures or from comparisons of purchasing behavior over distinct market products that may differ in dimensions beyond social impact, such as actual or perceived quality.
Thus, although the notion of individual and corporate social responsibility—a willingness to sacrifice profits or wealth in pursuit of broader social interest—has recently come into focus as a means to prevent efficiency losses due to external effects, the extent to which this presents an actual remedy for negative impacts of market activity remains to be better understood. But in real product markets, it is difficult to isolate social responsibility from other possible motives underlying production and consumption of such products. To address this issue, the authors report on two laboratory studies that explore the extent to which socially responsible market behavior can mitigate the problem of negative external effects.
Laboratory product market
Bartling and his colleagues develop a laboratory product market, in which sellers decide on a price and on which type of product they want to offer for sale—either one that produces a negative externality for a third party or one that does not, with the latter involving higher production costs. Consumers choose which offered product to buy or whether to purchase any product at all. The standard equilibrium prediction for these markets is that only the cheaper good, which produces the externality, is traded.
In contrast to this prediction, a baseline condition from a first study—conducted in Switzerland—finds that markets converge rapidly to a stable outcome in which a significant proportion (roughly 45%) of products traded cost more to produce but yield no externality. The prices for such goods are regularly higher than prices for externality-producing products, though to a lesser extent than the additional production cost. Thus, sellers and buyers in these markets share, on average, the burden for preventing negative externalities.
Comparative study in China
The experimental conditions generally reveal significant and stable levels of socially responsible behavior in markets conducted in Switzerland. However, it is also important to identify the robustness of this behavior in other populations, particularly across societies with varying cultural values, market practices, and historical trajectories in economic development. To this end, the authors report a second study, in which they compare socially responsible market behavior in their subject pool in Switzerland and a comparable subject pool in China. Bartling and his colleagues find that the market share of the socially responsible product is much lower in China, at 16%. Nevertheless, even though the manifestation of social responsibility is much weaker in the experimental markets in China than in Switzerland, the level of market social responsibility in China is stable and does not further erode with repeated market interaction.
Socially responsible behavior in a No Market condition
Finally, to address the debate whether markets “corrupt” concern for social impact, the authors include conditions in both studies that allow them to directly compare the strength of the social concern exhibited by individual participants in their market environment with social concern expressed in a comparable non-market choice context. The participants’ task in the non-market condition was to allocate given monetary amounts among themselves and other participants.
The No Market conditions allow the authors to directly compare the degrees of social concern in non-market settings in the two countries. In the non-market context, the authors find very little difference in behavior between Switzerland and China, as shown in Figure 1. Swiss and Chinese participants thus show very similar levels of prosociality – if they do not interact in a market context. When it comes to socially responsible behavior in markets, however, a big behavioral gap emerges between the two countries, which is evident from Figure 1. While participants behave prosocially less often in market contexts than in non-market contexts in both countries, the detrimental effect of the market context on prosocial behavior is much larger in China than in Switzerland.
Broadly, the results draw attention to the important challenge of better understanding the organizational, technological, and cultural conditions under which markets affect prosocial behavior. To this end, an appealing feature of the experimental design is that it easily lends itself to further study. After all, the findings of this and future studies could greatly affect the strategy of fair trade organizations and policy makers, who are fighting for social responsibility – be that on a local or global scale.
Literature: Bartling, Björn, Roberto A. Weber, and Lan Yao, “Do Markets Erode Social Responsibility?,” Quarterly Journal of Economics, 2015, Vol. 130(1): 219-266.
The Economics of Parenting Style
Since time immemorial, parents have struggled with the question of how best to raise their children. Fabrizio Zilibotti and Matthias Doepke argue that the choice of parenting style is driven by incentives.
What is the best way to raise children? For most of history, the experts of the day strongly advised a firm hand. It was only in the 20th century that the views of education reformers, such as Maria Montessori, gained wide acceptance, culminating in the popularity of anti-authoritarian education in the 1960s and 1970s. However, recently the tide has been turning again.
Much of the popular literature on parenting is based on the premise that parents do not know how best to raise their children, and that they need to be educated to adopt the best methods. From this perspective, when parents adopt the “wrong” parenting style, they make a mistake due to a lack of information.
In their own research on parenting styles, Doepke and Zilibotti take a different track that is based on the economic approach to human behaviour. They argue that parents, by and large, know about the pros and cons of different parenting strategies, and that choice of parenting style is driven by incentives. With this approach, the research task is not to tell parents what they should do, but to understand the economic incentives that drive what parents actually do.
Doepke and Zilibotti believe that parents have both altruistic and paternalistic feelings towards their children. While parents generally care about their children’s wellbeing (altruism), they may also disagree with some of the choices that their children make (paternalism). For example, parents and children often have different views regarding the optimal level of risk taking (say, in motor traffic or in experimenting with recreational drugs). As a result, parents have an incentive to attempt to influence their children’s choices in life.
The costs and benefits of alternative parenting styles
From the perspective of the parents, engaging in one of the intensive parenting styles that aim to control the children’s behaviour (authoritarian and authoritative) comes with costs. Some of these costs are direct (the time and effort spent on controlling the children or on instilling the appropriate values in them), and others are indirect (parents care about their children, and take into account the suffering that aggressive parenting imposes on the kids). A first prediction of the economic theory of parenting style is, therefore, that parents will be willing to bear the costs of intensive parenting only if the return is sufficiently high. So what is the return to intensive parenting?
The benefit of intensive parenting (authoritarian or authoritative) is that the children are more likely to engage in the choices that the parents consider appropriate. The return, therefore, depends on the stakes, i.e., the extent to which it matters whether the children make the “right” or “wrong” choices from the parents’ perspective.
The role of the return to education and inequality
While many parents worry about juvenile risks, we believe that the returns to effort in education and work during adolescence are even more important. A seemingly universal area of disagreement between parents and children is the trade-off between working hard for school and for one’s career versus having fun with friends and other immediate enjoyments. Few parents want their kids to blow off homework more often in exchange for some instant pleasure. This conflict can be interpreted as a difference in time preference – parents worry more about the long-term consequences of children’s behaviour (such as studying for school) than do the kids themselves. Hence, many parents push their children towards harder work, either through coercion (such as “grounding” children, i.e., not allowing them to spend time with friends) or through sustained indoctrination with a strong work ethic and a striving for success.
The return to pushing children hard consists of the increased likelihood that they will do well later in life. How important this is to parents depends crucially on the degree of economic inequality, and in particular on the return to education. In an economy where education and effort are highly rewarded and where people with little education struggle, parents will be highly motivated to push their children hard. Thus, we expect economic inequality to be associated with intensive (authoritarian and authoritative) parenting styles.
In contrast, in an economy where there is little inequality and artists and school dropouts earn only slightly less than doctors and engineers, parents can afford a more relaxed attitude, and permissive parenting should be more prevalent.
|Figure 1 shows the association of these values (i.e., the fraction of parents in a given country who consider the value important) with a measure of income inequality, namely the Gini index (higher values correspond to more inequality). As the theory predicts, across OECD economies parents in more unequal countries place more emphasis on hard work, and consider imagination and independence to be less important. Conversely, Scandinavian parents emphasise the value of imagin-ation and independence, consistent with the casual observation that children in these countries enjoy more leeway than their peers in Southern Europe and the US. The pattern also holds up for developing countries.|
The rise of authoritative parenting
Regarding the recent rise of more intensive parenting in Western countries (“Tiger Mom”, “helicopter parents”, etc.), our theory offers a straightforward explanation. In the 1960s and 1970s, when anti-authoritative, laissez-faire parenting reached the peak of its popularity, economic inequality was also at an all-time low. Given low returns to education, there was little reason for parents to exert major efforts to push their children. The last 30 years, in contrast, have seen ever-rising inequality combined with increasing returns to education. Children who fail to complete their education can no longer look forward to a secure, middle-class life, and consequently parents have redoubled their efforts to ensure their children’s success.
A final question is why among the intensive parenting strategies, modern parents increasingly rely on the subtle indoctrination methods of the authoritative style, rather than the command-and-control approach of an authoritarian parent. The methods of the “Tiger Mom” notwithstanding (which have both authoritarian and authoritative elements), traditional authoritarian parenting with its ample use of corporal punishment is becoming less common in many countries. From the economic perspective, the advantage of the authoritative approach is that the children, once successfully indoctrinated, no longer need to be monitored to do the right thing – they will implement the parents’ preferred choices on their own accord. Hence, authoritative parenting is more attractive than the authoritarian style when monitoring is difficult or impossible. We believe that the authoritarian style is declining because the economic returns to the independence of children have risen. The crucial phase of education is now often the college or post-graduate level rather than elementary or secondary school. Once off to university, chil-dren are no longer under the direct control of their parents, and they will succeed only if the appropriate values (such as valuing hard work and academic success) have already been instilled in them.
The future of parenting
Given that the spread of higher education is unlikely to reverse, our theory predicts that authoritarian parenting will continue its current decline; a return to the tough methods advocated by the Bible is unlikely. Regarding permissive versus authoritative parenting, the evolution of the return to education is what matters. If the march towards higher inequality continues, the current era will mark the beginning of a sustained trend towards ever pushier parenting. If, on the other hand, today’s inequality trends prove to be an aberration and we return to the less unequal times of the 1970s, future children (and their parents) will be able to enjoy a relaxed childhood once again.
Doepke, Matthias & Zilibotti, Fabrizio (2014). “Parenting with Style: Altruism and Paternalism in Intergenerational Preference Transmission”, CEPR Discussion Paper 10029.
The Advantages of Increasing Unemployment Benefits
The scope and costs of unemployment and unemployment benefits remain in the spotlight of political and societal discussion and will do so for the foreseeable future. To date, the majority of research on the subject focuses on the effects of unemployment benefits on a recipient’s behavior. In a study recently published by the American Economic Review, Josef Zweimüller argues that this only accounts for part of the story. In addition to these behavioral effects the market externalities - changes in the probability of finding a job for a given search intensity - are critical in determining the optimal level of unemployment benefits.
The majority of academic and policy research on unemployment benefits focuses on the effect a generous benefit system has on the effort and success of an individual recipient to re-enter the labor market. The prediction is that extending the maximum duration of the available benefits reduces a person’s efforts to search for a new job, resulting in longer unemployment durations. This prediction has ample empirical support. In fact, many micro-studies find that increasing the generosity of unemployment benefits tends to increase eligible individuals’ average duration of unemployment.
While many studies on the micro effect exist, this effect does not necessarily coincide with the overall (macro) effect of unemployment insurance generosity. The micro effect will give a biased estimate of the macro effect if market externalities are important. To identify externalities, the authors estimate the effects of extending unemployment benefits for non-eligible individuals. The basic idea is very simple: if externalities are important, extended unemployment insurance for eligible workers will also affect non-eligible workers. In contrast, if externalities are negligible, non-eligible workers should not be affected. For instance, when generous unemployment insurance strongly reduces eligible workers’ search effort, it will be much easier for noneligible workers to find a new job, reducing unemployment durations for the latter.
Challenges in measuring externalities
Although these market externalities have an impact on overall welfare costs and are critical in determining the optimal level of unemployment benefits, they are much harder to identify, and little empirical research is available on their quantitative importance. Zweimüller, Lalive and Landais bridge this gap by using data from an unemployment program launched in selected regions of Austria between 1983 and 1988. They argue that this program provides an ideal design to identify market externalities because labor markets with extended unemployment benefits can be compared to labor markets that do not get the extension. Contrasting non-eligible workers in treated labor markets to similar workers in the non-treated labor markets allows the authors to identify the sign and magnitude of market externalities due to increased unemployment insurance generosity.
The authors first compare the average duration of unemployment of eligible unemployed subjects in areas with extended benefits and their counterparts in areas without extended benefits. As in most existing studies, people eligible for increased benefit durations remained unemployed for longer periods than they would have otherwise.
An extension of unemployment benefits leads to shorter durations of unemployment for workers
not eligible to increased generosity.
The empirical analysis provides clear support for significant and quantitative important market externalities: individuals who are not eligible for extended benefits have shorter unemployment durations than similar workers in regional labor markets where these extended unemployment benefits were not granted. Non-eligible workers benefit from the reduced aggregated search effort of eligible workers. This reduction in unemployment duration is seen for non-eligible people and is strongest within the treated regional labor markets and, to a lesser extent, for people coming from neighboring areas, the latter indicating a regional spillover effect.
The effects described above become more pronounced for subsets of the market with increasing percentages of eligible subjects. The available data indicated this was the case for unemployed people over the age of fifty. The data shows that non-eligible unemployed persons over the age of fifty in areas with extended benefits will find a new employment much earlier than their counterparts in untreated markets.
Comparing the average duration of unemployment of the eligible and non-eligible workers in markets with and without extended unemployment insurance benefits.
Offering extended unemployment benefits leads to significantly longer durations of unemployment for eligible workers - compared to a setting with the unchanged unemployment benefits. Panel A shows the difference in duration of unemployment in weeks between markets with and without the benefit extension. Before 1988 (the start of the program) and after 1993 (the end of the program) these differences are negligible. During the program, however, the eligible remain unemployed for longer - on average 40 weeks.
Panel B shows the corresponding effect on non-eligible workers (the positive externality). Non-eligible people profit from the reduced search effort of the eligible group and have shorter unemployment durations. The externality is stronger for non-eligible individuals who are in close competition with eligible workers.
Including externalities improves the effectiveness of benefit policies
The overall (“macro”) effect of increased unemployment insurance generosity is the sum of the “micro” effect (on eligible workers) and the externality (the effect on non-eligible workers). The existence of market externalities, and the direction they take, implies that the macro effect of unemployment insurance extensions is smaller than that that micro-studies indicate. Relying on micro-studies to assess the moral hazard is therefore misleading and draws a too pessimistic picture on the implications of unemployment insurance generosity.
The existence of positive externalities points to intense competition for a limited number of jobs: it gets easier for me to find a job if all others search less hard. This result has important policy consequences: it implies that extending unemployment benefits during a recession is a beneficial, welfare-enhancing policy. Optimal unemployment insurance has to weigh moral hazard costs (lower search intensity) against its value of insurance against job loss (consumption smoothing benefits). With positive externalities, moral hazard costs of reduced search efforts are smaller in recessions, when jobs are scarce, providing an argument for more generous benefits in bad times. This provides support for government policies during the Great Recession such as the “emergency unemployment benefit program” in the US which granted more generous benefits in states hit hardest by the recession.
Lalive, Rafael; Landais, Camille & Zweimüller, Josef (2015). “Market Externalities of Large Unemployment Insurance Extension Programs,” American Economic Review, 105(12): 3564-3596.
Why Life Satisfaction Slumps in Midlife
A midlife crisis or mid-career slump in satisfaction can happen to anyone, even to those who seem to have the most fulfilling jobs. Dissatisfaction, frustration or, more visibly, random acts attempting to regain a sense of youth can be the result. When the crisis hits, it inflicts pain on the individual in question and causes productivity losses for employers. Yet, the phenomenon remains stigmatized and underresearched, leaving crucial questions unanswered. What are the causes? Why does this malaise seem to strike in midlife? And how can those who are stuck in its grips shake themselves loose?
An emerging literature in economics has started to investigate what happens during midlife, providing insights that might help people and firms to better handle these painful and costly episodes. Mid-career crises are a widespread regularity, rather than the misfortune of a few. Yet, there is good news: In the second half of people’s working lives, job satisfaction increases again, in many cases reaching higher levels than earlier in the career — essentially forming a U-shaped curve.
This age-related U-shape in job satisfaction is part of a much broader phenomenon. A similar midlife nadir is found in measures of people’s overall life satisfaction across the globe. On average, life satisfaction is high when people are young, then starts to decline in the early 30s, bottoming out between the mid-40s and mid-50s before increasing again to levels as high as during young adulthood. This U-curve occurs across the entire socio-economic spectrum, hitting senior-level executives as well as blue-collar workers and stay-at-home parents. It affects childless couples as well as single people or parents of four. In short, a mid-career crisis does not discriminate.
So what drives the midlife slump in job and life satisfaction if it is independent of people’s life circumstances? And if it is such a widespread phenomenon, why does it seem to catch us by surprise? To answer these questions, a recent study by Hannes Schwandt analyzes data from the German Socio-Economic Panel that followed 23,000 individuals from 1991 to 2004. In this survey, people report their current life satisfaction as well as their expected satisfaction in five years’ time. Since the same individuals are interviewed each year, it is possible to see if people accurately predicted their future life satisfaction.
Youth’s optimism meets adult’s realism
Young people, it turns out, are overly optimistic, expecting significant increases in life satisfaction, rather than anticipating the slide down the U-curve. Young adults typically believe that they will “beat the average” — that they will be the lucky ones who will end up with a top job, a happy marriage, and healthy children. Neuroscientists believe that overoptimism is based on biased information processing in the brain, which makes it difficult to correct overly rosy expectations in the young (this bias might actually be evolutionary efficient, as a powerful driver for seeking progress).
As we age, things often do not turn out as nicely as we planned. We may not climb up the career ladder as quickly as we wished. Or we do, only to find that prestige and a high income are not as satisfying as we expected them to be. At the same time, the high expectations about the future adjust downwards. Midlife essentially becomes a time of double misery, made up of disappointments and evaporating aspirations. Paradoxically, those who objectively have the least reason to complain (e.g. those with a desirable job) often suffer most. They feel ungrateful and disappointed with themselves particularly because their discontent seems so unjustified – which creates a potentially vicious circle.
As a whole, these findings tell a story in which the age U-shape in job (and overall life) satisfaction is driven by unmet aspirations that are painfully felt in midlife, when reality, as it is, requires to be acknowledged. Beneficially, the aging brain learns to feel less regret about missed chances, as brain studies have shown. This combination of accepting life and feeling less regret about the past leads to an increase in life satisfaction.
It is just a phase
In Hannes Schwandt’s study, this pattern emerged regardless of people’s socio-economic status, their gender, or whether they lived in East or West Germany, despite the cultural differences in the decade right after unification. Periods of “mid-career crisis” seem to be part of a natural developmental process, driven by bio-logy rather than the specifics of a particular job or life circumstances. Hence, drastic career or lifestyle changes are unlikely to make you feel better off. If the burned out Wall Street lawyer and the dissatisfied NGO activist were to change seats, perhaps neither would end up more content.
The data seems to suggest that if you are in the throes of a mid-career crisis, maybe you should just wait it out until the U-curve’s upward slope is reached. But there is more we can do in the face of this mid-career malaise:
• At the individual level, acknowledging mid-career dissatisfaction as a normal and temporary stage in one’s work life provides a light at the end of the tunnel. Moreover, understanding that feeling regret from unmet aspirations is a widely shared experience helps break the vicious circle of disappointment about feeling discontented.
• At the firm level, HR could consider mid-career mentoring programs. Mentoring is usually directed at early career stages and continues only informally through the rest of a person’s career. The findings suggest that those in a mid-career low can learn from their older colleagues who already went through the valley and have emerged feeling less regret, having adapted to life’s circumstances. A corporate culture that openly addresses mid-career discontent could support employees during this reorientation process and reduce frustration, demotivation, and fluctuation.
• While a mid-career crisis can be a painful time in life, it can also be an opportunity to reflect and to reevaluate personal values. Whether one chooses to wait out the discontent, or make a drastic change in the hopes of a brighter tomorrow, one thing remains for sure: this too shall pass. Take heart when you find yourself in the depths of this U-shaped curve, because things will only look up from here.