The end of information asymmetry (except when we want it)

Alex Tabarrok and Tyler Cowen of Marginal Revolution fame contemplate the implications of a diminishing information asymmetry.

Might the age of asymmetric information – for better or worse – be over?  Market institutions are rapidly evolving to a situation where very often the buyer and the seller have roughly equal knowledge. Technological developments are giving everyone who wants it access to the very best information when it comes to product quality, worker performance, matches to friends and partners, and the nature of financial transactions, among many other areas.
 

They begin with a great example of how a market increased liquidity by driving down information asymmetry.

The market for used cars, however, has been one of the earlier examples where market institutions largely (albeit not completely) solved the problem of asymmetric information. Even in 1970, the market for used cars was extensive, and some institutions existed to make information more symmetric. Perhaps the most important of these was the odometer. First used by Alexander the Great to measure distances between cities, modern odometers were standard on almost all cars by 1925. The odometer reading is the single most important piece of information about a specific car that determines its value, and that is why used car prices are adjusted for mileage. The law contributes to this solution by making odometer tampering illegal and successive state and federal laws have increased the penalties and enforcement over time. In 1972, for example, the Federal Odometer Act made tampering a federal felony. As with other crimes, punishment doesn’t eliminate tampering but it does reduce it quantity thus making odometer readings more trustworthy and quality information more symmetric. Even more importantly, the Truth in Mileage Act of 1986 requires that sellers disclose and record the odometer reading on the title at every transfer of title. The 1986 Act greatly reduced the benefits of tampering because the odometer could not be rolled back prior to the reading from a previously recorded sale.
 
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Perhaps the most telling fact is that the market for used cars is already some three times larger than the market for new cars (as measured by unit sales, see Bureau of Transportation Statistics). In 2012, for example, there were 40.5 million used car sales compared to 14.5 million new car sales (NIDIA 2013). On average, used cars sell for about a third the price of new cars, so the total size of the two markets is similar with both around $330 billion in sales. There just aren’t that many lemons to sustain such a high transactions volume. In fact both high-quality and low-quality used cars are available in fairly liquid, fairly transparent markets.
Information symmetry about the quality of automobiles is very likely to increase. Almost all vehicles today have “event data recorders” aka “black boxes,” similar to those found in airplanes. Event data recorders record data on vehicle performance and diagnostic checks but also speed, braking, seatbelt use and other information relevant to safety and car crashes. Some car companies, most notably Tesla, can collect such information remotely or stream it in real time. Tesla, for example, collects information on a vehicle’s odometer, service history, speed, location, battery use, charging time, braking, starting and stopping times, air bag deployment—even radio and horn use.[2] When a vehicle is sold the data transfers with the vehicle. It is now possible to prove that a used car really was driven by a grandma just on Sundays.
 

Even for new car purchases, reduced information asymmetry has vastly improved the purchase process, and it might be just as good for car dealerships, too. It's now possible to look up the dealer price for most any car on a variety of free websites. Instead of haggling back and forth with a car salesman, traditionally an unpleasant ordeal, you can simply offer to purchase a car at cost plus whatever margin you want the dealer to make.

I suspect it's only a matter of time before other traditionally unpleasant or inefficient marketplaces become less one-sided. One example, to stay in the automotive space, is purchasing auto insurance. Every time my policy comes up for renewal, I'll check around for better rates, and more often than you'd expect I find one. The insurance companies count on your laziness to minimize churn, and often they withhold discounts they could offer you based on your driving record. Someone is going to come along to either automate that process or offer to take a cut of any savings in exchange for doing the legwork.

I recently purchased my first condo, and shopping for a mortgage was also incredibly painful. Refinancing doesn't sound like much fun either. This is one area where good enough doesn't feel good enough; one always feels taken advantage of if there's money left on the table.

*****

Tabarrok and Cowen also discuss reduced information asymmetry in reputation in a variety of marketplaces.

Reputation is one very general way to think about solutions to moral hazard problems. A mechanic with a reputation for honest dealing can earn more business at a higher price. Cheating becomes less valuable when the price is a loss of reputation.
 
In recent times, information technology has made it easier to observe a seller’s reputation and to contribute to the formation of a seller’s reputation at low cost. Yelp, Angie’s List, and Amazon Reviews all make it easy for past buyers to report their observations on seller quality and for future buyers to observe a seller’s accumulated reputation. And of course it is not just sellers who are rated but workers too are evaluated in a variety of ways; for instance many employers check a worker’s credit rating, or on-line history, before making a hire. We may be creating some privacy problems with these techniques, but the old school issues of asymmetric information are drying up rapidly.
 
Early reputation mechanisms were one-way, namely that buyers would generate reputations for sellers, but now the ratings often go both ways. Many of the exchanges in the sharing economy, including Uber (transportation), Airbnb (accommodations), and Feastly (cooks) use two-way reputational systems. That is the customer rates the Uber driver, but in turn the Uber driver rates the customer. Dual reputation systems can support a remarkable amount of exchange even in the absence of law or regulation. The Silk Road marketplace for illegal goods, for example, supported millions of dollars of exchange through a dual reputation system. On the Silk Road it was possible to pay for goods in advance of delivery or to buy goods which were delivered before payment was made. In each case, honesty was maintained through reputation even without legal recourse for contract breach.[4] Thus, in these cases reputation maintained quality even when theories of information asymmetry would have predicted the problematic nature of any exchange at all.
 

Tabarrok and Cowen hone in on privacy as one problem with this world of two-way reputation. Privacy concerns and plain old cultural inertia may be the only things holding back more companies from implementing two-way reputation systems. Restaurants, hotels, airlines, car rental services, and almost anyone you transact with could start rating you as a customer and using that to determine whether they want your business in the future. Everyone deserves healthcare, I believe strongly in that, but maybe the jerk who always no-shows at a restaurant can and should live without a reservation.

*****

Given all this, why do we still tolerate so much information asymmetry when it comes to the people in our lives? Take the mating/dating market, for example. People spend money on fancy sports cars, exorbitant prix fixe meals, designer clothing, much of it just to signify wealth. Why not just show someone your bank statement?

How about signaling physical fitness? We spend a lot on gym memberships, Spanx, fad diets, all to look good for potential mates, but why not share the results of our latest physical from the doctor's office, along with a medical history?

Of course many technological advances have already started increasing the efficiency of such status signaling (a cursory scroll through your Facebook news feed would blow the mind of a sociologist from a previous era), but we still tolerate a surprisingly high degree of information opacity if considered purely from a market perspective.

I suspect it's not just cultural inertia, though that plays a part as in all technology dissemination. Instead, I suspect humans value the process of constructing narratives about themselves and about each other, and reducing information opacity to zero would remove all the pleasures of that activity. It would eliminate mystery, and ambling out of the fog of mystery  is one of the great pleasures of life.

That so many of us choose to derive so much of the narrative drama of life through the people around us is either natural or bizarre, depending on your personality. Even with someone you know so well, like your partner or spouse or child, one of the most pleasurable mysteries of life is learning new things about them every day, seeing how they evolve. If we have an insatiable desire for a certain level of narrative entropy, perhaps most of us would prefer to have it from the people in our lives than from, say, a new digital SLR, where we want to read every last bit of research and every last professional and consumer review to ensure we know what we're getting.

Perhaps some baseline level of relationship dissolution will always exist simply because we prefer a gradual diminishment rather than a sudden dissolution of information asymmetry when it comes to the people in our lives. 

Does surge pricing maximize consumer welfare?

Steve Randy Waldman makes one of the more persuasive arguments against surge pricing (a term which may have existed before Uber—the practice certainly did—but which now seems inextricably intertwined with their brand).

I don’t care all that much about Uber’s “surge pricing” — its practice of increasing its usual fare schedule by multiples during periods of high demand. I do, however, care about the damage done by a kind of idiot dogmatism that hijacks the name “economics”. Uber’s surge pricing may or may not serve Uber’s objectives of profit maximization and world domination. It may or may not increase “consumer welfare”. But it is not unambiguously a good practice, either from the perspective of the firm or as a matter of economic analysis. Its pricing practices impose tradeoffs that must be addressed with reference to actual, on-the-ground circumstances. Among prominent academic economists there may well be a (research-free) consensus that surge pricing promotes consumer welfare (ht Adam Ozimek), but that reflects the crude selection bias of the profession much more than actual analysis of the issue. The dogmatism which has arisen in support of Uber’s surge pricing is quite analogous to the case of urban rent regulation, a domain in which there is incredible heterogeneity across localities and nations, both of circumstance and policy, and a wide range of legitimate values that conflict and must be reconciled. (Here’s an interesting case in the news today, in Spain, ht Matt Yglesias.) Almost as a right of passage, economists drone in every intro course that rent controls are bad. By preventing price signals from working their magicks, they prevent the explosion of real-estate supply that a truly free market would deliver. This is stated as uncontroversial fact even while economists who research and opine prominently on housing policy have endlessly documented that housing supply is not in fact price-elastic in the prosperous cities where rent controls are typically imposed. None of this is to say that rent controls are good or bad, or that non-price barriers to construction are good or bad. These are complex questions involving competing values textured by local circumstance. They deserve bespoke analysis, not pat dogma imposed by distant central planners economics professors.
 
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As in the case of rent control, the stereotyped economist’s case for surge pricing is based on a conjectured elasticity of supply. With higher prices, the reasoning goes, more drivers will hit the road, more customers will be served, and the world will be better off. And that’s a good case, as far as it goes. But it doesn’t go very far, without some empirical analysis. It doesn’t justify Uber’s actual practice of surge pricing, which is far from the transparent auction our stereotyped economist seems to imagine. It doesn’t account for the trade-offs imposed by price-rationing (as opposed to time- or lottery- rationing), both between customers and for the public at large.
 
First, how price elastic is driver supply? If we presume that Uber is a Walrasian auctioneer, a disinterested matchmaker of supply and demand, apparently supply is not very elastic. Uber surges prices by multiples, two, three, even four times “typical” pricing in periods of high demand. That’s extraordinary! If supply were in fact elastic, small increases in price would lead to large increases in supply. The supply-centered case for dynamic pricing is persuasive in direct proportion to actual elasticity of supply. Uber’s behavior suggests that the supply-based case is not so strong. Of course, we cannot make very strong inferences about driver supply from Uber’s behavior, because they are not in fact a disinterested Walrasian auctioneer. When Uber surges, it dramatically raises its own prices and earns a lot more money per ride, whether ride supply increases not at all, or whether it spikes so much that drivers end up competing heavily for riders and suffer long vacancies. As a profit maximizer, Uber’s incentives are to impose surges primarily as a function of demand, and say nice things about supply to con economists and journalists.
 

This is one of the paradoxes of surge pricing. It is supposed to attract more drivers to the road, but if you live in SF as I do and have tried to call an Uber at the end of the workday (say 5-8pm), or on a weekend night, you know that Uber will inevitably be in surge pricing. And yet it still happens every day. If surge pricing worked, you'd expect drivers to learn that those are great times to drive to maximize their earnings, and that as more drivers did so surge pricing would wane as supply matched demand.

Perhaps there are still not enough drivers in total to match these spikes in demand. Or perhaps driver supply isn't as price elastic as claimed.

Or perhaps the cost of maintaining even the normal supply of drivers on a Friday night is just higher. Driving in rush hour in San Francisco isn't exactly pleasant work, and more importantly, drivers want to go out on Friday nights, too. The price to get them on the road may just permanently be higher on that night, like how evening movie tickets cost more than matinee tickets, or dinner costs more than lunch at restaurants even if the food is the same, or how Monday morning flights with Friday evening returns cost more to target business travelers. Completely plausible, but different from the story that ride sharing PR departments continue to put out, which is that surge pricing attracts more drivers until supply matches demand.

If that were the case, from a brand perspective, it would be better to just put those higher rates into effect permanently and call them peak rates and call the pricing at other times off-peak rates. Surge pricing is already a dirty word. If for some reason demand was even higher than normal peak demand, then put in surge pricing, and if for some reason it happened to be lower, you could offer a discount off of peak rates (ebb pricing?) and gain some consumer goodwill.

The other argument for surge pricing is, of course, price rationing. That is, by raising prices, we ensure that the scarce resource of Uber drivers goes to those who most need it.

Unfortunately, the argument for price-rationing (as opposed to lottery-rationing, or queue-rationing) of goods as being welfare-maximizing depends (at the very least) upon a rough equality of wealth so that interpersonal dollar values can stand in for interpersonal welfare comparisons. In an unequal society, price rationing ensures disproportionate access by the rich, even when they value a good or service relatively little. There is no solid case that price-rationing is optimal or even remotely a good idea when dispersion of purchasing power is very large. I’ve written about this, as has Matt Yglesias very recently. Matt Bruenig has two excellent posts relating this point to Uber specifically (as well as another post on ethical claims about Uber’s pricing).
 

The service is still scaling (incredibly), so it may not be fair to judge the validity of the price-rationing argument. However, based on the three times I've seen crazy surge pricing multiples for Uber (I'm talking 8X to 9X, for example during a blizzard in NYC the day after the Super Bowl two years ago), price rationing meant Uber was only available to price-insensitive wealthy folks. Great for maximizing Uber's profits, but not exactly what people claim when they say the market is the best way to allocate scarce resources during times of peak demand, for example an emergency. Unless you want to argue that because the wealthy were willing to pay more, they deserved or needed the service more than poorer folks. Pursue that line and next thing you know, you're dancing with a woman in a mask at your masquerade ball and she's whispering in your ear:

There's a storm coming, Mr. Wayne. You and your friends better batten down the hatches, because when it hits, you're all gonna wonder how you ever thought you could live so large and leave so little for the rest of us.
 

Matt Bruenig explains this with a very clear example:

Suppose that, in a given location, 10 people will normally hail an Uber cab, and 10 drivers will normally be cruising about to accept them. Now suppose that, because of an emergency, the number of people trying to hail a cab shoots to 100 people. In response, Uber jacks up prices very high, which has the effect of bringing 10 additional drivers on to the road. That means there are now 20 drivers (a doubling of supply) and 20 of the 100 people trying to hail an Uber cab succeeds in doing so.
 
Under Econ 101 analysis, you say that there was a welfare increase here. See, there were 20 people who got Uber cabs rather than 10 people. But, as I keep pointing out, this argument is not determinative if we assume the 100 people vying for Uber cabs have unequal economic resources. Further, the more unequal the resources are among those people, the more likely using prices like this actually decreases aggregate utility.
 
To see why, consider these two scenarios:
 
Non-Surge
  • Rider Demand: 100
  • Cab Supply: 10
  • Chance of Getting a Cab: 10% for all 100 riders
Surge
  • Rider Demand: 100
  • Cab Supply: 20
  • Chance of Getting a Cab: 100% for wealthiest 20 riders, 0% for other 80 riders
From a glance, you can immediately see that for the bottom 80 riders, the rational preference should be the Non-Surge. In Non-Surge, their odds of getting a cab are 10%. In Surge, their odds of getting a cab are 0%. Don’t let stupid journalists confuse you on this point.
 

Did more cars hit the road in response to the 8x or 9x surge pricing that snowy night in NYC? Without data from Uber, it's impossible to say. Given that Uber has been under a bit of a public relations siege, at least in the tech press and locally here in the Bay Area, if surge pricing increased supply of drivers in any meaningful manner in times where demand outstrips supply, I would've thought they would've released data proving that point.

This isn't to say I'm not a fan of Uber and other ride-sharing services. I love ride sharing, I use Uber and Lyft all the time. They've undoubtedly produced a great deal of surplus consumer and societal welfare, especially in this time of a heavily subsidized price war for market share. What taxi drivers and the government are doing in Paris to fight off Uber is just one more reason I've fallen deeply out of love with what was once one of my favorite places in the world.

And I don't doubt some of the grumbling about surge pricing is just the usual consumer noise greeting any price increases, however reasonable. It would be more bizarre if consumers didn't complain simply as another signal to suppliers of their preferences.

But the argument that surge pricing always maximizes consumer welfare is a more complex one, and not a premise that should be accepted at face value.

Wife bonuses

And then there were the wife bonuses.
 
I was thunderstruck when I heard mention of a “bonus” over coffee. Later I overheard someone who didn’t work say she would buy a table at an event once her bonus was set. A woman with a business degree but no job mentioned waiting for her “year-end” to shop for clothing. Further probing revealed that the annual wife bonus was not an uncommon practice in this tribe.
 
A wife bonus, I was told, might be hammered out in a pre-nup or post-nup, and distributed on the basis of not only how well her husband’s fund had done but her own performance — how well she managed the home budget, whether the kids got into a “good” school — the same way their husbands were rewarded at investment banks. In turn these bonuses were a ticket to a modicum of financial independence and participation in a social sphere where you don’t just go to lunch, you buy a $10,000 table at the benefit luncheon a friend is hosting.
 
Women who didn’t get them joked about possible sexual performance metrics. Women who received them usually retreated, demurring when pressed to discuss it further, proof to an anthropologist that a topic is taboo, culturally loaded and dense with meaning.
 

Finally got around to reading this piece in the NYTimes on Upper East Side moms. Is this real?

The author wrote the piece to promote her new memoir titled, no joke, Primates of Park Avenue.

An Upper East Side wife penned this response with about as virally-optimized a title as even the greatest minds in the Buzzfeed labs could concoct: I get a wife bonus and I deserve it, so STFU. 2015 is shaping up to be the year every one tried to break the internet.

Al came out in favor of the idea of the wife bonus almost as soon as we moved to Australia. He’s got a very politically incorrect sense of humor and joked it was to reward me for being a “good little wife,” which made me laugh out loud. Seriously, though, we settled on the exact terms: When he received his bonus every year at the end of April, we’d each take a fifth after tax and bank the rest.
 
I’m exceptionally lucky to have a husband who values how important a job it is to stay home and take care of a child, as well as understanding how difficult it is to leave friends, family and career prospects behind to further his career. He was actually pleased to have a tangible way to recognize the contribution that I also make to the success of our lives.
 
The wife bonus gives me not only financial freedom, but freedom from guilt too. We have a joint account, and before we started the system, I was reluctant to spend our money on myself, even though my husband insisted he was happy for me to. Now that I have a quantifiable amount to treat myself with, I don’t feel guilty doing so.
 
The five-figure amount has pretty much stayed the same despite the economy. Last year, I bought a Prada handbag and Burberry raincoat for about $1,500 each. I tend to wait until I’m back home in London to spend my bonus because I can leave Lala with a member of the family and go on a week-long splurge to upscale stores like Selfridges. My favorite labels include Bottega Veneta, Chanel, Prada, Smythson, Erdem and Stella McCartney.
 

I will leave aside any personal judgment here and just observe that the furor reflects the evolving conception of marriage. Whereas once they were largely seen as economic arrangements, now we expect more from marriage, from our spouses. They must fulfill us in every way. I can't tell what the model of hedonic marriage has to say about wife bonuses, perhaps an economist out there has an analysis.

If the couples observed here just had shared bank accounts and the money flowed the same way otherwise, we wouldn't have any such furor. The framing is everything here.

Competing against robots

Some scholars are trying to discern what kinds of learning have survived technological replacement better than others. Richard J. Murnane and Frank Levy in their book “The New Division of Labor” (Princeton, 2004) studied occupations that expanded during the information revolution of the recent past. They included jobs like service manager at an auto dealership, as opposed to jobs that have declined, like telephone operator.
 
The successful occupations, by this measure, shared certain characteristics: People who practiced them needed complex communication skills and expert knowledge. Such skills included an ability to convey “not just information but a particular interpretation of information.” They said that expert knowledge was broad, deep and practical, allowing the solution of “uncharted problems.”
 
These attributes may not be as beneficial in the future. But the study certainly suggests that a college education needs to be broad and general, and not defined primarily by the traditional structure of separate departments staffed by professors who want, most of all, to be at the forefront of their own narrow disciplines. But this old departmental structure is still fundamental at universities, and it is hard to change.
 

Full article here from Robert Shiller.

A few random thoughts. Disciplines which are purely about knowledge accumulation are risky if the type of knowledge acquired is that which computers can accumulate in a fraction of the time. Lots of Ph.D's seem unlikely to be economically worthwhile considering the cost of higher education.

Watch the virtual assistant on your phone. Siri or Google Now are good benchmarks for what skills are becoming obsolete, and which are still of great value.

Most humans still prefer a bit of entropy and warmth from those they interact with, especially in the service sector, and indexing high on that still commands a premium.

Supposedly irrelevant factors

There is a version of this magic market argument that I call the invisible hand wave. It goes something like this. “Yes, it is true that my spouse and my students and members of Congress don’t understand anything about economics, but when they have to interact with markets. ...” It is at this point that the hand waving comes in. Words and phrases such as high stakes, learning and arbitrage are thrown around to suggest some of the ways that markets can do their magic, but it is my claim that no one has ever finished making the argument with both hands remaining still. 
 
Hand waving is required because there is nothing in the workings of markets that turns otherwise normal human beings into Econs. For example, if you choose the wrong career, select the wrong mortgage or fail to save for retirement, markets do not correct those failings. In fact, quite the opposite often happens. It is much easier to make money by catering to consumers’ biases than by trying to correct them. 
 
Perhaps because of undue acceptance of invisible-hand-wave arguments, economists have been ignoring supposedly irrelevant factors, comforted by the knowledge that in markets these factors just wouldn’t matter. Alas, both the field of economics and society are much worse for it. Supposedly irrelevant factors, or SIFs, matter a lot, and if we economists recognize their importance, we can do our jobs better. Behavioral economics is, to a large extent, standard economics that has been modified to incorporate SIFs.
 

Richard Thaler on behavioral economics. Again and again, studies have put cracks in the edifice of rational homo economicus.

SIFs exist in product design, too. The myth of the rational utility-maximizing user can be just as pernicious and misleading an assumption. If it wasn't, we wouldn't need concepts like smart defaults in apps, the design equivalent of nudges like retirement savings programs that are opt out instead of opt in.

Negative interest rates

It’s not unusual for interest rates to be negative in the sense of being lower than the rate of inflation. If the Federal Reserve pushes interest rates below inflation to stimulate growth, it becomes cheaper to borrow and buy something now than to wait to make the purchase. If you wait, inflation could make prices go up by more than what you owe on the loan. You can also think of it as inflation reducing the effective amount you owe.
 
What is rarer is for interest rates to go negative on a nominal basis—i.e., even before accounting for inflation. The theory was always that if you tried to impose a negative nominal rate, people would just take their money from the bank and store cash in a private vault or under a mattress to escape the penalty of paying interest on their own money. When the Federal Reserve slashed the federal funds rate in 2008 to combat the worst financial crisis since the Great Depression, it stopped cutting at zero to 0.25 percent, which it assumed to be the absolute floor, the zero lower bound. It turned to buying bonds (“quantitative easing”) to lower long-term rates and give the economy more juice.
 
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Now comes the interesting part. There are signs of an innovation war over negative interest rates. There’s a surge of creativity around ways to drive interest rates deeper into negative territory, possibly by abolishing cash or making it depreciable. And there’s a countersurge around how to prevent rates from going more deeply negative, by making cash even more central and useful than it is now. As this new world takes shape, cash becomes pivotal.
 

Fascinating. It's understandable why banks would want to move to a cashless society, but it might not be a bad idea. The mindset shift required might take a generation or two to overcome, cultural inertia being such a powerful force. What usually wipes the slate clean, as morbid as it may be, is simply the dying off of the previous generation.

Heist movies would be a lot less fun minus Brinks armored trucks and giant vaults filled with cash. I'm fine with a cashless society, but I may be more trusting of government than the average citizen. Those less trusting in government might be more inclined to have a virtual currency like Bitcoin replace cash, but virtual currencies come with technological opacity for the average person that carries its own trust issues.

Like chemotherapy, negative interest rates are a harsh medicine. It’s disorienting when people are paid to borrow and charged to save. “Over time, market disequilibria are dangerous,” G+ Economics Chief Economist Lena Komileva wrote to clients on April 21. Which side of the debate you fall on probably comes down to how much you trust government. On one side, there’s an argument to be made that cash has become what John Maynard Keynes once called gold: a barbarous relic. It thwarts monetary policy and makes life easy for criminals and tax evaders: Seventy-eight percent of the value of American currency is in $100 bills. On the other side, if you’re afraid that central banks are in a war against savers, or that the government will try to control your financial affairs, cash is your best defense. Taking it away “is a prescription for revolution,” Cecchetti says. The longer rates break on through to the other side, the more pressing these questions become.

Neighborhood destiny

A new study by the Harvard economists Raj Chetty and Nathaniel Hendren, when read in combination with an important study they wrote with Lawrence Katz, makes the most compelling case to date that good neighborhoods nurture success. (The Upshot has just published a package of articles and interactives on the study.)
 
Let me be upfront about my own reading: These two new studies are the most powerful demonstration yet that neighborhoods — their schools, community, neighbors, local amenities, economic opportunities and social norms — are a critical factor shaping your children’s outcomes. It’s an intuitive idea, although the earlier evidence for it had been surprisingly thin. As Sean Reardon, a professor of education and sociology at Stanford, said of the study, “I think it will change some of the discussion around how where children grows up matters.”
 

That's Justin Wolfers on this paper (PDF) by Chetty and Hendren.

Those earlier analyses grouped children who moved to a neighborhood as toddlers with those who moved in their late teens. So comparing all of the children whose parents won the lottery with all of those whose parents lost showed small effects. Yet if what matters are years of exposure to a good neighborhood — a hypothesis strongly suggested by the second of these two studies — then the effects might be very different, as those who moved as toddlers enjoyed most of their childhood in better neighborhoods, while those who moved as teens received few such benefits yet still had to deal with the disruption of moving.
 
Armed with this hypothesis and also newer data on the longer-run outcomes of these children, Mr. Chetty, Mr. Hendren and Mr. Katz reanalyzed the outcomes of the same families. (Full disclosure: Lawrence Katz was my Ph.D. adviser.)
 
And the findings are remarkable. In particular, the previous results actually hide two quite distinct findings, one positive and one negative. The children who moved when they were young enjoyed much greater economic success than similarly aged children who had not won the lottery. And the children who moved when they were older experienced no gains or perhaps worse outcomes, probably the result of a disruptive move, paired with few benefits from spending only a short time in a better neighborhood.
 

As Tyler Cowen notes, the biggest problem with poverty tends to be “you usually end up living near other poor people.” Or, as Judith Rich Harris wrote in her groundbreaking book The Nurture Assumption, a children's peer group may have a great influence on that child's outcomes than their parents. I first learned all this from Boyz in the Hood.

How does this square with the popular theory that general intelligence is most important to one's future outcome? I hypothesize some interaction effects between the two, with the right neighborhood being an environment most conducive to wringing all the potential from genetically inherited general intelligence. Peer emulation or peer pressure exerting an activation effect.

Whatever the reason, it's clear how complex it is to break the cycle of poverty. So many nested problems, from education to urban planning to crime, all nearly impossible to isolate.

The marriage squeeze is hitting China and India

Fascinating read on how the marriage squeeze, already established in countries like Japan and South Korea, has finally hit a third of the world's population, namely that of China and India. It's not just that sex selection at birth has led to a large gender imbalance in the population. Other factors exacerbate the problem.

Countries with normal sex ratios can experience a marriage squeeze if their fertility rates are falling fast. Fertility is important, because men tend to marry women a few years younger than themselves. In India the average age of marriage for men is 26; for women, it is 22. This means that when a country’s fertility is falling, the cohort of women in their early 20s will be slightly smaller (or will be rising more slowly) than the cohort of men they are most likely to marry—those in their late 20s (this is because a few years will have gone by and the falling fertility rate will have reduced the numbers of those born later). This may not sound like a big deal. But in fact between 2000 and 2010 the number of Indian men aged 25-29 rose by 9.2m. The number of Indian women aged 20-24 (their most likely partners) rose by only 7.6m.
 
Even if India’s sex ratio at birth were to return to normal and stay there, by 2050 the country would still have 30% more single men hoping to marry than single women. This is explained by a rapid decline in India’s fertility rate. But in China, where fertility has been low for years, the more gradual decline in fertility still means there will be 30% more single men than women in 2055, though the distortion declines after that. A decline in fertility usually benefits developing countries by providing a “demographic dividend” (a bulge of working-age adults compared with the numbers of dependent children or grandparents). But it does have the drawback of amplifying the marriage squeeze.
 
The problem is further accentuated by a so-called “queuing effect”. The length of a queue is determined by how many people join it, how many leave, and how long queuers are prepared to wait. In the same way, marriage numbers are a result of how many people reach marriageable age (the joiners); how many get married (the leavers) and how long people are willing to wait. In India and China, marriage remains the norm, so men keep trying to tie the knot for years.
 
Hence, a marriage queue in India and China builds up. At stage one, a cohort of women reaches marriageable age (say, 20-24); they marry among the cohort of men aged 25-29. But there are slightly more men than women, so some members of the male cohort remain on the shelf. Later, two new cohorts reach marriageable age. This time, the men left over from the previous round (who are now in their early thirties) are still looking for wives and compete with the cohort of younger men. The women choose husbands from among this larger group. So after the second round even more men are left on the shelf. And so on. A backlog of unmarried men starts to pile up. Just as you need only a small imbalance between the number of people joining a queue and the number leaving it to produce a long, slow-moving line, so in marriage, a small difference in the adult sex ratio can produce huge numbers of bachelors.
 

One can't help but conclude that India and China must prepare for an end to universal marriage. Is that so bad? Could both countries start to shift their policies to prepare for a post-universal-marriage society? Are there any countries with economic policies that can cope with declining birth rates?

Perhaps, but it's difficult to imagine a world in which the consequences are anything but a net negative.

There may be positive side effects: a shortage of brides in India is causing dowry prices to fall in some areas, for instance. Overall, though, the impact is likely to be negative. A study by Lena Edlund of Columbia University and others found that in 1988-2004, a one-point rise in the sex ratio in China raised rates of violent crime and theft by six to seven points. The abduction of women for sale as brides is becoming more common. The imbalance is fuelling demand for prostitution.