Why has Facebook's stock price fallen sharply? As I understand it, Facebook is now offering its users the right to "opt out" and not share their data. You do not have to be as sharp as Professor James Heckman to anticipate that this will cause a selection bias issue. Who will opt in to continue to provide their data to Facebook? How representative will this subsample be of the entire population? If advertisers are aware that the quality of the Facebook data has declined because of this selection bias issue, then they will bid less aggressively for advertising on this platform. This will lower Facebook's revenue.
Will good econometricians figure out how to do a valid Heckman 2-step correction to make kosher inferences from the data Facebook now collects moving forward? This hinges on finding Z variables that predict the probability of opting into Facebook's data sharing program but are uncorrelated with actual search behavior and "likes". I can't think of one. Will Facebook randomly assign different payments to people for sharing their data? This is what Frank Wolak and I did in this 2013 field experiment.
I recognize that this theory cannot explain the timing of why FB's stock price fell so sharply last week but this pursuit of privacy (and people's differential demand for privacy) poses key issues for this platform's reliability in yielding insights about the public.
I would also note that Linkedin has not been affected by these issues. I have asked economists whether they are surprised that Linkedin and Facebook aren't integrated into "one life experience". When we teach Edgeworth Box economies, we celebrate the integration of economies but these two giant companies thrive separately. The answer is obvious. Facebook is about your private social life while LInkedin is about the workplace. People want a sharp divide between the two. I doubt that political issues arise on Linkedin because people people in the for profit space know that such stirring of the pot won't help their career concerns. I doubt that the Russians bought any Linkedin ads in 2016.
-
Here are some suggested readings for those who want to learn about climate change economics. I name 3 books and one free article of mine.
Here is Nordhaus' book on greenhouse gas mitigationHere is my 2010 book on climate change adaptationHere is Wagner and Weitzman's book on climate change and risk.Here is a free paper of mine that offers some key intuition -
Labor economists are investigating the role of market power in labor markets as a rising source of income inequality. Here is a piece from the Washington Post and here is the Krueger and Posner Hamilton Project White Paper.
The intuition here is the following; there are many workers who seek jobs. There are a few large employers (such as KFC Franchises) who sign non-compete clauses so that branches of the same firm do not compete against each other for talent. Such side deals mean that the necessary conditions for perfect competition do not hold and workers gain less in terms of higher wages when productivity rises. Why? There are fewer bidders in the labor market seeking talent as firms agree "not to compete".
How does capitalism respond to this dynamic?
I can think of three margins of adjustment here.
1. Uber and the gig economy
2. migrating to a city featuring more firm competition for workers
3. new firms seeing that wages are low and entering to compete for talent
For the new generation of "Non-UChicago" labor economists to be correct about their claim that labor market power is driving rising inequality, they need to be able to dismiss these 3 margins.
1. Uber --- Uber is a stand in for the "gig economy". One can always opt out and be self employed. Yes, I understand that some people do not have a car but Uber drivers earn $21 an hour (see Figure 1). Yes, one must subtract out fuel costs. If you drive 35 miles in one hour and drive a Prius, you will pay a little less than $3 in gas. In cities featuring a demand for transit services, Uber driver opportunities await. The "gig economy" is an extension of home production but now rather than making a flow of services for yourself --- you sell them to others. This opportunity cost of working in the monopsony sector is always available.
2. Young people choose which local labor market to work in. If a local labor market features stagnant wages over the life cycle, then people will only remain if rents are very low. If rents are low, then real local wages are higher than the labor economists claim they are (this is Enrico Moretti's real wage inequality AEJ logic but in reverse!). The labor economists have to think about the urban economics here. As Enrico taught us, you do not want to compare nominal earnings across locations. San Fran housing prices can be 10 times the price of Cleveland.
3. New firm entry -- the labor economists need to team up with the IO economists. Davis and Haltiwanger wrote several papers on "new firms" and market entry. If the incumbent "big firms" are engaging in labor market collusion, then why aren't more small firms moving in to hire the "cheap workers"? I conjecture that regulations limiting product entry would create the wedge here. These entry limits on new firms vary across states and localities.
So, in equilibrium economics --- if one group is being paid less than its marginal product such people are not passive victims. Capitalism will evolve as the 3 margins I have discussed highlight. Urban economics is key in all 3 of my margins of adjustment.
I could add more margins of adjustment. If young workers anticipate that low skill labor demand is not increasing (due to robots and monopsony), they may invest more in their skills to avoid being trapped in this sector.
The new labor economists need to discuss the general equilibrium implications of their models.
UPDATE: Monopsony will be more costly for workers if there is significant industry specific human capital. Scholars such as Altonji, Topel and Neal have studied this issue. But, this raises the issue of --- moving forward -- will young workers continue to make such investments if they know they will be "stranded" in the near future. Legacy capital (i.e that you have invested in being an expert in a sector that now pays you less per unit of skill by using market power to exploit you) is interesting but represents a transition issue.
-
The economist's model of supply and demand is pretty straightforward but in this brief post I would like to highlight a few twists that urban economics offers. These twists make urban economics a really interesting (and challenging) field. Economists are a type of detective. We observe market prices and quantities and how they change over time. Like a detective, we want to know why prices and quantities have changed. We have two "prime suspects" called supply and demand.
In housing economics, the price is monthly rent and the quantity is the number of units of housing. Building on the influential work of Glaeser and Gyourko, there are more and more studies arguing that home prices are high in cities such as San Francisco because of limits on building new housing supply. Supply constraints limit supply and raise market prices. I document that progressive cities are more likely to engage in such regulations in this 2011 paper.This discussion matters in policy debates today because there are many proponents of YIMBY (yes in my back yard) who argue that allowing new construction in neighborhoods will make housing more affordable. In general, I agree with this point and I support this agenda. But, this blog post focuses on some nuanced points.From basic supply and demand, consider the following thought experiment; if the demand for housing in an area such as near Market Street in San Francisco is stable over time and the supply of housing now increases, then the market price of housing will decline. This means that housing is more affordable and more middle class people can live there.To the economists, this is the "ceteris paribus" condition (all else equal). But, permit me to offer some counter-examples.Never forget "marginal vs. average". If USC Economics signs a nobel laureate to join our faculty, then the average quality of my department rises because the marginal person (the last hire) is a great nobel laureate.By similar logic, as the new housing is built due to the YIMBY, if the new entrants to the community are richer and there are many of them --- then both population density and local market potential increases, then there is more local purchasing power. Good restaurants and good retail stores within walking distance will open up to cater to them and this market potential effect will be capitalized into local home prices.So, note what just happened. An increase in supply of housing causes the neighborhood to have more market potential and this leads the local "consumer city" to upgrade in quality and this causes local home prices rise as the area becomes "hot".Joel Waldfogel started this literature with this paper.Waldfogel J. The median voter and the median consumer: Local private goods and population composition. Journal of Urban Economics. 2008 Mar 1;63(2):567-82.In my own research set in China, I have documented the complementarities between new housing and the rise of the local consumer city. Read this paper and this paper. For profit firms have strong incentives to seek out new markets. New housing construction is a leading indicator of new sales opportunities for restaurants and retail.People who know my work also know that I have other work arguing that limits on housing supply can raise local demand for housing by guaranteeing that only the super-rich can live in the area (this commitment device leads the rich to increase their demand for such coastal housing). See my 2010 paper.Randy Walsh and I discuss these issues at length in our Handbook of Urban Economics chapter.So , the point of this blog post is that too many papers in economics these days seek to uncover a simple "cause and effect" relationship. At first blush, it is "obvious" that an increase in supply lowers prices. But, this logical inference hinges on a maintained assumption that the increase in supply has no other effects on the market equilibrium.An example. There is a prominent paper published in the 2005 JPE that argues that exogenous shifts in air pollution allow the researchers to measure the value of clean air. The authors estimate two equations;1. Change in house prices is a function of the change in air pollution2. The change in air pollution is a function of local "randomized" air pollution regulation levels.The point of this blog post is that this type of IV strategy over-estimates the value of the specific amenity because of the Waldfogel "snowball effect". Randy Walsh and I discuss this at length in our chapter.Yes, the regulation improves local air quality and yes this directly raises local home prices. But, as local air quality improves --- new restaurants and new types of higher human capital people move to the area and the change in home prices in the treated area reflects all of these upgrades. So, in the language of applied econometrics -- -the "exclusion restriction was violated" because the IV caused endogenous improvements in local amenities.So, from the calculus -- the authors recover the total effects of regulation --- not the partial derivative of the increase in home prices caused by a change in air pollution (holding all else equal). The great thing about urban economics is that "all else" is never equal --- it reflects a market equilibrium that changes over time. I can't think of a case where there is an exogenous change in local amenities and there is no market reaction (i.e migration or opening of new stores and restaurants) in response to this shock to the amenity equilibrium.If you say; "well these changes will take time to manifest themselves" -- I would respond that under rational expectations that the home prices will immediately jump up to reflect the expected PDV of these amenity gains. One could use rental data immediately after the amenity increase --- but before the general equilibrium effects manifest themselves.This would be a promising line of research. -
I have added two more problems and a free version is available here.
-
I'm going to keep marketing my free e-book. Here is the Table of Contents listing the problems I present;
1. Trade vs. Autarky
2. The Roy Model of Comparative Advantage
3. Household Economics
4. Standard Consumption Theory with a "Becker Twist"
5. The Cost of Climate Change
6. The Diet Problem
7. Hyperbolic Discounting
8. Rational Addiction
9. Risk Smoothing through the Family versus the Market
10. Risk Smoothing through the Village
11. The Family and the Quantity vs. Quality Tradeoff
12. Fertility in the Developing World
13. The Permanent Income Hypothesis
14. The Benefits of Regulation?
15. Revealed Preference and Patriotism
16. Compensating Differentials
17. Identification of Preferences using Revealed Preference Methods
18. Lotteries
19. Lotteries and Social Preferences
20. Option Value and Discrete Choice Over Human Capital Investment
21. Robust Decision Making
22. Urban Housing and Labor Markets
23. The Microeconomics of Regression Discontinuity Research Designs
24. Hedonic Estimation and Infra-Marginal Households
25. Pollution Exposure and Offsetting Using Market Products
26. Model Mis-specification and Inference
27. Labor Supply
28. Adapting to Spatial Risk
29. Rebound Effects
30. Sea Level Rise
31. Urban Transportation Mode Choice
32. Crime and Punishment
33. Car Insurance
34. Revealed Preference and Self Selection
35. Disneyland
36. Air Conditioning and Firm Productivity
37. Durables Demand and Expectations
38. Becker's Discrimination Model
39. Differentiated Product Supply
40. Moral Hazard and Firm Contracts
41. Matching and Heterogeneous Workers Matched to Heterogeneous Firms
42. Misallocation and Productivity Wedges
43. Farmer Adaptation to Climate Change
So, these 43 problems offer different simple lessons for thinking about economics.
In writing out these new question, my goal is to increase the set of strategies for new economists to build up economic intuition.
