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Economic education, a continuing series
1. Megan Non-McArdle explains what is a "separating equilibrium." First sentence:
There are bad reasons why the girl doesn’t ask out the boy.
2. Tim Harford argues that stock price crashes can be rational. Market trading reveals information by showing traders the slope of the demand curve.
3. Jason Kottke points us to the Coca-Cola index, which correlates the consumption of this beverage with freedom and prosperity.
Posted by Tyler Cowen on June 11, 2006 at 07:14 PM in Education | Permalink
Comments
Herr Cowen,
Re: Coke
The Coke-Quality of life correlation makes perfect sense.
On freedom: Did the count the developing countries that produce their own coke and use the brands’ names and logos (without license agreement). Such states tend to be less free.
Posted by: Chairman Mao at Jun 11, 2006 10:37:55 PM
Speaking of Levitt, here's the abstract of Ted Joyce's newest paper on Levitt's most famous theory:
Further Tests of Abortion and Crime
Ted Joyce
Professor of Economics
Baruch College, City University of NY
& National Bureau of Economic Research
May 2006
The association between legalized abortion and crime remains a contentious finding with major implications for social policy. In this paper, I replicate analyses of Donohue and Levitt (2001, 2004, 2006) in which they regress age-specific arrests and homicides on cohort-specific abortion rates. I find that the coefficient on the abortion rate in a regression of age-specific homicide or arrest rates has either the wrong sign or is small in magnitude and statistically insignificant when adjusted for serial correlation. Efforts to instrument for measurement error are flawed and attempts to identify cohort from selection effects are mis-specified. Nor are their findings robust to alternative identification strategies. A convincing test of abortion and crime should be based on an exogenous change in abortion that had a demonstrable effect on fertility. Thus, I analyze changes in abortion rates before and after Roe to identify changes in unwanted fertility. I use within-state comparison groups to net out hard to measure period effects. I also follow Donohue and Levitt (2004) and average the effects of abortion on crime over 15 to 20 years of the life of a cohort to lessen the impact of the crack epidemic. I find little support for a credible association between legalized abortion and crime.
http://web.econ.uic.edu/health/joyce_abor_crime_april_uic.pdf
Posted by: Steve Sailer at Jun 11, 2006 11:31:01 PM
"the Coca-Cola index, which correlates the consumption of this beverage with freedom and prosperity": that must constitute the most vicious verbal attack on democracy that I've ever seen.
Posted by: dearieme at Jun 12, 2006 7:20:05 AM
Regarding Harford's argument, most efficient markets theories say that
crashes are perfectly rational if they follow some suddenly bad news.
There may also be something to the "estimating the demand curve"
argument for some disequilibrium price movements. But I strongly
question any purported "rational" explanation for the 22% decline of
the DJI on October 19, 1987, when there had been no noticeable bad
news of any sort. This is just being cute.
Posted by: Barkley Rosser at Jun 12, 2006 3:06:51 PM
Tim Hartford seems to have missed the memo on the Efficient Markets Hypothesis.
Posted by: hmmm at Jun 12, 2006 7:10:07 PM
Harford's article makes no sense as an extrapolation of the Froot & Klemperer paper. One can see how you might have (in very odd microstructural conditions) rational bubbles like this in individual stocks, but who would have this kind of information about the entire market?
Also it doesn't prove what it sets out to prove; Harford wants to say that the market prices reflect fully rational behaviour, but someone who buys a stock for way more than it's worth is only "rational" in a technical game theory sense of having acted rationally on a misleading signal. In real life, people who believe they have reliable private information informing them that trees grow to the sky are colloquially called "fools".
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Posted by: levan at Sep 8, 2006 5:45:05 AM
