Descendants of the wealthy people of England in 1850 are still wealthy. They also have longer life spans than the average person; they are much more likely to attend Oxford or Cambridge; they still live in more expensive neighbourhoods; and they are more likely to be doctors or lawyers.
These are the central findings of new research on intergenerational wealth mobility by Professor Gregory Clark and Dr Neil Cummins, published in the February 2015 issue of the Economic Journal. Their study uses rare surnames – such as Pepys, Bigge and Nottidge – to trace back family lineages in England over five to seven generations to examine how much wealth persists across generations from 1850 to the present.
The researchers’ analysis of data on nearly 19,000 people reveals that wealth persists much more than is suggested by conventional studies based just on parents and children. The descendants of the wealthy of 1858 are still much wealthier than the average person in 2012.
What’s more, wealth turns out to be strongly correlated with life span, education and occupation. To those who have, more is given. What your great-great-grandfather was doing is still predictive of what you are doing now.
More surprisingly, there is no indication that wealth and status persistence has declined at all since the Victorian era. The introduction of substantial wealth taxation after 1910, the arrival of mass public schooling, the opening of the universities and professions to a modern meritocracy – none of these policies has changed social mobility rates one iota.
WOMEN PREFER COOPERATION AT WORK; MEN LIKE COMPETITION
Women are more comfortable than men in a working environment that involves teamwork, according to a new experimental study by Peter Kuhn and Marie Claire Villeval, published in the February 2015 issue of the Economic Journal.
Their research indicates that this is in part because women are less pessimistic than men about the relative performance of their potential colleagues: even high performing women are attracted by teamworking. This is an important result, the authors conclude, since it suggests that introducing voluntary teamwork will have less negative effects in companies that employ a higher share of women.
Kuhn and Villeval analyse the behaviour of men and women when they are asked to choose between receiving either individual performance pay or team payment to perform a task. They find that fewer than 11% of men
choose the team payment scheme while 44% of women are attracted by this compensation scheme.
While women tend to shy away from competition, the results suggest that men shy away from cooperation. In fact, while part of the decision is a matter of preferences, the difference is mainly explained by the fact that compared with men, women hold much less pessimistic beliefs about the relative performance of their potential team members.
The researchers also show that choices change dramatically when they introduce a small economic advantage to the team payment scheme. Then, men and women select the team payment scheme in similar proportions. Indeed, men react more strongly to monetary incentives than women; thus one can influence their occupational choices in favour of teamwork with only small economic incentives.
OBESITY LINKED TO IMPATIENCE: New US evidence
People with low levels of patience have a greater chance of becoming obese, particularly at a time when meat and high-calorie foods are relatively inexpensive. These are the central findings of a new study by economists Charles Courtemanche, Garth Heutel and Patrick McAlvanah, published in the February 2015 issue of the Economic
Journal.
They conclude that a tax on unhealthy food, though controversial, could be used to address the undesirable effects of impatience and over-consumption. Tackling the cost incentives of cheap, high-calorie snacks may make a significant impact for those who struggle with the problems of self-control that lead to obesity.
The study analyses data from the US National Longitudinal Survey of Youth (NLSY), focusing particularly on responses to survey questions about ‘time preference’. This is a term economists use to describe how
people make trade-offs between their present and future desires. In other words, it can quantify an individual’s level of patience.
The NLSY time-preference questions asked how much extra money the respondents would have to be offered to accept a yearlong delay in receiving a monetary reward of $1,000 – and then how much they would accept to wait for one month. These answers yielded patience measurements of the respondents, which can then be evaluated against measures of body mass index (BMI).
HIV TESTING AND RISKY SEXUAL BEHAVIOUR: The ‘nothing to lose’ effect
People surprised by HIV-positive test results increase their risky sexual behaviour, exposing their partners to HIV infection and experiencing a more than nine-fold increase in sexually transmitted infections (STIs). That is the key finding of research by Erick Gong, published in the February 2015 issue of the Economic Journal.
HIV testing is encouraged in many sub-Saharan African countries battling AIDS epidemics. Millions of people are tested for HIV each year. Conventional wisdom is that those who learn they are HIV-positive will take steps to prevent infecting others. The new study shows that testing can have an adverse effect – specifically that those who unexpectedly learn they are HIV-positive have ‘nothing to lose’ and increase their sexual activity.
The author recommends that anti-retrovirals (ARVs) be provided immediately to individuals who learn they are HIV-positive. Studies have found that ARVs can improve the health of those infected by HIV and dramatically reduce the likelihood that an HIV-positive individual infects his or her sexual partner. Immediately access to ARVs can thus counteract any adverse behavioural response to HIV-positive tests.
The study uses data from an experiment where over 1,900 individuals were enrolled in a randomised control trial in Kenya and Tanzania. A random half of individuals were offered HIV-testing, and over 90% agreed to be tested. Individuals surprised by HIV-positive test results subsequently increased their risky sexual behaviour – an unintended consequence of testing. There is good news however; those surprised by HIV-negative tests went on to decrease their risky sexual activity.
ASSET PRICE BUBBLES: New research on the tough choices facing central bankers
Central bankers face a trade-off in the face of high and rising asset prices, according to research by John Conlon, published in the February 2015 issue of the Economic Journal. They can follow a policy of bursting bubbles in an attempt to protect less sophisticated investors from unwarranted price movements. If this policy is successful, then investors can trade with greater confidence and resources will be allocated more efficiently across the economy.
But if central banks do follow such a policy, Professor Conlon warns that there is a potential downside: ‘Anything they do will move markets. In fact, even inaction may move markets if this inaction is interpreted as agreement with current asset prices.’
In the past decade or two, economists have begun to develop more realistic analyses of bubbles. These approaches are essentially ‘greater fool’ theories of bubbles, according to which, bubble investors know that they are taking risks by holding overpriced assets. They know that they are ‘fools’ to hold the assets. But these initial fools hope to be able to sell the assets to ‘greater fools’ before prices collapse.
These theories often depend on ‘asymmetric information’: the original fools hope that they have an informational advantage over the greater fools. This means that bubble policy becomes an issue of information management by policy-makers.
For example, if the US Federal Reserve chair Janet Yellen is considering a bubble-bursting policy, she must ask herself what she knows that investors might not know. Are there sophisticated investors who know more than she does? Does she, in turn, know more about asset values than the less sophisticated, greater fool investors?
And if she pursues a bubble-bursting policy, can she protect these less sophisticated investors from the more sophisticated investors? Can she protect the ‘greater fools’ from the more sophisticated initial fools who hope to exploit them?
The new study suggests that central banks can potentially protect greater fools from more sophisticated investors. But there's a catch: suppose that investors expect central banks to follow a policy of bursting bubbles. Then if asset prices are high and the central bank does not try to deflate them, investors may interpret this as an endorsement of the high prices, which might push them even higher.
This can actually be a good thing if the high prices are justified by fundamentals. In this case, investors can trade assets with more confidence, and resource allocation becomes more efficient. But if assets are overpriced, then central bank inaction can make the overpricing worse.
WHY FIRMS PREFER NOT TO DISCLOSE THE QUALITY OF THEIR PRODUCTS – AND HOW REGULATORS MIGHT RESPOND
Rather than explicitly revealing information about the quality of their products and services, many firms prefer to signal quality through the prices they charge, typically working on the assumption that a high price indicates high quality. New research by Maarten Janssen and Santanu Roy provides a new explanation for why firms choose not to disclose quality directly – and explains how prices that are set to signal quality can distort actual buying decisions.
Their study, which is published in the February 2015 issue of the Economic Journal, shows that when firms compete on price, not disclosing product quality voluntarily can soften competition and boost profits. This has an important policy implication for regulators: even if consumers infer all relevant product information from prices (or other actions by firms), there may be a case for imposing mandatory disclosure regulation. Such regulation can reduce market power and the price and consumption distortions resulting from firms’ use of prices to signal product quality.
The researchers begin by noting that in a large number of markets, ranging from educational and health services to consumer goods and financial assets, sellers have important information about the quality of their products. Quality attributes include satisfaction from consuming the product, durability, safety and potential health hazards
as well as ethical and environmental attributes.
Information about these quality attributes is not always publicly available to potential buyers or competitors. In many of these markets, firms have the option of voluntarily disclosing product information in a credible and verifiable manner – for example, through independent certification, rating agencies or regulated advertising.
But in practice, firms do not disclose product quality very often, even when there are relatively cost-effective mechanisms for credible disclosure and even when the product quality itself is not bad. For example, empirical studies find that hospitals often do not disclose risk-adjusted mortality; schools often do not report standardised test scores; restaurants almost never disclose hygiene inspection reports; and so on.
In fact, the reluctance of firms to disclose voluntarily may discourage the emergence of rating agencies and certification intermediaries in many industries. This study provides a new explanation for why firms do not wish to disclose quality.
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