Economy

My go to classroom experiment has been Veconlab‘s supply and opportunity cost experiment for at least a decade (here is a 2016 post). Here is the abstract from Holt et al. (2010):

This paper describes an individual choice experiment that can be used to teach students how to correctly account for opportunity costs in production decisions. Students play the role of producers that require a fuel input and an emissions permit for production. Given fixed market prices, they make production quantity decisions based on their costs. Permits have a constant price throughout the experiment. In one treatment, students have to purchase both a fuel input and an emissions permit for each production unit. In a second treatment, they receive permits for free and any unused permits are sold on their behalf at the permit price. If students correctly incorporate opportunity costs, they will have the same supply function in both treatments. This experiment motivates classroom discussion of opportunity costs and emission permit allocation under cap and trade schemes. The European Union Emissions Trading Scheme (EU ETS) provides a relevant example for classroom discussion, as industry earned significant “windfall profits” from free allocation of emissions permits in the early phases of the program.

I’m teaching an intro to environmental and resource economics class to mostly non-majors. For the third semester in a row I’m teaching online (n=45) and in-person (n=26). Both classes participated in the experiment on the second day of class. Here is the estimated linear probability model with Pr(sale=1) as the dependent variable, PRICE ranges from 1.5 to 8.5, COST is the marginal cost of production equal to 1, 3, 5 for units 1, 2, 3 in each of the 16 rounds, and GRAND is equal to 1 when permits are grandfathered and 0 when there is the permit price is $3. Through the magic of in-person teaching I stopped the experiment after four rounds of mostly ignoring opportunity cost and explained what was going on (DEBRIEF=1, 0 otherwise). The model is OLS with clustered standard errors (n = 20, t = 48 with the face-to-face data; n = 33, t = 48 with the online data):

Looking at the constants, the online class was more likely to sell the product with a 40% baseline probability (vs 26% in the F2F class). The F2F class put more weight on the price and cost. The price and cost coefficients should be equal since a $1 change in each effects profits the same way. But, in both classes more weight is placed on the cost variable. The F2F class ignored opportunity cost more than the online class. The debrief reduces much of the overproduction in the grandfathered rounds. But, overproduction is not much lower than for the online class after the debrief. The coefficient of determination (R2) tells me that the F2F class paid more attention to the variables than the online class.  

Here is my attempt to turn this experiment into a journal article: https://www.env-econ.net/2023/09/new-working-paper-with-tanga-mohr.html. 

The title is “External Validity of Inferred Attribute Non-Attendance: Evidence from a Laboratory Experiment with Real and Hypothetical Payoffs”. Here is the abstract:

We consider differences in hypothetical and real payoff laboratory experiments using attribute non-attendance methods. Attribute non-attendance is an empirical approach that measures and accounts for when survey respondents ignore attributes in stated preference surveys. We use attribute non-attendance methods with data from an emissions permit experiment with real and hypothetical payments. Our conjecture is that attribute non-attendance may be more pronounced in hypothetical sessions and, once accounted for, hypothetical decisions and real decisions influenced by monetary payoffs will be more similar. In both treatments we find that the effect of the cost of an emissions permit on behavior differs if the cost is implicit or explicit. In inferred attribute non-attendance models with the real treatment data we find two classes of respondents with different behavior but no evidence of attribute non-attendance. With the hypothetical treatment data we find two classes of respondents with different behavior and evidence of attribute non-attendance on two of the four choice attributes.

And yes, it is the first paper where I’ve used lab experiment data.

If you submit a paper to the [redacted] journal and follow the submission guidelines:

Then the journal will kick the submission back to you and say:

Provide conflict of interest statement in the blinded manuscript.

So now the information is on the title page and in the blinded manuscript. And, I’ve wasted about an hour fighting with Editorial Manager. 

From Springer: 

This book delivers a user guide reference for researchers seeking to build their capabilities in conducting discrete choice experiment (DCE). The book is born out of the observation of the growing popularity – but lack of understanding – of the techniques to investigate preferences. It acknowledges that these broader decision-making processes are often difficult, or sometimes, impossible to study using conventional methods. While DCE is more mature in certain fields, it is relatively new in disciplines within social and managerial sciences. This text addresses these gaps as the first ‘how-to’ handbook that discusses the design and application of DCE methodology using R for social and managerial science research. Whereas existing books on DCE are either research monographs or largely focused on technical aspects, this book offers a step-by-step application of DCE in R, underpinned by a theoretical discussion on the strengths and weaknesses of the DCE approach, with supporting examples of best practices. Relevant to a broad spectrum of emerging and established researchers who are interested in experimental research techniques, particularly those that pertain to the measurements of preferences and decision-making, it is also useful to policymakers, government officials, and NGOs working in social scientific spaces.

I’m too old to learn how to estimate DCEs with R but this looks like a good book for someone who wants to do that or teach it to grad students. 

We made the big announcement that we would try to post more here in January 2023. We average 400 visitors from January through May. That is 600 fewer relative to when blogs were big in  economics (i.e., before Twitter took over the conversation). Summer followed pattern we were accustomed to with only a fraction of the academic semester average number of visitors. Except, except for August 11 when we inexplicably enjoyed 3420 visitors. There was a post on August 20 but nothing to explain that spike — it received 692 views, 13 likes and 1 retweet on Twitter. I’m not tech savvy enough to figure out where all these came from. I’m just concluding that was a weird day.

I sent the questionnaire to an email list provided by the client* and received this email:

Started answering but too long. 

I replied:

Thanks for letting me know.

I sent the email on Monday and the current response rate is 36%. The completion rate is 95% so maybe up to 5% of the respondents think the questionnaire is too long.

Here is the distribution of minutes taken to complete the survey:

The median is 8 minutes and the mean is 10. Six respondents took more than 20 minutes to complete it and one took over an hour (i.e., got started, had dinner, and then finished).

The price is 25% of the hardback here.

Some people will get very excited by the title of this post (before the parenthetical) but don’t for one minute think this adaptive behavior isn’t costly (Heating Waters Force Change in Industries That Depend on the Ocean):

In Maine, lobsters are heading north and some lobstermen are moving into kelp farming. …

Marine heatwaves are expected to become stronger and more frequent, according to a consensus of oceanographers and climate scientists.

One of the fastest-warming waters is the Gulf of Maine, forcing lobstermen to change tactics to save their businesses.

Summer surface temperatures between July and September in the gulf have risen four times the global ocean average since 1982. The entire region is warming more rapidly than 97% of the ocean’s surface because of overall climate warming and a shift in local currents, according to the Gulf of Maine Research Institute.

The warming is making life more unpredictable for the $388 million lobster fishing industry in Maine. The U.S. lobster catch has moved 162 miles northward and nearly 70 feet deeper over the past 50 years, according to the National Marine Fisheries Service, as the crustaceans seek refuge in colder water. The Maine lobster catch has fallen 26% since a record catch of 132 million pounds in 2016.

Some harvesters in the state are looking for new species, such as black sea bass, tuna or crabs.

Steve Train, a third-generation lobsterman in Casco Bay, Maine, has become a farmer. He started growing kelp–something still plentiful in the area–offshore of his property to earn money during spring months when lobstering is traditionally slow.

Train says kelp is no substitute for lobsters, still the most lucrative single-species commercial fishery in U.S. waters. But it can help as Maine’s coastal environment changes.

“The people who survive are going to have to be diversified so they can take the cream out of a few different fisheries and have a paycheck year round,” Train said as he pulled up a string of lobster traps onto his 32-foot boat Marcia, a few miles from the Portland wharf where he sells his catch. …

In Casco Bay, Steve Train has watched Maine’s lobster population shift north, driven by changes in bottom water temperatures and the supply of the tiny animals that are the main food of baby lobsters.

Over time, Train has been moving his traps to deeper water and said he has noticed a faster temperature increase in the past five years. “I started setting gear in June where I thought the lobsters would be in August or September,” he said. “Everything the lobsters do is by water temperature.”

Train and other lobster fishermen own licenses that are tied to specific fishing grounds. So there are limits on how far north or offshore they can set their traps.

Train, 56, says his kelp-farming venture isn’t as easy as he initially thought. “Between the moorings, the storms, the tide, and the stretch of the line, there’s a lot of maintenance,” Train said. “But now I have another month or two filled in for cash flow.”

He said he is figuring out the best direction to suspend ropes in the water that are embedded with kelp seeds to avoid tidal currents that could damage his harvest. The seeded ropes mature into an underwater forest. He expects to be profitable this year, while expanding from 4 acres to 10 acres.

Each spring, Train collects wide fronds of brownish-yellow kelp and sells them to Atlantic Sea Farms, a Biddeford, Maine-based company that processes seaweed into kelp burgers, smoothie cubes, and pet-food additives. It has signed up 30 lobster fishermen across Maine since it launched in 2018, and another 19 are in line for a state license, according to CEO Briana Warner.

“We’re building an entirely new market,” said Warner, who sold 30,000 pounds of kelp products last year to grocery and restaurant chains.

Train said lobstermen he has known for decades are beginning to consider a future that will reward adaptability as waters continue to warm. “Even the people that are in denial are a little concerned,” he said.

So, the lesson from this case study is that, yes, people will adapt to climate change but the net benefits of their new behavior is lower with the climate constraint than business as usual pre-climate change. Economists who promote adaptation as a magical fix are doing a disservice. 

*****

And, inexplicably, in the middle of the article someone at the WSJ decided to question whether climate change is happening:

There are other possible explanations in addition to climate change and the El Niño/La Niña cycle. New pollution rules have cut airborne sulfur aerosol particles released by commercial ships over parts of the ocean, clearing the air and allowing more sunlight to reach the ocean surface. That in turn might be heating the water along some shipping routes, although the amount is in dispute, according to several recent estimates.

In January 2022, an underwater volcano near Tonga blasted 50 million tons of water vapor into the stratosphere. Some researchers believe that vapor might be acting as a planet-warming greenhouse gas and nudging up ocean temperatures. Both theories are still under investigation, and their overall impact is up for debate.

From NAAFE:

Marine Resource Economics (MRE) is pleased to present the 2022 Outstanding Article Award to:

Ted E. Gilliland, James N. Sanchirico, and J. Edward Taylor for their article:

A Bioeconomic Local General Equilibrium Assessment of Distributional Consequences of Small-Scale Fisheries Reform in Developing Countries, MRE 37(2): 111-134.

Gilliland, Sanchirico, and Taylor (2022) develop an economic model to assess the short and long-run effects of fisheries reform for local economies in developing nations. Coastal fisheries in many developing nations are characterized by poorly defined property rights and weak collective governance, such that the fish stock is essentially an open access resource – leading to overfishing and a loss of economic value. Prior theoretical and empirical work has demonstrated the potential for fishery governance reforms to recover stocks and increase the economic value of the industry. However, few studies have measured the spillovers of these reforms beyond the fishing sector or have examined how impacts may differ across socioeconomic groups.

The authors address these knowledge gaps by developing a bioeconomic local general equilibrium model and calibrating it using data from a municipality on the island of Palawan in the Philippines. This model explicitly considers the flows of benefits and costs of reform over time as the stock recovers, while also accounting for economic spillovers from the fishery sector to the non-fishery sector. In addition, the authors separately evaluate impacts to poor and non-poor households over 20 years, as well as households participating in fishers versus those that do not participate. The authors find that fishing households eventually benefit from governance reform – despite early losses in harvesting income – with wealthier households securing the largest absolute gains. However, non-fishing households in the local economy are never made better off by the reform due to increases in fish prices and indirect economic spillovers such as reduced spending on non-fish goods during the fishery rebuilding phase.

Editor in Chief, Joshua Abbott of Arizona State University notes: “Fisheries reforms in the Global South are often touted as a form of ‘pro-poor’ conservation policy. However, knowledge of how the benefits and costs of reform are distributed across households is very limited. Gilliland, Sanchirico, and Taylor have made a significant contribution to filling this knowledge gap. Most notably, they have demonstrated that non-fishing households in the local economy may be harmed by reforms – suggesting that additional policy tools beyond the usual scope of fisheries governance may be needed to address these spillovers.”

This annual award recognizes outstanding works published in Marine Resource Economics, with selections made by the associate editors[*], who consider articles published during the award year.

Visit the journal’s Outstanding Article Award webpage https://www.journals.uchicago.edu/journals/mre/oaa for more information about the award and to see the list of previous recipients.

*I am one of those associate editors.

The second edition of the Encyclopedia of Energy, Natural Resource, and Environmental Economics is in the works. Me and Tim have revised our entry on the Contingent Valuation Method. Other than annoying required format changes from the first to the second editions (e.g., adding references), we didn’t do much. But there is one substantive change in the validity section*: 

*ANA and CVM is my theme for the next 12 months.