Archive for February 11th, 2016

When institutions are bad, how much do social networks really help?

February 11, 2016

Fascinating bit of research by trio of Ulrik Beck, Benedikte Bjerge, Marcel Fafchamps.

Ever since the seminal paper of Coase (1937), economists have known that transactions costs can hinder the efficiency of exchange. If transaction costs are present, some mutually beneficent transactions may not take place.

In developing countries, poor institutions mean that many such transactions are left on the table since transaction costs are too high. For example, property rights are often vaguely defined and contracts hard to enforce legally. Well-functioning institutions support well-functioning markets through low transaction costs. In these contexts, there is increasing evidence that households instead rely on their social networks. One example is how social ties play an important role in informal insurance schemes (Fafchamps and Lund 2003, Mazzocco and Saini 2012). In fact, the importance of social ties shows up in very diverse contexts where they can help to decrease transaction costs; other examples from the economics literature are in the selection of an international trading partner (Granovetter 1995, Topa 2001) and in labour markets where seeking and getting a job is affected by social networks (Rauch 2001, Chaney 2014).

There are good reasons to think that social networks can also reduce barriers to the exchange of production factors. Social connections can increase trust between individuals and important information can be exchanged. Social ties can also reduce the risk of violation of agreements, since the violator risks losing not only the contract but also the social connection. These are some of the ways in which social ties are thought to lower transaction costs. However, the extent to which social ties can offset the negative impacts of high transaction costs for exchange of production factors is an open research question. Earlier papers provide indirect evidence that this may be the case (Sadoulet et al. 1997, Holden and Ghebru 2005, Macours et al. 2010).

So what does their analysis show? Do networks help? Somewhat…


How digital world is disrupting GDP calculations?

February 11, 2016

Diane Coyle has a piece on the topic:

Digital technologies are having dramatic impacts on consumers, businesses, and markets. These developments have reignited the debate over the definition and measurement of common economic statistics such as GDP. This column examines the measurement challenges posed by digital innovation on the economic landscape. It shows how existing approaches are unable to capture certain elements of the consumer surplus created by digital innovation. It further demonstrates how they can misrepresent market-level shifts, leading to false assessments of production and growth.

Some examples of this:

Digital technologies, like any innovation, clearly create consumer surplus. Hedonic pricing techniques capture some quality improvements, but it seems unlikely they can ever fully reflect large qualitative changes in human possibilities or well-being due to such major innovations. It is clear that there is additional consumer surplus associated with developments such as the wider choice available through online marketplaces, or the time saved by using online services, or from zero price and voluntarily-produced online products and services. For example, somebody who uses an online platform to swap homes for a holiday might well spend the money they save on other goods and services that are captured in measured GDP, but the benefit of their ‘free’ holiday is not. It is not clear how to assess the scale of this digital surplus.

What’s more, the impact of digitally business on measured GDP by current definitions reveals some oddities. For example, the disintermediation and move to online provision in several sectors such as finance, travel, and retailing is reducing GDP as investment in commercial property declines, but the service provided to consumers is clearly the same or better. Figure 1 shows the decline in constant value investment in just two sectors in the UK, retailing and finance, taking their share of total gross domestic fixed capital formation in buildings from 17% in 1997 to 4% in 2014 (investment in buildings has typically been in the range of a fifth to a quarter of total business investment over this period.)

Hmm.. There is more in the post.

This is all interesting stuff to ponder upon. We could actually see a world where GDP does not show much progress or a decline but people are overall fine/happy..

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