Economics 854 Midterm

Prof. Bryan Caplan

Spring, 2013

Part 1: True, False, and Explain

(10 points each - 2 for the right answer, and 8 for the explanation)

State whether each of the following six propositions is true or false. In 2-3 sentences (and clearly-labeled diagrams, when helpful), explain why.

1. Suppose the government uses lump-sum taxation to equalize initial endowments, and the outcome that emerges is Kaldor-Hicks efficient.

T, F, and Explain: The outcome will automatically maximize average happiness, too.

FALSE. Kaldor-Hicks efficiency and maximum happiness are not the same. Kaldor-Hicks ignores distribution, so at minimum happiness maximization requires an adjustment for diminishing marginal utility of consumption/wealth. You should also probably adjust for personality (some people’s happiness is more responsive to consumption/wealth than others’) and other disconnects between willingness-to-pay and happiness (i.e. true love, which causes great happiness even though people won’t pay you to love them).

2. T, F, and Explain: According to the Median Voter Model, fringe parties are invariably counter-productive from their own point of view.

FALSE. Irrevocably switching to a fringe party is indeed counter-productive, because it moves the equilibrium platform in the opposite of the desired direction. But provisionally switching until “your” party becomes more radical can indeed lead to more radical policies. The catch: Provisionally switching is risky. It increases the radicalism of its policies conditional on winning, but reduces “your” party’s probability of electoral victory.

3. Suppose you are trying to predict ideology in the GSS.

T, F, and Explain: Univariate regressions of ideology on education and income tend to overstate the effect of both education and income on ideology.

FALSE. As explained in the notes, education and income mask each others’ effects on ideology. Since education and income are highly correlated, univariate regressions show that education makes you slightly more liberal, and income makes you slightly more conservative. A bivariate regression of liberalism on education AND income shows a larger positive effect of education and a larger negative effect of income.

4. Suppose you test the Median Voter Model using questions of the form, “AGREE or DISAGREE: Spending on X should be increased.” Assume that the distribution of voter bliss points is continuous.

T, F, and Explain: On real-world data, you will almost always reject the Median Voter Model.

TRUE. If there are just two response options, the ONLY observation consistent with the Median Voter Model is if the population splits exactly 50/50. Otherwise, the median respondent wants something different from the status quo, contrary to the MVM. The lesson is that two-response questions are an unfair test of the MVM: Respondents should at minimum also be offered the third option of supporting the status quo.

I gave partial credit to responses that cited Bartels. The evidence was definitely relevant, but it overlooked the more fundamental point that two-response questions stack the deck against the MVM.

Part 2: Short Essays

(20 points each)

In 6-8 sentences, answer all of the following questions.

1. People often illustrate the Tiebout model by discussing the effect of public school quality on locational choices and real estate prices. Are the observed patterns really what the Tiebout model predicts? Why or why not?

The Tiebout model correctly predicts that, ceteris paribus, better schools lead to higher real estate prices and higher property taxes lead to lower real estate prices. It also correctly predicts that people sort into localities that offer subjectively attractive school/tax combinations. Wealthy parents often deliberately move to areas with excellent public schools, and low-income retirees often deliberately move to areas with low property taxes. However, these patterns are far weaker than the Tiebout model implies. In particular, the Tiebout model implies that (a) localities that offer a relatively bad school/tax package will completely depopulate, and (b) some localities will cater to childless residents (or families that prefer private schools) by offering no public schooling whatsoever. Both (a) and (b) are false.

2. In the GSS, the question LETIN1 asks:

Do you think the number of immigrants to America nowadays should be... increased a lot (=1), increased a little (=2), remain the same as it is (=3), reduced a little (=4), or reduced a lot (=5)?

Here are the results if you regress LETIN1 on years of education (EDUC), age, dummy variables for race (BLACK, OTHRACE), ideology (POLVIEWS, 1=”extremely liberal”, 7=”extremely conservative”), being born in the U.S. (yes=1, no=2), church attendance (0=”never”, 8=”more than once a week”), and Biblical literalism (1=”word of God”, 2=”inspired word”, 3=”book of fables”).

Note: The coefficient on the log of respondent income (omitted) was approximately zero.

How well do these results fit what we have learned about the determinants of public opinion? Be careful to point out any anomalies, and discuss magnitudes as well as statistical significance.

Overall, the results fit our class lessons well: the SIVH does poorly, and the ideological and especially group-interest models do well.

Since previous immigrants compete most closely with new immigrants in the labor market, self-interest predicts that the sign on BORN would be positive. In fact, the sign is strongly negative, consistent with the group-interest story that previous immigrants identify with and care about new immigrants. Blacks and members of “other races” (primarily Hispanics) are also relatively pro-immigrant – contrary to their economic interests, but consistent with the idea that non-whites identify to some degree with immigrants. Also note that older people are more anti-immigrant – contrary to their self-interest as consumers of old-age care, but consistent with a less multicultural identity.

The lectures also correctly predict that education and liberalism both make respondents more pro-immigration.

The main anomaly: Church attendance leads to more pro-immigration views, but Biblical literalism leads to more anti-immigration views. This might reflect church-going Catholics’ tendency to be pro-immigrant while opposing a literal reading of the Bible.

3. “The centers of national journalistic activity are relatively rich states including New York, California, Maryland, and Virginia. Once again, the journalists — and, for that matter, academics — avoid the first-order availability bias: they are not surprised that the country as a whole votes differently from the residents of big cities. But they make the second-order error of too quickly generalizing from the correlations in their states.” (Gelman et al, “Rich State, Poor State, Red State, Blue State”)

Carefully explain what Gelman et al are saying. Are they right?

Gelman et al find that the state-level party/income correlation gets smaller as average state income rises. In the rich states where national journalists generally reside, the party/income correlation is near-zero. Upshot: When national journalists extrapolate from their states of residence to the entire country, they underestimate the party/income correlation. The problem, in a nutshell: Journalists know and adjust for the fact that they are weird, but they fail to realize or adjust for the fact that their states are weird, too.

Gelman et al’s story makes a great deal of sense. You could accuse them of overstating the party/income correlation by ignoring race. But if you read them closely, they acknowledge and correct for this problem.

4. The antiwar movement largely collapsed after Obama’s election. How would Zaller explain this change?

Zaller would apply his concepts of the “polarization” and “mainstream” effects. Potential members of the antiwar movement, like all activists, have high political awareness. During the Bush era, elites were divided along partisan lines regarding the War on Terror. As a result (“the polarization effect”) Democratic activists opposed the War strongly enough to man a sizable antiwar movement. During the Obama era, however, the War on Terror became much more bipartisan. As a result (“the mainstream effect”), Democratic activists have become much more accepting of the War on Terror. Too accepting, in fact, to continue to man a sizable antiwar movement.