A Brief Response to Robert Frank

Professor Frank’s blog post downplays the role of competition, diversity, and the potential for supply responses to mitigate the “Arms Race” that he worries about.   In economics, there is demand and there is supply.  He solely focuses on one side of each market he discusses.

In 1956, Gary Becker published his thesis on the economics of discrimination.  You can read about his key points in his Nobel Prize lecture available here.  If there are employers who only hire attractive people, then there is a profit incentive for employers who do not discriminate to step in and hire the average Joe and Jane.   If both types of firms produce pizza and sell on a competitive market (and if the pizza buyers don’t observe the beauty of the pizza sellers), then the firm that discriminates against average people will be driven out of business because its profits will be negative.

Frank writes;  ”If you’re applying for a job, for example, you’re advised to look good when you go for your interview. But looking good is an inescapably relative concept. If other applicants spend more on clothing, your best bet may be to spend more as well, even though your likelihood of a callback won’t rise if all spend more.  Yet if others spend more and you don’t, your odds will fall.”

This sounds like there is an arbitrage opportunity for firms who aren’t picky about appearances to contact the slackers and screen those with tattoos and no neck tie to see who might be  a good fit for their firm.   My point is that those who don’t partake in the Frank arms race won’t be “doomed” if there are arbitraging firms seeking a bargain.   Firm heterogeneity brings about efficient matching with those who engage in the “counter-culture”.    Dr. Frank implicitly is assuming that there is no firm heterogeneity.  If firms were all homogeneous with respect to their hiring practices then they would all agree with respect to what they are looking for in individuals. But diversity is two sided!

Consider UCLA.    If UCLA paid attractive Professors 20% more, I would not get a raise, and student tuition would eventually rise.  This wage premium wouldn’t be sustainable as students would transfer to a school with an equally good but ugly faculty.   In which industries do the beautiful win the relative beauty competition, the workers  earn the wage premium and the firms persist in earning non-negative profits in competitive equilibrium?    If UCLA didn’t hire professors who don’t wear a suit to the interview, these folks will be hired by some up and coming university (think of the University of Chicago hiring Jews in the 1930s) and that school will rise and the discriminators will sink.

Implicit in Professor Frank’s blog post is a strong assumption about the shape of the “supply curve”.    Why can’t good schools be replicated? Why can’t good neighborhoods and housing be replicated.   He writes;  ”Any family that failed to rent or purchase a house near the median of its local price distribution would have had to send its children to below-average schools.”  But, why are the schools below-average?  What investments could be made to increase the supply of good schools?

In Econ 101, we teach the concept of constant returns to scale.  Constant returns to scale means that industry can always double output produced at a constant average and marginal cost. In this case rising demand leads to more output with no rise in price and no worries about the “Arms Race”.   When does CRS apply versus when are we in the Frank “Zero Sum Game” fighting for a finite set of slots?   Intuitively, when does  the supply curve slope up versus when is it flat versus when is it vertical?

An “Arms Race” breaks out in a zero sum game for slots (when the supply curve is vertical) but why can’t Harvard or Stanford increase their number of slots as they gain more endowment income from the benevolent billionaires such as Zuckerberg and Bloomberg?

UPDATE:  As I re-read Dr. Frank’s post, I see several examples at the end related to the pursuit of status. But note again that he assumes that we are all identical in our common agreement that our status is defined by our toys such as the “biggest house, the whitest teeth, the biggest jewel” and that we can be ranked on this single index criteria as if we were pro chess players be  ranked from Kasparov to Kahn.    This world view that embraces the “single index” of quality ignores that there are many ways to achieve “self esteem” and self respect.  He downplays such comparative advantage and diversity.  How many of the RBC readers rank themselves on the  ”tacky toys criteria”?

 

 

Comments

    • Ken Rhodes says

      CRS (Constant Return to Scale) provides a lower bound on efficiency. For [an oversimplified] example, if demand doubles, you can build a second factory just like the first, and operate them independently. Nothing in that principle precludes the improvements of efficiency available in economies of scale.

  1. mwilbert says

    “why can’t Harvard or Stanford increase their number of slots as they gain more endowment income from the benevolent billionaires such as Zuckerberg and Bloomberg?”

    Who knows why? What we know is that they haven’t significantly increased their enrollments even as their endowments have grown dramatically over the past several decades. My guess is that they don’t want to decrease the exclusivity that gives them part of their cachet, but that’s just a guess.

    • MikeM says

      Absolutely, Harvard and Stanford should increase the number of slots. When you have an excellent product with a high market potential, you should franchise the product, dilute it to reduce unit cost, and get as much money out of it as you can.

  2. J. Michael Neal says

    This sounds like there is an arbitrage opportunity for firms who aren’t picky about appearances to contact the slackers and screen those with tattoos and no neck tie to see who might be a good fit for their firm.

    My observation of corporate hiring practices is that there are a lot of things that are probably arbitrage opportunities, but such a small number of companies are willing to explore them that those opportunities persist without producing any change in corporate hiring practices. As far as I can tell HR departments (or worse, the employment agencies to which those functions have been outsourced) are so fundamentally risk averse that anyone with an odd looking resume gets immediately tossed out of the pool at the vast majority of firms.

    An environment in which there are large multiples of applicants for every open position are a breeding ground for groupthink. Any approach that relies upon a rational, risk-neutral view of hiring practices will fail to model the current environment.

    • says

      It’s more than just groupthink. The employer is looking for people who will make an effort to fit in. Roughly speaking they always want employees who are conscientious, agreeable, and intelligent enough for the job. Intelligent enough can be assessed quite quickly from CV and interview. Conscientious is a lucky dip. So the decider is often agreeable. Picking the tattooed guy (or, worse, girl) is to accept a risk of conflict with colleagues. Robert’s arms race is real and won’t go away because of the possibility of eccentric counter-intuitive employers.

      The big evidence against Matthew’s thesis is the very persistent wage gap between white men and women and blacks. This is narrowing, but very slowly, and not because of the conspicuous success of imaginary counter-cultural employers. What actually happens is that one woman or black makes it against the obstacles to a position of power (in the case of women, it can be by widowhood as with Brazil’s women-run airline TAM). This widens opportunity for other women and blacks lower down, and the institutional culture gradually shifts against unconscious discrimination.

      • Lars says

        Evidence? Kahn has proven discrimination doesn’t exist. Why would be need evidence? What kind of economist would be be if he let the facts get in the way of a good theory?

    • Maynard Handley says

      “This sounds like there is an arbitrage opportunity for firms who aren’t picky about appearances to contact the slackers and screen those with tattoos and no neck tie to see who might be a good fit for their firm.”

      How has that arbitrage opportunity worked out in the case of hiring a CEO who is willing to accept one tenth the pay package while delivering the same work?
      It hasn’t? Wow, color me amazed.

      How can an entire profession be so blind as to what happens in the real world, where decisions are made by actual human beings, not mythical deciding entities called corporations? Stupidity or prostitution?

    • SamChevre says

      From what I can tell, the IT world is entirely dominated by the firms that hire based on something other than suits.

  3. says

    “But, why are the schools below-average?  What investments could be made to increase the supply of good schools?”

    By God, unleash the free market and quit the nimby-pamby whinging about inequality and ALL the schools will be above average!

    • worn says

      Wait, a sec. Don’t half of them have to be below average?

      I mean, isn’t all that we can do is play with the distribution (in a geographic sense)?

  4. DCA says

    The argument here seems to be “If X existed, it would create arbitrage opportunities that would remove if, so X does not exist”. But the “would create” is theory (relying on assumptions that some earlier commenters raise questions about); so the question becomes, is this theory supported by empirical evidence relevant to its claims (eg about hiring)? I see no data in this post, unlike Frank’s post, merely a-priorism.

    • Keith Humphreys says

      This reminds me of my recent trip to Somerset, during which I found a tenner blowing in the wind in the parking lot. The colleague/friend I was with, thankfully, was not an advocate of the efficient markets hypothesis, so we chose to believe that the money was real and went for a few pints at the pub. (And yes, this is a true story).

      • Michael O'Hare says

        Keith, the efficient markets rule for cash concerns a twenty, and I believe a US $20; theory is not at risk here. I have found, on successive days in one weird week last month, two 1c coins together, a nickel, a quarter, and a dollar bill. I told my economist colleagues about this and they were completely unperturbed. Though they (i) warned me not to fit a line to the data and project it in practice if I ever wanted to have lunch with any of them again (ii) offered to teach me econometric techniques to be sure that didn’t happen by accident.

      • Maynard Handley says

        I can add (again a true story) that not only did I see a US$20 note on the sidewalk as I walked to the Pasadena library about two weeks ago, but I left there, on the theory that whoever did pick it up probably could use it a lot more than I could.

        My god, two economic heresies in one afternoon!

  5. Brendan says

    There have been predictions of arbitrage in the Law community for years, that the bi-modal distribution of income[1] would be busted by someone willing to take someone outside the T14 schools, pay them 100k instead of whatever the starting salary is now and CRUSH the competition. Why hasn’t it happened? You can use this as an example of hiring “beautiful” mostly T14 students, with plenty of opportunity for arbitrage.

    You can look at how schools judge admission for another example. How much heterogeneity exists in entrance exams? There are two, and they are distributed by the areas in which the test developed, the coasts are primarily SAT and the middle ACT [2], why? They are both accepted everywhere. Get to graduate school and it gets down to one, depending on your field.

    Funding for schools is based on property taxes[3], in order to make all schools good, you’d have to make all neighborhoods good. I am not discounting the possibility of some better than others, but I think we can all agreed that every school should at least be “good”. Making all neighborhoods good requires money and opportunity, since there is only a finite amount of money and opportunity in the world it has to come from the top, thus reducing inequality.

    I get the feeling you are making some smug argument against “less inequality is always better” which is a total straw man. We could reduce inequality by making everyone destitute, I suppose, or we could try to ensure everyone gets an easy childhood and a good school followed by plenty of opportunities.

    Sorry, how does one embed links, html code?
    [1]http://www.nalp.org/salarydistrib
    [2]http://usatoday30.usatoday.com/news/education/2007-03-18-life-cover-acts_N.htm
    [3]http://sitemaker.umich.edu/finaldompierre.356/how_public_schools_are_funded

    • CharlesWT says

      Texas instituted a so called Robin Hood plan wherein wealthier school districts had to share so of their property tax revenue with less wealthy districts. More than a few of the formally less wealthy districts took their windfall and built million dollar stadiums.

      • Brendan says

        I am not sure what the oafishness of administrators has to do with performance of students vs. expenditures per child. If it helps I wasn’t trying to make that argument anyway, though on re-reading I can see it. Studies of the efficacy of the Robin Hood Plan have shown a correlation between expenditure per student and performance, take it for what you want, that work has citations to studies which disagree.

        My point is that good schools rarely exist in bad neighborhoods, if you improve the neighborhood the schools should follow. If you want kids to perform well (during and after education, this is what makes a good school) you have to ensure a stable home life, parent(s) who are present (or able to be) and a peer system that encourages behaviors that lead to success.

    • says

      “How does one embed links, html code?”
      Use tags. In your first example, replace braces below }{ with angle brackets >< – I can't use them here or the software will try to interpret them:
      {a href=”http://www.nalp.org/salarydistrib”}NALP salary distribution chart{/a}

      The software also supports the usual formatting tags for comments, {i}italics{/i}, {strong}bold{/strong}, {blockquote}indented citation{/blockquote}.

      A good starter primer on HTML is Dave Raggett’s.

  6. BevM says

    It seems to me that we have hundreds of years of evidence demonstrating that, left to its own devices, “The Market” will consistently and predictably savagely disadvantage whatever groups are currently “out.”

        • CharlesWT says

          The assertion made was that …, “The Market” will consistently and predictably savagely disadvantage whatever groups are currently “out.” Blacks were very much an out group in the American South. Therefore, the implication is that the racists that got the Jim Crow laws passed were just wasting their time and effort. “The Market” would have put Blacks at severe economic and social disadvantages all on its own.

  7. Ken Rhodes says

    “why can’t Harvard or Stanford increase their number of slots as they gain more endowment income?”

    This problem has been addressed exhaustively by the Society of American Baseball Research. The answer is found in the term “Replacement Level.”

    When a team loses its star power hitting lutfielder for a short time because of an injury, the replacement it has to promote from its minor league system is NOT an average major league outfielder. If he were average, he would have already had a place in the majors, and some poor schlub on the end of the bench would have been spending his time in the minors.

    So the replacement is the outfielder who wasn’t good enough to make the majors yesterday. And the term “replacement level,” in Sabermetric calculations, is very different from “average.” Likewise, you want to expand the Econ Department at Harvard, you have to either (a) hire the best Econ professor who wasn’t good enough to be there already, or (b) get into a bidding war with MIT (or Wharton, or whoever)to get a really good one.

    • Lowell says

      The baseball metaphor also is a case where the market is much closer to an ideal frictionless situation. Faculty positions are very sticky in transaction-cost senses, Taking on unnecessary costs will *tend* to make one market participant less competitive, but as long as the decisions and the factors they’re based on are fairly opaque, and the costs of switching an employee (or employer) are significant, that tendency can end up being very weak.

      I’m fairly sure that Harvard’s remarkably bad record with getting facilities built as it tried to expand across the river into Boston represents a type of market friction on faculty hiring as well. How would that get put into economics’ terms?

  8. says

    Kahn: This world view that embraces the “single index” of quality ignores that there are many ways to achieve “self esteem” and self respect. He downplays such comparative advantage and diversity.

    Yes this is true about Frank. But this is true for all of academic economics including your own analyses.
    For example your main arbitrage here argument relies on a “single index” of value to achieve equality and fairness.

    The “single index” rules because those of us who don’t covet what we are supposed to covet are an insignificant minority.
    We are outliers beyond the outliers…

    The cascade of desires that begins with Romney’s crowd and trickles down to the middle class tells us that we are supposed to want speed boats, golf wear, gold watches, and our own Lear jet.
    All worthless crap in my value system. But Frank is arguing it is a sufficiently reality of wants to the vast majority of native American savages. And he is correct.

    On the other hand: What is going on with Frank’s post and associated links is a backdoor way of injecting, into a culture suffering from acute affluenza, some small is beautiful values.
    All via a different means of taxation. He may not realize the small is beautiful link. Or he may. Either way, he is correct with that push too.
    I wish him luck. But I suspect the culture is too “single index” sick to be saved. Unless of course, the kids rebel from it again…

  9. dave schutz says

    Matthew Kahn, you say ” If UCLA didn’t hire professors who don’t wear a suit to the interview, these folks will be hired by some up and coming university (think of the University of Chicago hiring Jews in the 1930s) and that school will rise and the discriminators will sink.”

    One of my favorite stories was told to me by a fellow congregant at First Parish Unitarian in Cambridge, in the early 70. He was then in his mid 80s, and had worked in Harvard admissions in the 20s-30s. They started requiring photos with the applications. Why? To identify, and put a thumb on the scale against, Jews. “We had a saying: ‘They can change the Moses, but they can’t change their noses’”

    The kids Harvard turned away, who went on to brilliant prosperous lives with degrees from Elsewhere U., are still a blot on the Harvard escutcheon. And they gave lots of money to Elsewhere U, worse yet!

    This was during the presidency of Abbott Lawrence Lowell, who was proud of his stance holding the line against Jews, and for whom it is said three cities in Mass. are named. Punch lines vary: either Lawrence, Lowell, and Marblehead, or Lawrence, Lowell, and Athol.

  10. Mark Kleiman says

    Matt, you’re entirely assuming away market signaling. (Cf. Mike Spence.) Picking out sharp-looking attorney candidates may be a cheap way for law firms to measure otherwise hard-to-measure characteristics of job candidates. And if being well-dressed helps win negotiations and jury trials, then the characteristic is directly job-relevant, too. So there’s no actual arbitrage available.

    Bob Frank’s point remains: whether I’m trying to impress an employer, a negotiating partner, a jury, or a mate, being “well-dressed” means, mostly, having spent more money on clothing than the person I’m competing with. That leads to inefficient arms races, just like the process of bidding up housing prices in “good” school districts.

    • CharlesWT says

      For lawyers and other professions that deal directly with people, being physically attractive likely trumps being well-dressed. And that is a lot harder and more expensive to obtain than silk suits.

      • Mark Kleiman says

        Sure. And yet it’s still true that a male law student who showed up for a job interview wearing a $200 off-the-rack suit would put himself at a severe disadvantage, other things equal, in competition with someone wearing a $1500 made-to-measure. The fact that people also have to compete on even-more-expensive dental and dermatological work just makes it worse.

        • dave schutz says

          One of the best examples (other than the Ivy League’s last-century failure to take qualified Jews) of Matthew Kahn’s discussion of discriminators putting themselves at a disadvantage is Walmart versus Target. Walmart is conspicuously willing to hire ugly people, tattoed people, missing-teeth people. Target has a remarkable number of cute cashiers. And I think Walmart has been eating Target’s lunch for years.

          • Lowell says

            There are quite a few other differences in their corporate strategy. It’s unlikely that all else is equal. Also, in recent years both companies have tracked the overall market fairly closely (the big exception being that Wal-Mart didn’t take a hit in 2009 — but the difference closed sharply as the market has come back up), so there’s no empirical evidence of lunch being eaten.

          • NCG says

            This hasn’t been my experience. Often at Target I see employees who have clearly lacked access to decent healthcare — missing teeth, obvious scars and so forth. Otoh, there’s no Walmart nearby so maybe the employees there look worse? It’s funny you should bring this up, because a conservative person I know became (slightly) more liberal after he had experienced the recruiting process, because he felt that basic decency requires that people be able to maintain a certain tooth/head ration. Just as a matter of fairness.

  11. NCG says

    It seems to me that the field of economics would be improved by requiring a basic course on primate behavior. We people are animals. Trying to forget that is a mistake. Rational choice critique doesn’t seem to be getting the job done. Maybe you-all need less abstraction.

  12. paul says

    Yep, a people have pointed out, this logic works only when after-hiring performance is completely uncorrelated to pre-hiring appearance clues. Which is fairly difficult for people-facing positions. (Oh, and the whole antisemitic thing: probably would have stayed quite comfortably in force except for that minor unpleasantness in europe during the 30s and 40s.)

  13. Finn says

    Matt, in response to your question:
    “In which industries do the beautiful win the relative beauty competition, the workers earn the wage premium and the firms persist in earning non-negative profits in competitive equilibrium?”

    The answer is {a href=”http://online.wsj.com/article/SB10001424052970203687504576655331418204842.html”}all of them{/a}.

    The problem is that the beauty contest is an arms race in itself and there are only so many relatively attractive people! Have you even bothered to think about the fundamental assumptions you have made?

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