An all-in-one post for the past three months

Instead of doing a deep dive into one topic today, I have a few different points of discussion. First, thank you to Intelligent Economist for including me again this year in the top economics blog list. Second, I'll be joining a PhD program in Economics this fall and I can share my thoughts on the application procedure and offer whatever limited advice I have and hope/encouragement to those thinking about applying. This is particularly for those who have been out of school for more than a few years in job/grad school and those who found economics a little later in life (both of these apply to me). If I had one general piece of advice about PhD preparation, it is that I've found many people shy away from math and believe that only a few "select" individuals with innate abilities can be good at it (if I had a dollar for every economist I ran into while solving problems in a coffee shop who told me about the one genius in their college real analysis class) but - like anything else in life - I think those who are driven, purposeful, and work hard at it are well-rewarded.

One of the previous posts on this blog had discussed minimum wage policy. There wasn't enough time to cover all of the implications of minimum wage in that post, but I recently came across an interesting implication that I had not read about before. Specifically, a paper by Dettling and Hsu (2018) finds that higher minimum wages have significant effects on consumer credit markets (supply of unsecured credit, payday lending, and delinquency on credit payments). Higher minimum wages lead to lower borrowing costs for low income borrowers because they increase the number and favorability of credit card offers and they increase credit limits and decrease delinquencies. As noted in the paper, "labor market outcomes... are just one part of a household's finances. Interactions with consumer credit markets also play a crucial role in many families' economic wellbeing..."

Ethiopia gender diagnostic

The World Bank's Gender Innovation Lab - the team that I work for within the Office of the Chief Economist for Africa - has published a gender diagnostic report for Ethiopia. In this section, these views and interpretations are my own not that of the WB. The report does a few things: it provides evidence of gender gaps in agriculture, self-employment, and wage sectors in Ethiopia based on the Ethiopia Socioeconomic Surveys; it utilizes an Oaxaca-Blinder decomposition method to connect these gaps to gender gaps in the levels and returns to resources (e.g. fertilizer); and it provides concrete ideas to address the challenges that Ethiopian women face in the labor market. Oaxaca-Blinder decomposition decomposes the gender gap into observable differences in factors of production (endowment effect) and unexplained differences in returns to the same observed factors of production (structural effect). It allows us to determine to what extent differences in productivity are due to differences in the levels of resources versus the impact of those resources on productivity. It should be noted that the report is policy-oriented rather than academic in nature.

One example of a finding from this report is that the evidenced gender gap in agricultural productivity in Ethiopia is by and large due to unequal levels of productive factors such as land size and quality, fertilizer and other production inputs, formal credit, and farmer extension services (which can serve as a proxy for agricultural knowledge). When these - and other individual- and household-level observable characteristics - are controlled for, the gender gap in agricultural productivity drops from 36 percent to 6 percent. This is not necessarily the case in other countries in Sub-Saharan Africa, where giving female farmers access to the same level of productive factors as male farmers will not close the gender gap. For Ethiopia, we can assess how to close the gaps in factors of production.

For example, access to formal credit is an issue for not only female farmers but male farmers as well. The report on myths in African agriculture that I cited in an earlier post indicated that across the African continent only 6 percent of households used credit - formal or informal - to purchase agricultural inputs. It notes that "rural credit markets need to be deepened to serve farmers better, especially with respect to modern input use." On the other hand, the proliferation of farmer extension services is much greater with nearly 40 percent of male plot managers in Ethiopia having attended extension services recently (but only 23 percent of female plot managers having attended). There is a gender gap in both of these resources but while one has high take-up among male farmers, the other does not and therefore may require broader solutions.

If we focus on women's attendance of extension, we hypothesize based on existing literature and data that there are institutional factors that impact women's attendance and their level of agricultural knowledge more broadly. Namely, women are more time-constrained due to greater responsibilities in the home and are not as mobile due to costs of travel and to safety considerations. Both of these factors - time poverty and more limited mobility - can limit women's access to knowledge because they are not necessarily able to be in a particular place at a particular time to learn.

It is interesting because this underlying theme runs through many discussions about gender gaps in both the developed and developing worlds. A better understanding of how our existing systems are structured around the needs of specific subsets of our population can allow us to devise solutions that can better suit the needs of the others. For example, we posit that access to mobile phone technology can dramatically improve agricultural knowledge among female farmers because - conditional on their access to the technology - they will be able to access information at the time and place that is convenient for them (in Ethiopia, this is particularly challenging due to the limited competition in the telecommunications sector that has hindered mobile phone and internet penetration). Similarly, as this article in the Harvard Business Review illustrates, women in the developed world are advocating for more flexible working arrangements not to reduce hours but to manage workload at their own time and place where possible.

However, there are other important solutions as well. For example, investments into technologies that can alleviate the time poverty that women face in the first place. The tasks of collecting firewood, other fuel, and water for household energy consumption often fall on the women of the household and can take several hours per day in rural areas. Yet, there are interesting companies engaged in East Africa that are focused on addressing these energy consumption needs (some of which are highlighted in this report as examples). They provide alternatives to wood-fuel stoves in the form of solar energy or biodegradable biomass. This is just one example of how an evidence-based finding from the report can be developed to identify areas for future academic research, e.g. how successful are these alternative fuel companies and how effective are their alternatives at addressing women's time poverty? For more on these ideas, do check out the report.

Recession 

There has been an upsurge in talk of recession recently in the popular media. It's not a topic that I've had much experience working on but I'll do my best to point out a few resources and start the conversation.

This article from the Fed lists the points of concern that have gotten analysts, investors, and economists talking in the first place. It lists four important housing market indicators, notes the significance of the housing market has in predicting economic downturns ("based on its forecasting track record - where a housing downturn is necessary but not sufficient for a recession to occur - the risk of broad-based economic recession certainly would be higher if the housing market were to weaken further"), and illustrates that recent trends are consistent with other pre-recessionary periods in 2001 and 2008.

The key is that current estimates of the four indicators listed - 30-year fixed mortgage rate, home sales rate, home-price change, and residential investment - are compared to their averages over the past three years to determine whether there is significant deviation from the average. For example, the below Fed chart shows the deviation in percentage points of the mortgage rate from the preceding three-year average. In the run up to the recessionary periods in 2001 and 2008 there was a rising deviation of the mortgage rate from the three-year average. The green trend for 2019 indicates the same pattern today.



It is unclear in my opinion that the other three indicators track the 2001 and 2008 trendlines as closely as they do here for the mortgage rate but either way I think this is one part of a larger picture. The larger picture is that in 2001 and 2008 these housing market indicators worked in conjunction with a private sector financial deficit (financial deficit from households and firms). This is discussed in an episode of the Exchanges at Goldman Sachs podcast - which I highly recommend - on five areas of credit market risk and how they impact the likelihood of recession. It is just one section from a GS report, "Learning from a Century of US Recessions."

The report itself provides a high-level summary of the various risk areas that lead to economic downturns but does not provide much detail on the individual risk areas. The podcast does a better job of discussing in detail the primary risk area: financial risk and asset bubbles. The GS viewpoint is that the current private sector surplus differentiates the current situation from 2001 and 2008 where the housing market may have been heating up - as it is today - but at the same time the private sector was running a large deficit. These two deficit periods are indicated in the GS figure below.



In the podcast, it is also mentioned that debt growth for households in the mortgage market is in decline - 16 percent inflation adjusted decline - that is unprecedented in the past 60 years. I ran a quick chart using the Fed's data to see the trendlines for all mortgage holders (in blue) and one- to four- family residences (in orange) and they do indicate a slow growth in recent years. How much slower than in the rest of the 30-year period shown here (1990-2018) is not clear since the trendline is still rising. However, it is unsurprising that mortgage debt is rising more slowly now than in the pre-2008 period given tighter credit standards in the aftermath of the Great Recession.

It is possible that an overheating of the housing market and relatively slow mortgage debt growth for households are consistent with one another if mortgage debt and home-ownership are more concentrated today than they were pre-2008. It would be interesting to see whether a smaller segment of the population is driving the uptick in the housing indicators being measured by comparing mortgage debt and home-ownership across the income distribution today and pre-2008. Tighter credit standards and more sluggish recovery among lower- and middle-income households after the 2008 economic downturn, in addition to rising income inequality in the aftermath of the downturn, may explain greater concentration in debt and home-ownership today. This could explain trends in the housing market as well as the private sector financial balance.   

Review of AEA sessions in Atlanta (Jan 4-5)

I took last month off from this blog (and most other productive activities) because I was on holiday for three weeks in the Bay Area. I hope all of you had a great holiday season 2018 with friends and family and a refreshing start to the new year 2019. The first topic I wanted to come back to is a review of the webcast sessions from the American Economic Association's annual meetings held in Atlanta from Jan 4-5, 2019. Several of the sessions are webcast here and you can access lectures on various topics including growth in the developing world, automation and the future of work, public debt, and - returning from last year with an extremely compelling panel - the gender problem in economics and what steps the profession can take to address it. In this post, I discuss two of the panels with an eye to discussing Autor's lecture on the future of work in the next post.

Growth challenges in the developing world 

The AEA convened a "World Bank economists" session consisting of three former World Bank Chief Economists (Justin Lin, Francois Bourguignon, Kaushik Basu), current Chief Economist Pinelopi Goldberg, and moderated by former Acting Chief Economist Shanta Devarajan. The purpose of the panel was to deliberate on the challenges facing the developing world. Given the very broad - arguably too broad - scope of the topic, it is natural that the panelists settled on a narrower topic over the course of the conversation: industrialization and the informality trap facing Africa.

Historically, industrialization and the rapid job creation in the formal wage sector that accompanies it have been seen as the most effective ways to raise wages and lower the poverty rate in developing countries. Lin cited historical examples of low-income countries' growth trajectories after capturing manufacturing jobs moving from the U.S. to Japan in the aftermath of WWII, Japan to Southeast Asia in 1960s and 1970s, and from Southeast Asia to China in 1980s and 1990s. Now that wages are increasing in China, many of these manufacturing jobs will be looking for a new home. How can Africa capitalize on these opportunities in coming decades was the question most of these economists were trying to answer. Chapter 2 of this policy report from the African Development Bank does a good job of summarizing these issues including evidence of what some economists call "de-industrialization" and the obstacles to small business growth. Given the demographic changes that will add 2 billion to the working age population in the African continent in this century, the creation of jobs in the formal wage sector will be important not only for economic but social and political stability. 

1. The primary point of contention is that it is not clear that "de-industrialized" countries will capture these manufacturing opportunities without concerted policies. E.g. automation is a real threat to manufacturing jobs in certain industries and less so in others (retail incl. clothing, shoes, and furniture). Furthermore, the trade environment is rapidly changing with advanced economies looking to be less hospitable to imports from low-income countries. The second half of the panel asked panelists to comment on different ways of approaching this issue wherein I think the issue of too broad a topic came to light. I think it would have been more useful to showcase specific examples and evidence from recent research. 
2. It wasn't discussed in the panel but it is relevant discuss the impact of a shift from self-employment and agriculture to industrial employment on working populations and whether there is desire on the part of working populations to hold these types of jobs in the first place. Specifically, J-PAL poses the issue in preface to a 2017 paper from Chris Blattman and Stefan Dercon that studied the effects of industrial employment on Ethiopian workers: "Industrial sector development to boost mass hiring is seen as important to poverty alleviation at the macroeconomic level. But how those jobs, particularly in early stages of industrial sector development, affect the workers themselves and what the workers prefer are less well-understood." The findings from this paper are summarized in this New York Times article with the bottom line being: workers are initially unaware but quickly become aware of the safety hazards and poor wages paid in sweatshop conditions leading to a high turnover rate in these early-stage manufacturing firms. The authors find that particularly when the constraints to self-employment were addressed through cash grants the workers preferred self-employment. 
1. Does this mean that industrialization is not the best way to raise wages and lower the poverty rate in low-income countries? No. But it indicates that there may be a more efficient equilibria where a set of regulations providing a baseline level of safety for workers that address the issues identified in this study (chemical fumes, repetitive stress injuries, and probability of serious injury) can be beneficial to both employers via a lower turnover rate and to workers who would more likely work there if these health concerns were addressed. Such a set of regulations need not be so stringent that they reduce the comparative advantage of setting up shop in sub-Saharan Africa given the low wages on the continent but they will provide better standards of living for workers expected to drive these changes. 

Gender in the profession

On the panel on gender in the economics profession. The community by now is well aware of statistics indicating the low proportion of women who study economics as undergraduates, the lower proportion who study it as PhD candidates, and the even lower proportion who are tenured faculty at universities. The primary questions now, in my opinion, are (1) whether members of the community believe that these statistics are indicative of gender bias (as opposed to differences in ability or preference between the genders); and (2) whether members of the community believe that they can and should take action to address this bias, particularly when it is implicit and particularly where it requires the buy-in of economists who are neither part of the problem nor the solution.

Several of the questions posed in the panel revolve around these ideas. First is the need for data and evidence that is reflective of implicit bias to indicate to said economists that there is a problem at hand. Erin Hengel's paper on publication records of male and female economists that I discussed last year and Alice Wu's paper on sexism within the Econ Job Market Rumors website which is informal but commonly used among academic economists for job postings and career advice (see this interview with Wu on this paper) are two examples of this type of evidence. This webpage put together by the UC Berkeley Women in Economics group offers other useful information.

From my own anecdotes and research experience within the Gender Innovation Lab at the World Bank, there are a few issues that I think are actionable to address:

1. Role models and social networks among women 
2. Gender gap in perceived abilities in STEM fields 
3. Culture and implicit bias within the profession

Given that the third issue is probably the one that is most difficult to address I think it requires first the buy-in from the community that I mentioned above. Being aware of implicit bias and its effects on the community are important because they are needed to take the next steps. For example, one issue that was talked about in the panel is aggression in economics seminars. It likely impacts women more than men because women tend to do better in collaborative and non-aggressive environments and the aggression tends to be more often directed towards women than it does towards other men (e.g. see Wu's paper on EJMR). But suffice it to say, I think we would all do better - men and women alike - if we were all a bit kinder to one another without compromising the rigor of our work. Specifically, to both acknowledge that we can and should be able to communicate questions and criticisms without resorting to aggression and be willing to learn the techniques to do so. Same with being willing to learn the techniques to recognize and address implicit bias.  

I have been supported in my efforts by peers and role model figures - mostly male - that have been enthusiastic about my ability to succeed in this profession. I have been blessed in not only role models in professional and academic life but also partners in my personal life that have been the most influential factors in my decision to undertake graduate studies. My thoughts on this issue are - in addition to addressing systematic issues within the field - if you can support a young person and believe in their abilities it is probably a determining factor in their decision to pursue higher studies. Whether we have the data or not as of yet (and there is more empirical research being conducted on role model figures and mentoring), we can't underestimate the value of empathy in how people decide whether or not they want to be in a particular location, field, university, firm. 

China and the future of development aid

At the end of last year, research organization Aid Data published the first extensive data set documenting Chinese aid flows around the world. The Chinese government is notoriously secretive about its development aid outflows: it does not publish any project-level or country-specific data on its own nor does it work with international organizations that attempt to quantify and release this information. To create the data set, researchers at Aid Data scoured publicly available news reports, official embassy documents, and aid/debt information from other countries for the past five years. The Tracking Underreported Financial Flows methodology that they rely on is detailed here.

China's lack of transparency has been cited as a growing issue given its increasing role on the international stage. In the past few years, China surpassed the U.S. in terms of annual spend on development aid and has established itself as one of the key development players in Africa. Critics - such as Moises Naim in this opinion post years ago in the New York Times - have raised concerns that in competing with Western donors and international organizations such as the World Bank, China is seen as the "no strings attached" donor likely to give to undemocratic regimes and countries with poor institutions that would be subject to higher scrutiny under traditional Western giving and lending practices. 

It is unsurprising, then, that researchers have already taken to the new Aid Data data set to answer a myriad of questions about the impact of Chinese aid on local economies. In this post I look specifically at the paper, "Chinese aid and local corruption" published last month in the Journal of Public Economics. Authors Isakkson and Kotsadam (2018) employed Aid Data's Chinese Official Finance to Africa data set to identify locations with: (1) ongoing Chinese aid projects, and (2) those selected for future Chinese aid projects. They then connected this data with Afrobarometer survey data eliciting survey respondents' experiences with corruption (whether they "had to pay a bribe, give a gift, or do a favor to government officials") in order to estimate the effect of an ongoing Chinese aid project in a given location on the level of local corruption. Because they geocode both data sets and restrict their sample to only those aid projects for which they can identify a granular location, the authors are able to identify respondents within 50 or 25 km of aid project locations to analyze their experiences with localized corruption. 

The authors find that Chinese aid projects have a statistically significant effect on local corruption with point estimates of a 3.5% (bribes given to "avoid a problem with the police") or 2.7% (bribes given to "get a document or permit") increase in bribery in locations with ongoing Chinese projects relative to locations selected for future Chinese projects. They speculate that Chinese aid increases local corruption through two potential mechanisms: first, that presence of the donor changes the cost-benefit structure of engaging in corruption (i.e. if the donor is indifferent as to the "means" by which a project is completed and is willing to reward for the "ends" of completing it then this raises the benefits associated with corruption). Second, they posit that the donor is in a position of power to influence social norms and create institutional change. A donor's acceptance or propagation of corrupt activity could worsen norms (noting that norms are easier to change for the worse than the better). Finally, they employ the same strategy around World Bank aid project locations and do not find any effect of these projects on local corruption. 

Estimation strategy

The paper employs a model similar to a difference-in-differences model wherein the responses of individuals who live near a site that is currently developed by the Chinese are compared to the responses of individuals who live near a site that will be developed by the Chinese in the future. In the following regression model, the authors employ the difference between the coefficients on "active" and "inactive" as the key parameter of interest. Individuals located within the radius of an ongoing Chinese aid project are "active" ("active" = 1). Those located within the radius of a future Chinese aid project are "inactive" ("inactive" = 1). And those that are outside the radii of any current or future Chinese aid projects are neither active nor inactive ("active" = 0; "inactive" = 0). 

(1) Yit = β1 activeit + β2 inactiveit + αs + δt +y Xit +εivt 

Isakkson and Kotsadam employ this method rather than interpreting the coefficient on the "active" dummy to avoid the ex-ante assumption that "there is no relationship between project localization and the pre-existing institutional characteristics of project sites." In other words, if the locations for Chinese aid projects were selected based on certain institutional characteristics it is very possible that those institutional characteristics are correlated with corruption levels and that, as a result, interpreting the coefficient on "active" alone erroneously captures pre-existing differences in corruption levels between locations with Chinese aid projects and those without. 

To control for the geographic and time-based variation in the data set - which includes data from across the African continent and spanning 2000-2013 - the authors include spatial fixed effects, year fixed effects, and a set of individual controls. While the baseline results indicate that Chinese aid projects led to an increase in local corruption, the various iterations do lead to questions:

1. The authors point to two statistics from the regression output to determine whether the parameter of interest is significant: coefficient on the "active" dummy variable (if there is an effect this should be positive and statistically significant) and the statistic for an F-test testing the hypothesis "active - inactive = 0" (if the effect on corruption is a result of a Chinese aid project this hypothesis should be rejected). The baseline results indicate that both with respect to police bribes and permit bribes the coefficient on "active" is positive and highly statistically significant and the F-test hypothesis can be rejected at the 5 percent level. See Table 1 for details.
2. However, the sensitivities indicate that the coefficient on "active" is statistically significant across most but not all iterations and the F-test cannot be rejected at the 5 percent level in at least one of the iterations. The results indicate that the effects are stronger for police bribes than they are for permit bribes which leads to questions about the mechanism that leads to increased corruption and why it impacts police bribes more so than permit bribes. See Table 2 for details.
3. Furthermore, the authors conclude that World Bank aid projects do not similarly lead to an increase in local corruption not because the coefficient on "active" in that sample set is not positive or statistically significant (in fact it is significant in several iterations) but because the F-test results indicate that it cannot be rejected that the "active" and "inactive" coefficients are equal. But why is it that both "active" and "inactive" locations with World Bank projects see a higher level of local corruption than those without World Bank projects (where Chinese aid projects don't, because the "inactive" coefficient is not significant in most Chinese projects)? It's not a question that this paper seeks to answer but there should be a reasonable hypothesis for why locations selected for World Bank vs. Chinese aid projects differ in this way.
4. My main question reading this paper was whether the implementation of an aid project leads to a change in the demographic population of a locality. Given that the Afrobarometer survey is not a panel data set, the same individuals are not necessarily interviewed pre- and post-implementation of an aid project. 
1. While it is possible that the implementation of a project leads to the corruption of existing actors it also seemed possible that it led to inflows of new actors into the locality due to a possible increase in local economic growth and activity. If the increase in local corruption is due to the influx and changing composition of the locality this is distinct from an increase due to corruption of the existing population. 
2. The authors attempt to address this question by analyzing whether there are more police stations in active aid areas vs. inactive aid areas (to address the claim that more bribery is a result of more police stations rather than more corruption), stating: "Neither do we find any evidence that the results are driven by increased resource flows making the project areas into 'honey pots' attracting corrupt actors." However, the empirical investigation does not seem to answer the original question of whether aid projects lead to an influx of corrupt actors. 
3. It boils down to how the effect is interpreted: in the case of this paper, the parameter of interest does not distinguish or isolate the two effects presumably because both lead to an increase in local corruption whether by migration or by impacting existing populations. 

Implications for the future of development aid

Overall, the implications of the paper that Chinese aid projects lead to local corruption are the first step in understanding how different forms of aid (and specifically "no strings attached" aid) can create institutional change and impact social norms. While the quantification of this impact is important, the paper does not explicate the mechanism by which these projects increase corruption and without that linkage it is difficult to prescribe appropriate policy solutions to improve local governance and reduce corruption. But the paper reaffirms questions about China's development strategy to work within existing entrenched systems to create economic growth vs. the traditional Western approach to attempt to improve governance and create institutional change at the same time. The broader takeaways for the field of development aid:

• It is clear that conceptualizing Chinese vs. Western aid as a competition is not the most effective way to improve growth and development in these economies, rather, assuming Chinese aid will continue at its current rate how can each set of aid practices complement and supplement one another? Transparency and data availability make it easier to answer these questions. 
• Given the importance of international coordination in aid, this new availability of data on Chinese aid offers a novel opportunity for other donors to provide a value-add to these economies in sectors and projects that the Chinese are not investing in and to advocate more strongly for better governance and effective democratic institutions given the apparent worsening of certain aspects of local governance as a result of Chinese aid projects. 
• China's increasing role in development and aid places places a need for further introspection on the part of international organizations such as the World Bank, specifically: how should the organization continue to advocate for good governance and effective democratic institutions while simultaneously recognizing the need to work with one of the largest unilateral donors that may not be interested in propagating those norms? Will the World Bank's role and priorities change as funds from China and from private investors play an increasing role in the growth of developing economies? How can it position itself most effectively in this rapidly changing space and provide a distinct value-add?

Sources

1. Isaksson, A. and Kostadam, A. (2018). Chinese aid and local corruption. Journal of Public Economics. 

Insurance products for increasingly risky livelihoods

As climate change increases the frequency and severity of extreme weather in developing countries, a key question is whether agricultural insurance can play a larger role in mitigating the household level losses associated with catastrophic droughts.

Insurance products are particularly relevant in regions where agriculture or pastoralism constitute the primary source of income. In these regions indemnity payouts from insurance products can provide significant consumption smoothing benefits to insurance policyholders in the event of drought and improve material well-being.

A paper published last week by the World Bank's Development Research Group ("Insuring Well-being? Buyer's Remorse and Peace of Mind Effects from Insurance") finds that index-based livestock insurance (IBLI) also improves non-material well being for a sample of pastoralists in southern Ethiopia. Specifically, Tafere et al. (2017) find that a "peace of mind" effect associated with purchasing insurance that is positive and statistically significant. They find this effect outweighs a negative "buyer's remorse" effect on well-being, which arises when households purchase insurance and realize after the uncertainty period ends that they did not need the insurance after all.

They note:

"The implication is that, despite premiums set above actuarially fair rates, IBLI improves buyers' SWB [subjective well-being] even over a period when pastoralists in southern Ethiopia lose money on the policy. The ex ante peace of mind effect dominates any ex post buyer's remorse. In other words, even an insurance policy that does not pay out still improves people's perceptions of their well-being."

Estimation strategy

To estimate the "peace of mind" effect, the authors randomize the provision of 10-80 percent discount coupons and comic book or audio tape information interventions to households in the communities in southern Ethiopia. These incentives act as instruments which increase uptake of IBLI among households in an instrumental variables model. In the reduced form  stage, the measure of well-being is regressed on the probability of IBLI uptake predicted in the first stage.

The authors measure SWB using the question: "On which step do you place your present economic conditions?" with possible responses ranging in the Likert scale from very bad (1) to very good (5). They employ a vignette-based adjustment of the SWB scores by asking respondents to rank their own circumstances with respect to a set of individuals described in short vignettes to improve the comparability of the subjective welfare measurements to one another.

In both of the years in which insurance policies were active there were no indemnity payouts. This allowed the authors to disentangle the ex ante peace of mind effect from the ex post buyer's remorse effect on SWB. It also ensured that the effects measured were not material or payout based.

There are two issues to consider with respect to the empirical strategy:

1. Depending on how well-being is assessed it is possible that well-being could be positively affected by discounts for the sole reason that it is a discount and is saving people money. If true this would invalidate the instrumental variables assumption that the instrument be exogenous from the reduced form model. Though I considered this possibility, I dismissed it since SWB is assessed in the period after the period in which the discount is applied and insurance purchased, it seems unlikely that said discount would have such a lasting impact on SWB.