T6 Slides

Tutorial 6

What have we done?Problem

(social phenomenon) Explanation Validity Predictions

- Theory- Conditions Advices

Criticize a Theory

Adequacy Conditions

Empirically testable

Explanandum follows logically from explanans

One general law & one antecedent condition

Empirical content

SummaryLecture 6

Summary 1

What are criteria for a good theoretical basis for developing policy advice.

The most important criterion is that you have a valid reasoning. That is: you have an adequate explanation (according to the adequacy conditions) how the expected effects of the proposed policy logically follow from an explicitly formulated theory (law + condition). If there is a trade-off, then try to find an “optimal” strategy (e.g. busing only in smaller towns, where people hardly move)

Summary 2

Learn what are the steps in coming from theory to advice.

Step 1: Find related phenomena to explain.

Step 2: Develop valid explanations for these phenomena.

Step 3: Derive from the theory that you use to explain the phenomena why the proposed policy advice should have the proposed effects (valid reasoning).

Summary 3

Learn what are problems of applying theories to real life problems.

The most important problem is that you overlook implicit “ceteris paribus” assumptions in your reasoning that turn out to not be true.

One way to address this problem is that you try to develop “deeper” explanations that specify under what conditions certain premises apply and when they do not apply.

Summary of the summary

When you develop policy advices, be aware of the fact that theories make implicit ceteris paribus assumptions.

Try to predict what might go wrong and how likely this might happen and consider this when you give an advice.

If there is a trade-off, then try to find an “optimal” strategy (e.g. busing only in smaller towns, where people hardly move)

Exercise

Task of the exercise

We have a problem

Why is there this problem (use a theory to explain it)

Check validity of the explanation

If valid - Use the same theory to make predictions

Use the predictions to give advice.

What is kidnapping???

Kidnapping - Explanation

Why do we think a policy has an expected effect?

Because we have a theory (lawlike statement) that predicts that given the policy is applied (condition) the expected effect will be obtained (prediction or explanandum)

Why is there kidnapping?

Let’s go from the very general to a more specific explanation of our problem

Task 1

Use RCT to explain why is there kidnapping?

THEORY - LAWLIKE STATEMENT

CONDITION

___________________________

EXPLANANDUM

(5 min)

Keep in mind!

If a social policy does not actively employ the interests of those on whom it has an impact, it will find those interests actively employed in directions that defeat its goals. (J. Coleman)

Intro: Rational Criminals?

The higher the perceived utility of a course of action, the more likely an individual will choose this action

When the benefit of breaking the law (committing a crime) is greater than the punishment, an individual will break the law

ExplanationThe higher the perceived utility of a course of action, the more likely an individual will choose this action

The lower the costs of kidnapping a person (the higher the benefits) the more likely an individual will choose this action

Kidnappers face the punishment (if caught) as the cost of kidnapping

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The lower the punishment of kidnapping the more likely kidnappers will kidnap a person.

Task 2: Advice

Think about this explanation

If this is explanation, what would it imply for the policy?

WHAT IS YOUR ADVICE? Construct a valid argument predicting the implication of your advice on the phenomenon.

(5 min)

Advice

The higher the costs of kidnapping a person the more likely an individual will not choose this action

Increasing the punishment of kidnapping making it equivalent to murder will increase the costs of kidnapping a person

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Increasing the punishment of kidnapping to the level of murder reduces the likelihood of kidnapping.

Advice: Increase the punishments to kidnappers

What might have gone wrong?

In most cases, the family of an abduction victim is willing (if able) to pay any ransom required - hoping the relative will be released as a result. But, will the kidnapper release her? Should he? On the one hand, the victim may have seen him, she may have some information about the place where she had been hidden, or she simply may know those little details that help to trace the kidnapper. On the other hand, killing the victim will typically spur a more intensive investigation (as in increasing the number of investigators, the duration of the investigation, or rewards for helpful hints), and in case the kidnapper is caught and sentenced, he will experience a harsher punishment, probably without parole.

Task 3: Ceteris Paribus

Implicit Assumptions???

It is assumed that there are no other consequences of increasing punishments to kidnappers

The advice is valid BUT the policy does not have the expected effects

(5 min)

Ceteris Paribus Problems

Kidnappers always return the victim after the ransom is paid.

However, if the punishment is equivalent between kidnapping and murder kidnappers will have incentives to kill their victims.

We cannot guarantee a better societal outcome!

How else can we increase the cost (or reduce the benefit) of kidnapping?

Outcome

Individuals who choose to kidnap face an equal punishment by keeping their victims dead or alive

Keeping a victim alive brings a higher cost to the kidnapper (increased probability of being caught)

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Increasing the punishment of kidnapping to the level of murder reduces the likelihood of kidnapping. (YES)

Increasing the punishment of kidnapping to the level of murder increases the likelihood that kidnappers will murder their victims. (YES)

Advice: Increase the punishments to kidnappers equivalent to murder

Task 4: Other advices?

How else can we increase the cost (or reduce the benefit) of kidnapping?

If there is a trade-off, then try to find an “optimal” strategy

(10 min)

Give other explanations and advices.

Some explanations


The higher the benefits of kidnapping a person (the lower the costs) the more likely an individual will choose this action

Kidnappers receive monetary ransoms for their kidnapped victims

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The higher the ransom a kidnapper can receive the the more likely he/she will kidnap a person.

Advice

The lower the benefit of kidnapping a person the more likely an individual will not choose this action

Punishing the payment of ransoms to kidnappers reduces the benefit of kidnapping a person

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Punishing the payment of ransoms reduces the likelihood of kidnapping.

Advice: Make it illegal to pay ransoms to kidnappers


The lower the costs of kidnapping a person the more likely an individual will choose this action

The lower the probability of being arrested for kidnapping the lower the (expected) cost to a kidnapper

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The lower the probability of being arrested for kidnapping the more likely a kidnapping will take place

Advice

The higher the probability of being arrested for kidnapping the more likely a kidnapping will not take place

Increasing investments in police force increases the probability of being arrested for kidnapping

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Increasing investments in police force increases the probability that a kidnapping will not take place

Advice: Invest a higher portion of resources to strengthen the police force

Combined advice

Increasing punishment reduces the likelihood of kidnappings

Punishment must have an upper limit (not too high to lead to other worse crimes)

Punishing the payment of ransoms reduces the likelihood of kidnappings

Increasing the investment in police force will reduce the likelihood of kidnappings.

Demographic Decisions

The Problem In rich countries the average age at which women have their first child is now 28, compared with 24 in 1970.

A growing number of women are forsaking motherhood altogether.

Of those born in 1965, 18% are childless (with large variations from country to country)

Portugal 4%

Italy 20%

Some of these women may not have been able to have a family, but most will have chosen not to.

The DecisionsThe decision to have a child is one of the most important decisions that couples take together.

The decision to terminate childbearing is equally so.

Women in developing countries today are both having fewer number of children and using an unprecedented level of permanent methods of contraception such as sterilization.

Real options and demographic decisions. (Iyer and Valu, 2006)

Task 5

We have a problem: What is the problem?

Why is there this problem (use a theory to explain it)

Check validity of the explanation (star test)

If valid - Use the same theory to make predictions

Use the predictions to give advice.

(10 min)

Research Questions

Why are women having fewer children and using permanent contraception at a much earlier age than their mothers or grandmothers before them?

What determines their decision making?

Real options and demographic decisions. (Iyer and Valu, 2006)

Is there a value in waiting to have a child, which may arise as a response to the influence of uncertainty?

Theory - Real Options

Bearing a child is an investment decision

The presence of uncertainty affects the decision about when to have a child.

The investment decision displays irreversibility and flexibility.

Irreversibility: Once you use the option you cannot go back - You cannot return the baby to the factory

Flexibility: There is a period of time in which the option is available - (re)productive years of the woman

ExplanationRCT argues that men and women evaluate the cost and benefits of childbearing in a net present value framework taking into account economic factors such as the contributions to current and future income that children may make, but also the phycological and societal benefits of having children (Becker, 1981; Schultz, 1998; Dasgupta, 2000).

The woman has the option to wait at each decision point in her reproductive life-span: this is the marginal benefit of keeping open the decision to have a child, versus the alternative either to delay or to stop childbearing.

Explanation

3.2. A real options model for the decision to have a child

In a demographic context, let us define C8 as the costs of children and R as thebenefits.9 Let the future benefits and costs be discounted at a positive rate r N0, theopportunity cost of parental time specified exogenously. Then the net benefits of children(let us call this B) are:

B ! R" C

This is the conventional net present value (NPV) decision framework. Now consider Fig.2, which illustrates a representative woman’s fertility decisions over her reproductive lifespan.

For the woman, we assume that biological constraints dictate that she does not bear anychildren from the time of her birth, t0, until the age at which she attains menarche. In manysocieties, she would be married considerably later than the age at menarche, and this age isdenoted by t*. Note that we assume that childbearing is taking place within marriage. Thisis not an unrealistic assumption to make, as in many developing countries childbearingcontinues to take place largely within marriage. But the assumption is not strictlynecessary. Married or not, the woman embarks upon her reproductive life span at t*. In anet present value framework, the woman may choose to have her first child at time t1, hersecond child at time t2, and so forth, where it is argued, these decisions are dictated by thebalance between the costs and benefits of children (R"C).

Now, the conventional NPV framework can be modified to incorporate the option towait (F) using the real options approach. Assume that the benefits of having children aresubject to uncertainty. Then there is value in waiting to have the next child, which existsover and above the net benefit of having the child. This value is derived from two sources.First, the value from delaying having the next child in order to see whether, and how, theuncertainty surrounding the benefits of having the next child resolves. Second, the valuefrom the benefit of delaying the current cost of the investment to have the child, X10. Thesecond condition will hold as long as the reduction in the net benefit from having the childis smaller than the savings generated from delaying the investment in having the child.This results in the decision to have the next child being undertaken at a date later than thatwhich conventional NPV analysis would predict. Let us show this result more formally.

Let us denote the value of waiting to have the next child by F(B). The benefits ofhaving children are subject to uncertainty. The level of uncertainty will be influenced by

8 This is the cost of child rearing.9 Both the costs and benefits are stated in present value terms.

t0 t*

Unmarried Ability to have children

t1= first child tn= permanentcontraception

G1 = option to wait

t2= second child

G2, G3,…Gn = option to wait

Fig. 2. The fertility decision.

10 This current cost of investment is the cost of childbearing that includes hospital and other medical expenses.

S. Iyer, C. Velu / Journal of Development Economics 80 (2006) 39–58 47

There is a value in waiting to have the next child

delaying the next child in order to see wether, and how, the uncertainty surrounding the benefits of having the next child evolves

delaying the current cost of the investment to have the child.

Task 6: ComplementRead in your group the article: Baby blues. A juggler’s guide to having it all (The Economist)

What is the problem that needs to be solved?

What is the advice?

How has the advice been defended? In other words, what are the premises of the advice?

Is the advice adequate?

Might there be problems with hidden ceteris paribus assumptions?

(10 min)

See you next week

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