12
Sep 12

## The Trading Game: A Simple, Easy to Run In-Class Experiment

### Protocol

The Trading Game is pretty simple. Before the start of every semester I have to teach principles of microeconomics, I look at the number of students enrolled in my class, and I head out to the nearest dollar store to buy an equal amounts of trinkets.

As luck would have it, WikiMedia Commons has a picture of the very place in Durham where I buy all of my Trading Game trinkets:

(Source: WikiMedia Commons.)

The trinkets I buy are all in the \$1-to-\$3 range, and they consist largely of toys. This year’s trinket harvest yielded a Toys (as in the movie) puzzle, glow sticks, Donald Duck stickers, fake tattoos, miniature plastic animals, toy dinosaurs, etc. For a group of 50 student, I usually spend no more than \$100 of the allocation I receive for my course.

Then, when I want to run the Trading Game in the wake of teaching students about how trade can make everyone better off in context of chapter 1 of Mankiw’s Principles of Microeconomics, I go around allocating trinkets to students at random.

I then ask students to assign a value to the trinket they have just received ranging from 0 to 10, with higher values meaning cooler trinkets.

We then go around the room recording those values. Because students often bring their laptops to lecture, it is easy to find a volunteer to record those values, but you can have a teaching assistant do it. Once all values are recorded, total welfare (i.e., the sum total of the values students assign to their trinkets) is announced.

I then tell students that they have five minutes to trade voluntarily between themselves, insisting on the fact that trades must be voluntary (i.e., no stealing) and cannot involve dynamic aspects, or credit (i.e., no “I’ll give you my cool dinosaur if you give me your awful trinket and you buy drinks on Friday night.”)

Once students are done trading, we once again go around the room recording the values they assign to their trinkets. Once all values are recorded, total welfare is announced once again.

And that’s usually where the magic happens. When I ran the Trading Game last week, my class’ “aggregate welfare” went from 128 to about 180, if I recall correctly, and you could just see that it had become obvious to students that (in this context of well enforced property rights) trade not only left no one worse off, but it increased aggregate welfare.

If I’d wanted to do things more convincingly, I would’ve asked the student who recorded values in a spreadsheet to test whether the two values were statistically different from one another.

I cannot take credit for the Trading Game, as I first learned about it in 1999, when I played it at a colloquium for student leaders organized by a Canadian free-market think-tank (yes, those actually exist).

28
Aug 12

## How Can I Do Well in My Econ Course?

“I have studied a lot for this test, but I didn’t do well. How can I do better next time?”

This is a question I hear a lot. Because I teach the core undergraduate microeconomics course in a public policy school, where not all students like economics, it is a question I probably hear more often than my colleagues who teach microeconomics in an economics department.

Instead of saying the same thing over and over again to different students, I thought I should write down my thoughts about how one can maximize the chances one will do well in one’s core economics classes (e.g., micro, macro, or econometrics). You can download my handout on the topic here: How to (Maximize the Likelihood That You Will) Do Well in Your Economics Class.

08
May 12

## As You Sow, So Shall You Reap: The Welfare Impacts of Contract Farming

My article on contract farming titled “As You Sow, So Shall You Reap: The Welfare Impacts of Contract Farming” is finally out in World Development. Here is the abstract:

Contract farming is widely perceived as a means of increasing welfare in developing countries. Because of smallholder self-selection in contract farming, however, it is not clear whether contract farming actually increases grower welfare. In an effort to improve upon existing estimates of the welfare impacts of contract farming, this paper uses the results of a contingent-valuation experiment to control for unobserved heterogeneity among smallholders. Using data across several regions, firms, and crops in Madagascar, results indicate that a 1-percent increase in the likelihood of participating in contract farming is associated with a 0.5-percent increase in household income, among other positive impacts.

If I had to summarize the paper’s contribution informally, I’d say the estimates it presents of the welfare impacts of contract farming have better internal and external validity than those found in previous studies.

Click here for an ungated, older version (link opens a .pdf document), but note that the results in the ungated version had not undergone peer review, so they are not as solid.

13
Mar 12

## Do Food Prices Track Oil Prices?

Not necessarily, argues Kay McDonald on the basis of a recent OECD report:

While it is partly true in the industrial agricultural system that “food equals oil,” there are many other factors which affect food prices, including the definition of “food” used in making the comparison. Below, I’ve listed some of them.

• The dollar’s value compared to currencies of other food exporting and importing nations.
• Supply and demand.
• Amount of food used for biofuel production.
• Available infrastructure in transport and storage of food.
• The price of natural gas.
• Economic health of each nation.
• The amount of global meat consumption.
• Weather.
• Population growth.
• The percent of food wasted.
• Transport prices (not always the same as oil prices, as, for example, currently we have excess bulk shipping capacity which has lowered shipping rates).
• Government Ag policies and price support programs.
• Geopolitics.

In her post, Kay also discusses how the OECD report finds no support for the claim that food price volatility has increased  significantly over the last few years when compared to the last 50 years.

More generally, if you have any interest in food policy, Kay’s blog, Big Picture Agriculture, is a must-follow.

07
Mar 12

## Spring Break Classic Posts: Pretending to Be Poor

(It’s Spring Break here this week, so I am taking the week off from blogging to work to revise a few articles and begin working on new research projects. As a result, I am re-posting old posts that some new readers might have missed but which were very popular the first time I posted them. The following was initially posted on September 8, 2011.)

This is the title of a new paper in Economic Development and Cultural Change by Jean-Marie Baland, Catherine Guirkinger, and Charlotte Mali. Because EDCC does not publish abstracts, here is the abstract of a previous version:

“From ﬁeld observations of credit cooperatives in Cameroon, we ﬁnd that a substantial number of members take loans that are fully collateralized by savings they held in the same institutions. 20% of the loans observed fall into this category. The price paid in terms of net interest payments is not negligible as it represents 13% of the amount borrowed. As traditional arguments such as credit rating or time inconsistent preferences cannot explain such behavior in our speciﬁc setting, we propose a new rationale based on in-depth interviews with members of the cooperatives. Those interviews indicate that some members systematically use credit as a way to pretend that they are too poor to have available savings. By doing so, they can successfully oppose request for ﬁnancial help from friends and relatives. We develop a signaling model to analyze the conditions under which this behavior is an equilibrium outcome.” Continue reading →