[ECON4284] Tutorial 3

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Defending Radiation by Eating Salt

Defending Radiation by Eating Salt

Yesterday my friend, who is now an exchange student, spent one euro in printing his e-ticket at an Airbnb. He told me that he was taking Ryanair, the staff might not allow him to take the flight without the e-ticket, or paying ten euro in priniting the e-ticket at the airport. Finally, Ryanair did not require passenger to show their e-ticket on that flight. He was very happy as he told me that he was rational in economics sense. He told me that if he did not print the e-ticket at Airbnb and if he is required to show it, he might lose ten euro. The cost of priniting at Airbnb is smaller than expected codt of priniting at the airport. 

This event leads me to think about the earthquake in Fukashima in 2011. Due to the earthquake, the nuclear power plant exploded. There was rumor that taking salt can prevent radiation absorbed into human bodies. As a result, demand for salt surged. Price of 100g salt even rose to $40 per 100g (normally it costs $5 for 100g unless you are buying luxurious salts). Many people claimed that the people rushed to buy salt were insane and brainless. However, was this really irrational? 

Giving price of salt is $50, cost of curing cancer is infinity. Even if there were negligible probability that salts are useful, the expected cost saved is still much lower than you cost of a pack of salt. Due to the love towards family, many housewives rushed to buy salts in crowd and dirt markets. This action was completely rational. 

At the end, my friend asked me, “Wilson, am I right? Am I smart?”. I replied, “You are right, however you are stupid.” He was angry and asked me if I were him, what would I do. And I told him, “I would of course print the e-ticket at school’s computer barn.”

Crimes and Interest Rate (Part 2)

Crimes and Interest Rate (Part 2)

I have collected the data of real interest rate and crimes rate in the US from year 1968 to 2014. Crimes rate is defined as number of crimes per 100,000 population, thus effect of population growth in crimes number is considered. Before looking at econometrics analysis, let first take a look of the correlation coefficient between interest rate and crimes rate.

Correlation coefficient between real interest rate to 

Murder: 0.78

Rape: 0.37

Robbery: 0.17

Aggravated assault: -0.39

Burglary: 0.87

Larceny-theft: 0.70

Motor vehicle theft: 0.57

Data shows that there is a positive relation between real interest rate and crime rate. Moreover, the correlation between real interest rate and property crimes (the bottom three) is higher than the correlation between real interest rate and violent crimes (the top four). This shows that maybe impatient people just want to have earlier consumption rather than hurting others. 

However, can we conclude that higher interest rate leads to higher crime rate? Surely no unless we can control the effect of all other variables that affecting crime rate, including GDP, unemployment rate, Gini coefficient, etc. Therefore, to investigate the casuality, we have to conduct sophisticated econometrics technique in order to isolate the effect of interest rate from all other variables. 

I have calculated the first difference of interest rate and crime rate, and conducted the HP filter to the data. As a result, I can isolate the effect of the change in interest rate on change in crime rate. The followings are the effect of one percent increase in real interest rate of crime rate, parenthess is the t-statistics:

 

Murder: 2.46 (2.893)

Rape: 4.05 (3.695)

Robbery: 5.86 (6.271)

Aggravated assault: 3.00 (3.805)

Burglary: 4.01 (5.072)

Larceny-theft: 3.30 (5.043)

Motor vehicle theft: 1.85 (1.96)

The regression result shows that an increase in real interest rate will cause a higher crime rate, and the coefficients are all statistically significant. One percent increase in interest rate result in 2.46% increase in murder, 4.05% increase in rape, 5.86% increase in robbery, etc...

Therefore, data confirm that higher interest rate result in a higher crime rates.