- Home
- A-Z Publications
- Annual Review of Economics
- Previous Issues
- Volume 5, 2013
Annual Review of Economics - Volume 5, 2013
Volume 5, 2013
-
-
Early-Life Health and Adult Circumstance in Developing Countries
Janet Currie, and Tom VoglVol. 5 (2013), pp. 1–36More LessA growing literature documents the links between long-term outcomes and health in the fetal period, infancy, and early childhood. Much of this literature focuses on rich countries, but researchers are increasingly taking advantage of new sources of data and identification to study the long reach of childhood health in developing countries. Health in early life may be a more significant determinant of adult outcomes in these countries because health insults are more frequent, the capacity to remediate is more limited, and multiple shocks may interact. However, the underlying relationships may also be more difficult to measure, given significant mortality selection. We survey recent evidence on the adult correlates of early-life health and the long-term effects of shocks resulting from disease, famine, malnutrition, pollution, and war.
-
-
-
Fetal Origins and Parental Responses
Vol. 5 (2013), pp. 37–56More LessHow do parental investments respond to health endowments at birth? Recent studies have combined insights from an earlier theoretical literature on household resource allocation with improved identification strategies to capture causal effects of early life health shocks. We describe empirical challenges in identifying behavioral responses and how recent studies have sought to address these. We then discuss the emerging literature on dynamic complementarities in parental investments arising from the staged, developmental nature of capability production and how capabilities may have multiple dimensions. The bulk of the empirical evidence to date suggests that parental investments reinforce initial endowment differences.
-
-
-
Quantile Models with Endogeneity
V. Chernozhukov, and C. HansenVol. 5 (2013), pp. 57–81More LessIn this article, we review quantile models with endogeneity. We focus on models that achieve identification through the use of instrumental variables and discuss conditions under which partial and point identification are obtained. We discuss key conditions, which include monotonicity and full-rank-type conditions, in detail. In providing this review, we update the identification results of Chernozhukov & Hansen (2005). We illustrate the modeling assumptions through economically motivated examples. We also briefly review the literature on estimation and inference.
-
-
-
Deterrence: A Review of the Evidence by a Criminologist for Economists
Vol. 5 (2013), pp. 83–105More LessThis article reviews the evidence on the deterrent effect of police, imprisonment, and capital punishment and additionally summarizes knowledge of sanction risk perceptions. Studies of changes in police presence, whether achieved by changes in police numbers or in their strategic deployment, consistently find evidence of deterrent effects. Studies of the deterrent effect of increases in already long prison sentences find at most a modest deterrent effect. Studies of the deterrent effect of capital punishment provide no useful information on the topic. Four high-priority areas for future research are identified: developing and testing an integrated model of the effects of the threat and experience of punishment, measuring perceptions of sanction regimes, developing and testing a theory of criminal opportunities, and estimating the deterrent effect of shorter prison sentences and identifying high-deterrence policies.
-
-
-
Econometric Analysis of Games with Multiple Equilibria
Vol. 5 (2013), pp. 107–131More LessThis article reviews the recent literature on the econometric analysis of games in which multiple solutions are possible. Multiplicity does not necessarily preclude the estimation of a particular model (and, in certain cases, even improves its identification), but ignoring it can lead to misspecifications. The review starts with a general characterization of structural models that highlights how multiplicity affects the classical paradigm. Because the information structure is an important guide to identification and estimation strategies, I discuss games of complete and incomplete information separately. Although many of the techniques discussed here can be transported across different information environments, some are specific to particular models. Models of social interactions are also surveyed. I close with a brief discussion of postestimation issues and research prospects.
-
-
-
Price Rigidity: Microeconomic Evidence and Macroeconomic Implications
Vol. 5 (2013), pp. 133–163More LessWe review recent evidence on price rigidity from the macroeconomics literature and discuss how this evidence is used to inform macroeconomic modeling. Sluggish price adjustment is a leading explanation for the large effects of demand shocks on output and, in particular, the effects of monetary policy on output. A recent influx of data on individual prices has greatly deepened macroeconomists’ understanding of individual price dynamics. However, the analysis of these new data raises a host of new empirical issues that have not traditionally been confronted by parsimonious macroeconomic models of price setting. Simple statistics such as the frequency of price change may be misleading guides to the flexibility of the aggregate price level in a setting in which temporary sales, product churning, cross-sectional heterogeneity, and large idiosyncratic price movements play an important role. We discuss empirical evidence on these and other important features of micro price adjustment and ask how they affect the sluggishness of aggregate price adjustment and the economy’s response to demand shocks.
-
-
-
Immigration and Production Technology
Vol. 5 (2013), pp. 165–191More LessResearch on the labor market impact of immigration typically relies on a single-good model of production with separable capital. This article discusses theory and evidence that suggest that this standard model is too simple to capture the long-run labor market impact of immigration. A level of capital-skill complementarity supported in studies both involving and not involving immigration alone reduces the relative wage impact of immigration by 40% compared to simulations with separable capital. Other models in which the production structure responds to skill-mix changes, including models with endogenous choice of technique, directed technical change, or human capital spillovers, also imply that the long-run impact of immigration on wages is smaller than predicted by the standard model. This article discusses new research that tries to credibly evaluate such models using immigration-induced variation in the skill mix, an approach with further potential, and evidence that immigration impacts innovation and firm formation.
-
-
-
The Multinational Firm
Vol. 5 (2013), pp. 193–217More LessThis article documents the recent advances in the international trade literature toward understanding the role of multinational firms in the conduct of international commerce. Over the past 10 years, we have developed a better understanding of the incentives firms face in their choice of production location, and we know more about the incentives that induce firms to vertically integrate. Furthermore, the theory literature has progressed from two-country models that cannot capture the richness of multinational firms’ activities to multicountry models that do. The empirics have advanced as well but at a slower pace. Progress has been slowed by the lack of comprehensive data and the difficulties of distinguishing between the various mechanisms proposed by theory.
-
-
-
Heterogeneity in the Dynamics of Labor Earnings
Vol. 5 (2013), pp. 219–245More LessIn this article, we survey the literature on individual earnings dynamics with a particular focus on allowing for pervasive heterogeneity across individuals. We structure the discussion around ARMA processes with nonlinear trends for each individual. We show that allowing for pervasive and codependent heterogeneity in individual parameters has a major impact on econometric modeling, estimation, and substantive conclusions. We describe an econometric method that is suitable for models with pervasive heterogeneity. We develop a long list of statistics that describe any earnings panel in great detail and provide a demanding set of features of the data for fitting. This list encompasses most moments used in the literature and provides novel statistics based on individual regressions. Finally, we present an empirical illustration using a long Danish panel. Based on this, we provide some conclusions concerning earnings dynamics but emphasize that details will vary according to the sample.
-
-
-
Empirical Research on Sovereign Debt and Default
Vol. 5 (2013), pp. 247–272More LessIn this article, we review the empirical literature about sovereign debt and default. As we survey the work of economists, historians, and political scientists, we also emphasize parallel developments by theorists and recommend steps to improve the correspondence between theory and data.
-
-
-
Measuring Inflation Expectations
Vol. 5 (2013), pp. 273–301More LessTo conduct monetary policy, central banks around the world increasingly rely on measures of public inflation expectations. In this article, we review findings from an ongoing initiative at the Federal Reserve Bank of New York aimed at improving the measurement and our understanding of household inflation expectations through surveys. We discuss the importance of question wording and the usefulness of new questions to elicit an individual’s distribution of inflation beliefs. We present evidence suggesting that consumers update their inflation expectations in response to new information and that information dissemination may lead to more informed and reliable reporting of inflation expectations. Finally, we report on a financially incentivized experiment suggesting that expectations surveys are informative and that respondents generally act on their stated beliefs in a way consistent with expected utility theory.
-
-
-
Macroeconomic Analysis Without the Rational Expectations Hypothesis
Vol. 5 (2013), pp. 303–346More LessThe article presents a temporary equilibrium framework for macroeconomic analysis that allows for a wide range of possible specifications of expectations but reduces to a standard new Keynesian model in the limiting case of rational expectations. This common framework is then used to contrast the assumptions and implications of several different ways of relaxing the assumption of rational expectations. As an illustration of the method, the implications of alternative assumptions for the selection of a monetary policy rule are discussed. Other issues treated include the conditions required for Ricardian equivalence and for existence of a deflation trap.
-
-
-
Financial Literacy, Financial Education, and Economic Outcomes
Vol. 5 (2013), pp. 347–373More LessIn this article, we review the literature on financial literacy, financial education, and consumer financial outcomes. We consider how financial literacy is measured in the current literature and examine how well the existing literature addresses whether financial education improves financial literacy or personal financial outcomes. We discuss the extent to which a competitive market provides incentives for firms to educate consumers or to offer products that facilitate informed choice. We review the literature on alternative policies to improve financial outcomes and compare the evidence with that on the efficacy and cost of financial education. Finally, we discuss directions for future research.
-
-
-
The Great Trade Collapse
Vol. 5 (2013), pp. 375–400More LessWe survey recent literature on the causes of the collapse in international trade during the 2008–2009 global recession. We argue that the evidence points to the collapse in aggregate expenditure, concentrated on trade-intensive durable goods, as the main driver of the trade collapse. Inventory adjustment likely amplified the impact of these expenditure changes on trade. In addition, shocks to credit supply constrained export supply, further exacerbating the decline in trade. Most evidence suggests that changes in trade policy did not play a large role. We conclude that one benefit of the trade collapse is that it has stimulated research in neglected areas at the intersection of trade and macroeconomics.
-
-
-
Biological Measures of Economic History
Vol. 5 (2013), pp. 401–423More LessThis review discusses the methodology and some findings underlying four types of biological measures used by economic historians: mortality rates, stature, body mass index, and skeletal remains. Economic historians examine a variety of sources to learn when, why, and where modern industrial societies became rich and healthy. Monetary measures, such as income and wages, are highly desirable but usually unavailable to cover the time periods and countries over which modern societies evolved. Donning interdisciplinary lenses, these historians search archives, libraries, and archaeological sources for scraps of information, often assembled for other purposes, to construct a story of the evolution of humanity’s well-being. Biological measures have the advantage of comparability across time and culture; life expectancy, for example, means about the same today as in ancient Egypt, but the same cannot be said for the purchasing power of income, wages, or wealth.
-
-
-
Goals, Methods, and Progress in Neuroeconomics
Vol. 5 (2013), pp. 425–455More LessNeuroeconomics shares the main goals of microeconomics: to understand what causes choices, and the welfare properties of choice. The novel goal is linking mathematical constructs and observable behavior to mechanistic details of neural circuitry. Several complementary methods are used. An initial insight from neuroscience is that distinct systems guide choice: Pavlovian and instrumental conditioning (learning) of state-value and response-value associations, overlearned habits, and model- (or goal-) directed value that requires deliberation. These systems can differ economically from rational choice—for example, habitual choices have low utility and price elasticities, whereas model-directed values are often constructed preferences. Neuroeconomics also provides evidence of situations in which utility maximization either works well (in simple binary choice) or benefits from the introduction of behavioral constructs. Neuroeconomics is well equipped to guide the theory of how choices depend on mental states, such as fear or cognitive load. Examples include extensive studies of risk and time preference, finance, and neural decoding of private information.
-
-
-
Nonparametric Identification in Structural Economic Models
Vol. 5 (2013), pp. 457–486More LessStructural economic models allow one to analyze counterfactuals when economic systems change and to evaluate the well-being of economic agents. A key element in such analysis is the ability to identify the primitive functions and distributions of the economic models that are employed to describe the economic phenomena under study. Recent developments have provided ways to achieve identification of these primitive functions and distributions without imposing parametric restrictions. In this article, I consider a small set of stylized models and provide insight into some of the approaches that have been taken to develop nonparametric identification results in those models.
-
-
-
Microcredit Under the Microscope: What Have We Learned in the Past Two Decades, and What Do We Need to Know?
Vol. 5 (2013), pp. 487–519More LessResearch on microcredit is now two decades old. There has been enormous progress in understanding both what microcredit does and how. Yet a lot of what we have learned has raised new and often quite fundamental questions about its nature: Is microcredit primarily about investment, consumption, or savings? Why is it that the investments financed by microcredit do not always lead to income growth, and does this have to do with the structure of microlending? What are the roles of social capital, reputation, and group lending? This article attempts to take stock of this significant body of work and tries to identify the most important questions for future research.
-
-
-
Trust and Growth
Yann Algan, and Pierre CahucVol. 5 (2013), pp. 521–549More LessThis article surveys recent research on the relationship between trust and growth. It documents the strong international and interregional heterogeneity of trust. The theoretical mechanisms that explain the influence of trust on economic performance and the empirical methods used to identify the causal impact of trust on economic performance are reviewed.
-