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- Volume 6, 2014
Annual Review of Economics - Volume 6, 2014
Volume 6, 2014
- Preface
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Probabilistic Expectations in Developing Countries
Vol. 6 (2014), pp. 1–20More LessMany decisions are made under uncertainty, and individuals are likely to form subjective expectations about the probabilities of events that are relevant to their decisions. I review here a recent and growing literature that uses probabilistic expectations elicited from survey respondents in developing countries. I first present an illustrative model of one particular decision under uncertainty—the choice of a college—to exemplify the importance of subjective expectations data for identification purposes. I then review existing evidence emphasizing that it is feasible to elicit probabilities from survey respondents in low-literacy settings and describe common patterns of answers. Finally, I describe existing applications, many of which seek to assess how expectations influence behavior, in various domains, including health, education, agricultural production, and migration.
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Ill-Posed Inverse Problems in Economics
Vol. 6 (2014), pp. 21–51More LessA parameter of an econometric model is identified if there is a one-to-one or many-to-one mapping from the population distribution of the available data to the parameter. Often, this mapping is obtained by inverting a mapping from the parameter to the population distribution. If the inverse mapping is discontinuous, then estimation of the parameter usually presents an ill-posed inverse problem. Such problems arise in many settings in economics and other fields in which the parameter of interest is a function. This article explains how ill-posedness arises and why it causes problems for estimation. The need to modify or regularize the identifying mapping is explained, and methods for regularization and estimation are discussed. Methods for forming confidence intervals and testing hypotheses are summarized. It is shown that a hypothesis test can be more precise in a certain sense than an estimator. An empirical example illustrates estimation in an ill-posed setting in economics.
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Financing Old Age Dependency
Vol. 6 (2014), pp. 53–76More LessBaby boomers are now retiring in large numbers, and most do not have enough assets of their own to finance retirement. Social insurance programs help baby boomers afford retirement, but these programs are substantially underfunded. Reforming these institutions earlier will produce fewer distortions than continued delays. Several options also exist for helping households prepare for their own retirement: improving financial literacy, more opt-out defaults, better guidance about the value of delaying retirement, better guidance about delaying the claiming of social security benefits, improved estimation of out-of-pocket medical costs, and understanding the incentives facing their financial advisors. Some of these options are likely to be more effective than others.
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Recent Developments in Empirical Likelihood and Related Methods
Vol. 6 (2014), pp. 77–102More LessThis article reviews a number of recent contributions to estimation and inference for models defined by moment condition restrictions. The particular emphasis is on the generalized empirical likelihood class of estimators as an alternative to the generalized method of moments. Estimation methods for parameters defined through moment restrictions and their properties are described with tests of overidentifying moment restrictions and parametric hypotheses. Computational issues are discussed together with some proposals for their amelioration. Higher-order and other properties are also addressed in some detail. Models specified by conditional moment restriction models are considered, and the adaptation of these methods to weakly dependent data is discussed.
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Belief Elicitation in the Laboratory
Vol. 6 (2014), pp. 103–128More LessOne constraint we face as economists is not being able to observe all the relevant variables required to test our theories or make policy prescriptions. Laboratory techniques allow us to convert many variables (such as beliefs) that are unobservable in the field into observables. This article presents a survey of the literature on belief elicitation in laboratory experimental economics. We discuss several techniques available to elicit beliefs in an incentive-compatible manner and the problems involved in their use. We then look at how successful these techniques have been when employed in laboratory studies. We find that despite some problems, beliefs elicited in the laboratory are meaningful (i.e., they are generally used as the basis for behavior), and the process of eliciting beliefs seems not to be too intrusive. One hope for the future is that by eliciting beliefs, we may be able to develop better theories of belief formation.
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Models of Caring, or Acting as if One Cared, About the Welfare of Others
Vol. 6 (2014), pp. 129–154More LessThis article surveys the theoretical literature in which people are modeled as taking other people’s payoffs into account either because this affects their utility directly or because they wish to impress others with their social-mindedness. Key experimental results that bear on the relevance of these theories are discussed as well. Five types of models are considered. In the first, an individual’s utility function is increasing in the payoffs of other people. The more standard version of these preferences supposes that only consumption leads to payoffs and has trouble explaining prosocial actions such as voting and charitable contributions by poor individuals. If one lets other variables determine happiness as well, this model can explain a much wider set of observations. The second type of model surveyed involves people trying to demonstrate to others that they have prosocial (or altruistic) preferences. In these models, altruistic acts need not have a direct effect on utility. The third class of models includes those of reciprocity in which people’s altruism depends on whether others act kindly or unkindly toward them. In the fourth type of model, inequality has a profound effect on altruism, with individuals being spiteful toward people whose resources exceed their own. Finally, I discuss the fifth type of model, in which specifications of altruism might have to be modified to take into account how people behave when they are able to transfer lotteries to others.
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Exchange Rate Stabilization and Welfare
Vol. 6 (2014), pp. 155–177More LessThis article considers recent literature on optimal monetary policy in simple open-economy models. The presence of pricing to market, incomplete financial markets, and differences in preferences among households (in different countries) introduces some fundamental differences between closed- and open-economy New Keynesian models. In addition to the goals of stabilizing inflation and the output gap, policy makers may target currency misalignments and global imbalances. Optimal policies may involve targeting the exchange rate both directly, because of currency misalignments, and indirectly, because of the effects of exchange rates on imbalances, inflation, and output gaps.
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Copulas in Econometrics
Vol. 6 (2014), pp. 179–200More LessCopulas are functions that describe the dependence between two or more random variables. This article provides a brief review of copula theory and two areas of economics in which copulas have played important roles: multivariate modeling and partial identification of parameters that depend on the joint distribution of two random variables with fixed or known marginal distributions. We focus on bivariate copulas but provide references on recent advances in constructing higher-dimensional copulas.
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Firm Performance in a Global Market
Vol. 6 (2014), pp. 201–227More LessIn this article, we introduce an empirical framework to analyze how firm performance is affected by increased globalization. Using this framework, we discuss recent work on measuring the impact of various shocks firms face in the global marketplace, such as reductions in trade costs (through lowering tariffs and abolishing quotas). Our analytical framework nests most empirical approaches to estimating the impact of trade and industrial policies on firms active in international markets. We identify outstanding issues surrounding the identification of the underlying mechanisms and conclude with suggestions for future research.
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Applications of Random Set Theory in Econometrics
Vol. 6 (2014), pp. 229–251More LessIn recent years, the econometrics literature has shown a growing interest in the study of partially identified models, in which the object of economic and statistical interest is a set rather than a point. The characterization of this set and the development of consistent estimators and inference procedures for it with desirable properties are the main goals of partial identification analysis. This review introduces the fundamental tools of the theory of random sets, which brings together elements of topology, convex geometry, and probability theory to develop a coherent mathematical framework to analyze random elements whose realizations are sets. It then elucidates how these tools have been fruitfully applied in econometrics to reach the goals of partial identification analysis.
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Experimental and Quasi-Experimental Analysis of Peer Effects: Two Steps Forward?
Vol. 6 (2014), pp. 253–272More LessIn the past 10 years, there has been an explosion of well-identified studies that measure peer effects across many settings and for many outcomes. The emphasis on natural experiments and randomization is a highly useful one; in more standard observational studies, the self-selection of people into peer groups can make the measurement of peer effects extremely difficult. In the absence of exogenous variation, knowing that people have similar outcomes as their friends, classmates, and coworkers may tell us little about peer effects. I examine the successes, failures, and findings of experimental analyses of peer effects. I draw three broad conclusions. First, even more than in other areas of social science, the size and nature of peer effects estimated are highly context specific; peer effects in student test scores and grades are prominent in some cases and absent in others. That said, there is a pattern across studies suggesting that social outcomes (e.g., crime, drinking behavior) and career choices show larger peer influences than do test scores. Second, researchers have shown that the linear-in-means model of peer effects is often not a good description of the world, although we do not yet have an agreed-upon model to replace it. Third, despite potential temptation, we have not reached the point at which we can reliably use knowledge of peer effects to implement policies that improve outcomes for students and other human subjects.
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Coordination of Expectations: The Eductive Stability Viewpoint
Vol. 6 (2014), pp. 273–298More LessThe eductive approach consists of finding solutions consistent with common knowledge of individual rationality and the model. An equilibrium is stable whenever it is the unique outcome consistent with these assumptions. This is a strong stability criterion as it relies on no assumption of prior knowledge of others’ expectations. This review presents various (in)stability results. It focuses on the following method: Rewrite the model as a temporary equilibrium map in which the current economic outcome is determined by expectations and characterize stability by contracting properties of this map. The main insight suggested by these results is due to Guesnerie (2002): Stability is obtained when the actual outcome is not very sensitive to expectations. Additional insights include that agents’ heterogeneity is a source of instability; the ability of prices to transmit information is limited by the quality of private information; and coordination when agents are infinitely lived is difficult because of the large effect of long-run expectations.
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From Sudden Stops to Fisherian Deflation: Quantitative Theory and Policy
Vol. 6 (2014), pp. 299–332More LessIn the 1990s, Sudden Stops in emerging markets were a harbinger of the 2008 global financial crisis. During these Sudden Stops, countries lost access to credit, which caused abrupt current account reversals, and suffered severe recessions. This article reviews a class of models that yield quantitative predictions consistent with these observations, based on an occasionally binding credit constraint that limits debt to a fraction of the market value of incomes or assets used as collateral. Sudden Stops are infrequent events nested within regular business cycles and occur in response to standard shocks after periods of expansion increase leverage ratios sufficiently. When this happens, the Fisherian debt-deflation mechanism is set in motion, as lower asset or goods prices tighten the constraint further, causing further deflation. This framework also embodies a pecuniary externality with important implications for macroprudential policy because agents do not internalize how current borrowing decisions affect collateral values during future financial crises.
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China’s Great Convergence and Beyond
Vol. 6 (2014), pp. 333–362More LessA recent wave of economic research has studied the transformation of China from a poor country in the 1970s to a middle-income economy today. Based on this literature, we discuss the factors driving China’s development process. We provide a historical account of China’s rise, fall, and resurgence. We then discuss the stylized facts associated with China’s growth process and review a comprehensive theory of its economic transition. Finally, we discuss China’s future. In particular, we review some recent studies about technological and politico-economic factors that may foster or hinder its future economic performance.
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Precocious Albion: A New Interpretation of the British Industrial Revolution
Vol. 6 (2014), pp. 363–389More LessMany explanations have been offered for the British Industrial Revolution. This article points to the importance of human capital (broadly defined) and the quality of the British labor force on the eve of the Industrial Revolution. It shows that in terms of both physical quality and mechanical skills, British workers around 1750 were at a much higher level than their continental counterparts. As a result, new inventions—no matter where they originated—were adopted earlier, faster, and on a larger scale in Britain than elsewhere. The gap in labor quality is consistent with the higher wages paid in eighteenth-century Britain. The causes for the higher labor quality are explored and found to be associated with a higher level of nutrition and better institutions, especially England’s Poor Law and the superior functioning of its apprenticeship system.
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Disclosure: Psychology Changes Everything
Vol. 6 (2014), pp. 391–419More LessWe review literature examining the effects of laws and regulations that require public disclosure of information. These requirements are most sensibly imposed in situations characterized by misaligned incentives and asymmetric information between, for example, a buyer and seller or an advisor and advisee. We review the economic literature relevant to such disclosure and then discuss how different psychological factors complicate, and in some cases radically change, the economic predictions. For example, limited attention, motivated attention, and biased assessments of probability on the part of information recipients can significantly diminish, or even reverse, the intended effects of disclosure requirements. In many cases, disclosure does not much affect the recipients of the information but does significantly affect the behavior of the providers, sometimes for the better and sometimes for the worse. We review research suggesting that simplified disclosure, standardized disclosure, vivid disclosure, and social comparison information can all be used to enhance the effectiveness of disclosure policies.
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Expectations in Experiments
Vol. 6 (2014), pp. 421–443More LessThe rational expectations hypothesis is one of the cornerstones of current economic theorizing. This review discusses a number of experiments that focus on expectation formation by human subjects in a number of learning-to-forecast experiments and analyzes the implications for the rational expectations hypothesis. In these experiments, most agents are rational in an operational sense, and their expectations coordinate quickly, but not necessarily on the rational expectations value. In several situations, the homogeneous rational expectations hypothesis of Lucas and Prescott poorly describes the expectational dynamics and is outperformed by other hypotheses. But even in those situations in which the hypothesis gives a good description, it is more likely that coordination on rational values is brought about by the institutional structure of the market rather than the rationality of the agents.
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Optimal Design of Funded Pension Schemes
Vol. 6 (2014), pp. 445–474More LessThis article reviews the literature on the optimal design and regulation of funded pension schemes. We first characterize optimal saving and investment over an individual’s life cycle. Within a stylized modeling framework, we explore optimal individual saving and investing behavior. Subsequently, various extensions of the model are considered, such as additional financial risk factors, stochastic human capital, and more elaborate individual preferences. We then turn to the literature on intergenerational risk sharing, which suggests that a long-lived entity such as a pension fund or the government can yield ex ante welfare gains by allowing nonoverlapping generations to trade risk. The scope for this type of intergenerational risk sharing, however, is limited by the ability to commit generations to the contract. These commitment problems raise concerns with respect to sustainability and intergenerational fairness. We explore the role of solvency regulations to address these concerns about intergenerational fairness and discontinuity risk.
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The Measurement of Household Consumption Expenditures
Vol. 6 (2014), pp. 475–501More LessHousehold-level data on consumer expenditures underpin a wide range of empirical research in modern economics, spanning micro- and macroeconomics. This research includes work on consumption and saving, on poverty and inequality, and on risk sharing and insurance. We review different ways in which such data can be collected or captured: traditional detailed budget surveys, less onerous survey procedures that might be included in more general surveys, and administrative or process data. We discuss the advantages and difficulties of each approach and suggest directions for future investigation.
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Empirical Revealed Preference
Ian Crawford, and Bram De RockVol. 6 (2014), pp. 503–524More LessThis article aims to provide an introduction to empirical revealed preference (RP) and an overview of the current state of the field. We hope to give a sense of how RP methods work and the types of questions they can address and to assess the strengths and drawbacks of the approach. After briefly recapping the basics of RP theory, we review and critically assess the literature in two main areas representing the principal fields in which recent research has made significant advances: broadening the scope of RP methods and dealing with empirical issues related to bringing RP to the data. We conclude with a discussion of some future directions.
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Quality of Primary Care in Low-Income Countries: Facts and Economics
Jishnu Das, and Jeffrey HammerVol. 6 (2014), pp. 525–553More LessNew research on the quality of care in public and private primary care facilities has significantly enriched our understanding of how health care is delivered in low- and middle-income countries. First, this article summarizes recent advances in the measurement of quality, distinguishing between measurements of provider knowledge and provider effort. Second, it looks at the determinants of practice quality variation in low-income settings, highlighting the limited role of structural constraints such as infrastructure, the supply of materials including drugs, and provider training—the mainstay of much of global health policy today. In contrast, practice quality variation is clearly linked to provider effort, an aspect of provider behavior that can be altered through a variety of means. Third, it provides a broad economic framework to interpret the findings. We look for evidence of specific market failures in the provision of primary care and emphasize that the key difficulty is (and always was) the transaction-specific nature of medical advice. Providers can do too much or too little (or both), and the extent of either depends on the specific patient and the specific disease. We document specific ways in which it is difficult for both consumers and governments to monitor every transaction to detect potentially errant behavior.
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The Endowment Effect
Vol. 6 (2014), pp. 555–579More LessThe endowment effect is among the best known findings in behavioral economics and has been used as evidence for theories of reference-dependent preferences and loss aversion. However, a recent literature has questioned the robustness of the effect in the laboratory, as well as its relevance in the field. In this review, we provide a summary of the evidence and describe recent theoretical developments that can potentially reconcile the different findings, with a focus on expectation-based reference points. We also survey recent work from psychology that provides either alternatives to or refinements of the usual loss-aversion explanation. We argue that loss aversion is still the leading paradigm for understanding the endowment effect, but given the rich psychology behind the effect, a version of the theory that encompasses multiple reference points may be required.
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Decentralization in Developing Economies
Vol. 6 (2014), pp. 581–604More LessStandard models of fiscal federalism suggest many benefits of decentralization in developing economies, and there has been a recent push toward decentralization around the world. However, developing countries presently still have less decentralization, particularly on the revenue side, than both developed countries today and the United States and Europe historically. We consider how the trade-offs associated with fiscal federalism apply in developing countries and discuss reasons for their relatively low levels of decentralization. We also consider additional features relevant to federalism in developing economies, such as the prevalence of nongovernmental organizations and the role of social incentives in policy design.
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Local Labor Markets and the Evolution of Inequality
Vol. 6 (2014), pp. 605–628More LessUS labor markets have experienced rising inequality over the past 30 years—as evidenced by an increased gap in wages earned by high-skill workers (e.g., college graduates) and low-skill workers (e.g., high school graduates). Empirical evidence documenting this evolution of inequality comes from studies that assess wage-education gradients at the national level. But of course people work in local labor markets that differ in important ways. We provide a theoretical framework for evaluating inequality changes when individuals work in local labor markets, and we give an empirical reassessment of inequality changes in light of the insights that emerge from our framework.
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People, Places, and Public Policy: Some Simple Welfare Economics of Local Economic Development Programs
Vol. 6 (2014), pp. 629–662More LessMost countries exhibit large and persistent geographical differences in wages, income, and unemployment rates. A growing class of place-based policies attempts to address these differences through public investments and subsidies that target disadvantaged neighborhoods, cities, or regions. Place-based policies have the potential to profoundly affect the location of economic activity, along with the wages, employment, and industry mix of communities. These programs are widespread in the United States and throughout the world but have only recently been studied closely by economists. We consider the following questions: Who benefits from place-based interventions? Do the national benefits outweigh the costs? What sorts of interventions are most likely to be effective? To study these questions, we develop a simple spatial equilibrium model designed to characterize the welfare effects of place-based policies on the local and the national economy. Using this model, we critically evaluate the economic rationales for place-based policies and assess the latest evidence on their effects. We conclude with some lessons for policy and directions for future research.
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Applying Insights from Behavioral Economics to Policy Design
Vol. 6 (2014), pp. 663–688More LessThe premise of this article is that an understanding of psychology and other social science disciplines can inform the effectiveness of the economic tools traditionally deployed in carrying out the functions of government, which include remedying market failures, redistributing income, and collecting tax revenue. An understanding of psychology can also lead to the development of different policy tools that better motivate desired behavior change or that are more cost-effective than traditional policy tools. The article outlines a framework for thinking about the psychology of behavior change in the context of market failures. It then describes the research on the effects of a variety of interventions rooted in an understanding of psychology that have policy-relevant applications. The article concludes by discussing how an understanding of psychology can also inform the use and design of traditional policy tools for behavior change, such as financial incentives.
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The Economics of Human Development and Social Mobility
Vol. 6 (2014), pp. 689–733More LessThis article distills and extends recent research on the economics of human development and social mobility. It summarizes the evidence from diverse literatures on the importance of early life conditions in shaping multiple life skills and the evidence on critical and sensitive investment periods for shaping different skills. It presents economic models that rationalize the evidence and unify the treatment effect and family influence literatures. The evidence on the empirical and policy importance of credit constraints in forming skills is examined. There is little support for the claim that untargeted income transfer policies to poor families significantly boost child outcomes. Mentoring, parenting, and attachment are essential features of successful families and interventions that shape skills at all stages of childhood. The next wave of family studies will better capture the active role of the emerging autonomous child in learning and responding to the actions of parents, mentors, and teachers.
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Firms, Misallocation, and Aggregate Productivity: A Review
Vol. 6 (2014), pp. 735–770More LessFirm heterogeneity and the allocation of resources across firms play a key role in determining aggregate productivity. Entry barriers and misallocation can substantially impact productivity, as evidenced in recent work. This article provides a unifying theoretical framework and a review of this literature.
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Endogenous Collateral Constraints and the Leverage Cycle
Vol. 6 (2014), pp. 771–799More LessWe review the theory of leverage developed in collateral equilibrium models with incomplete markets. We explain how leverage tends to boost asset prices and create bubbles. We show how leverage can be endogenously determined in equilibrium and how it depends on volatility. We describe the dynamic feedback properties of leverage, volatility, and asset prices, in what we call the leverage cycle, and show how it differs from a credit cycle. We also describe some cross-sectional implications of multiple leverage cycles, including contagion, flight to collateral, and swings in the issuance volume of the highest-quality debt.
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Teacher Effects and Teacher-Related Policies
Vol. 6 (2014), pp. 801–825More LessThe emergence of large longitudinal data sets linking students to teachers has led to rapid growth in the study of teacher effects on student outcomes by economists over the past decade. One large literature has documented wide variation in teacher effectiveness that is not well explained by observable student or teacher characteristics. A second literature has investigated how educational outcomes might be improved by leveraging teacher effectiveness through processes of recruitment, assignment, compensation, evaluation, promotion, and retention. These two lines of inquiry are closely tied; the first tells us about the importance of individual teachers, and the second tells us how this information can be used in policy and practice. We review the most recent findings in economics on the importance of teachers and on teacher-related policies aimed at improving educational production.
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Social Learning in Economics
Vol. 6 (2014), pp. 827–847More LessSocial learning is a rapidly growing field for empirical and theoretical research in economics. We encounter social learning in many economically important phenomena, such as the adoption of new products and technologies or job search in labor markets. We review the existing empirical and theoretical literatures and argue that they have evolved largely independently of each other. This suggests several directions for future research that can help bridge the gap between both literatures. For example, the theory literature has come up with several models of social learning, ranging from naïve DeGroot models to sophisticated Bayesian models whose assumptions and predictions need to be empirically tested. Alternatively, empiricists have often observed that social learning is more localized than existing theory models assume, and that information can decay along a transmission path. Incorporating these findings into our models might require theorists to look beyond asymptotic convergence in social learning.
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Rethinking Reciprocity
Vol. 6 (2014), pp. 849–874More LessReciprocal behavioral has been found to play a significant role in many economic domains, including labor supply, tax compliance, voting behavior, and fund-raising. What explains individuals’ tendency to respond to the kindness of others? Existing theories posit internal preferences for the welfare of others, inequality aversion, or utility from repaying others’ kindness. However, recent evidence on the determinants of (unilateral) sharing decisions suggests that external factors such as social pressure are equally important. So far, this second wave of social preference theories has had little spillover to two-sided reciprocity environments, in which one individual responds to the actions of another. We present a novel laboratory reciprocity experiment (the double-dictator game with sorting) and show that failure to account for external motives leads to a significant overestimation of internal motives such as fairness and altruism. The experimental data illustrate the importance of combining reduced-form and structural analyses to disentangle internal and external determinants of prosocial behavior.
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Institutions, Human Capital, and Development*
Vol. 6 (2014), pp. 875–912More LessIn this article, we revisit the relationship among institutions, human capital, and development. We argue that empirical models that treat institutions and human capital as exogenous are misspecified, both because of the usual omitted variable bias problems and because of differential measurement error in these variables, and that this misspecification is at the root of the very large returns of human capital, about four to five times greater than that implied by micro (Mincerian) estimates, found in the previous literature. Using cross-country and cross-regional regressions, we show that when we focus on historically determined differences in human capital and control for the effect of institutions, the impact of institutions on long-run development is robust, whereas the estimates of the effect of human capital are much diminished and become consistent with micro estimates. Using historical and cross-country regression evidence, we also show that there is no support for the view that differences in the human capital endowments of early European colonists have been a major factor in the subsequent institutional development of former colonies.
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Growth and the Smart State*
Vol. 6 (2014), pp. 913–926More LessAs countries develop, the main driver of economic growth shifts from imitation to innovation. These two sources of growth require different policies and institutions. In particular, in this article we argue that the transition from an imitation-based to an innovation-based economy calls the old welfare state model into question. It is not so much the size of the state that is at stake but rather its governance. What we need to foster economic growth in developed economies is not a reduced state but a strategic state, which acts as a catalyst using selective and properly governed support to the market-driven innovation process. This idea of a strategic state that targets its investments to maximize growth in the face of hard budget constraints departs both from the Keynesian view of a state sustaining growth through demand-driven policies and from the neoliberal view of a minimal state confined to its regalian functions.
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The Causes and Consequences of Development Clusters: State Capacity, Peace, and Income*
Vol. 6 (2014), pp. 927–949More LessThree important aspects of development—per capita income, state capabilities, and (the absence of) political violence—are correlated with each other at the country level. This article discusses the causes of such development clusters and highlights two explanations: common economic, political, and social drivers and complementarities (two-way positive feedbacks). It also draws out preliminary policy implications of these patterns of development and proposes topics for further research.
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Under the Thumb of History? Political Institutions and the Scope for Action*
Vol. 6 (2014), pp. 951–971More LessThis article discusses the two leading views of history and political institutions. For some scholars, institutions are mainly products of historical logic, whereas for others, accidents, leaders, and decisions have a significant impact. We argue that although there is clear evidence that history matters and has long-term effects, there are not enough data to help us distinguish between the two views. Faced with this uncertainty, what is a social scientist to do? We argue that given the possibility that policy decisions indeed make a difference, it makes sense to assume they do and to try to improve policy making.
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