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- Volume 11, 2019
Annual Review of Economics - Volume 11, 2019
Volume 11, 2019
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Using Randomized Controlled Trials to Estimate Long-Run Impacts in Development Economics
Vol. 11 (2019), pp. 523–561More LessWe assess evidence from randomized controlled trials (RCTs) on long-run economic productivity and living standards in poor countries. We first document that several studies estimate large positive long-run impacts, but that relatively few existing RCTs have been evaluated over the long run. We next present evidence from a systematic survey of existing RCTs, with a focus on cash transfer and child health programs, and show that a meaningful subset can realistically be evaluated for long-run effects. We discuss ways to bridge the gap between the burgeoning number of development RCTs and the limited number that have been followed up to date, including through new panel (longitudinal) data; improved participant tracking methods; alternative research designs; and access to administrative, remote sensing, and cell phone data. We conclude that the rise of development economics RCTs since roughly 2000 provides a novel opportunity to generate high-quality evidence on the long-run drivers of living standards.
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Is Education Consumption or Investment? Implications for School Competition
Vol. 11 (2019), pp. 563–589More LessMilton Friedman argued that giving parents freedom to choose schools would improve education. His argument was simple and compelling because it extended results from markets for consumer goods to education. We review the evidence, which yields surprisingly mixed results on Friedman's prediction. A key reason is that households often seem to choose schools based on their absolute achievement rather than their value added. We show that this can be rational in a model based on three ingredients that economists have highlighted since Friedman worked on the issue. First, education is an investment into human capital. Second, labor markets can feature wage premia: Individuals of a given skill level may receive higher wages if they match to more productive firms. Third, distance influences school choice and the placements that schools produce. These factors imply that choice alone is too crude a mechanism to ensure the effective provision of schooling.
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Productivity Measurement: Racing to Keep Up
Vol. 11 (2019), pp. 591–614More LessThis article provides a nontechnical review of the literature and issues related to the measurement of aggregate productivity. I begin with a discussion of productivity measures, their performance in recent decades, and key measurement puzzles that emerge from the data. The remainder of the review focuses on two important questions. First, how do we make more accurate the measures of prices used to deflate nominal output so as to win (or at least not lose) the race for economic measurement to keep up with a changing economy? I frame the issues and point to the most important and promising areas for further research. Second, what does or should GDP measure? I defend GDP as a valuable measure of production and offer suggestions for improving it. At the same time, I emphasize the importance of measuring economic welfare (well-being) and argue that GDP should be supplemented with a satellite account that measures economic welfare.
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History, Microdata, and Endogenous Growth
Ufuk Akcigit, and Tom NicholasVol. 11 (2019), pp. 615–633More LessThe study of economic growth is concerned with long-run changes, and therefore, historical data should be especially influential in informing the development of new theories. In this review, we draw on the recent literature to highlight areas in which study of history has played a particularly prominent role in improving our understanding of growth dynamics. Research at the intersection of historical data, theory, and empirics has the potential to reframe how we think about economic growth in much the same way that historical perspectives helped to shape the first generation of endogenous growth theories.
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Production Networks: A Primer
Vol. 11 (2019), pp. 635–663More LessThis article reviews the literature on production networks in macroeconomics. It presents the theoretical foundations for the role of input–output linkages as a shock propagation channel and as a mechanism for transforming microeconomic shocks into macroeconomic fluctuations. The article also provides a brief guide to the growing literature that explores these themes empirically and quantitatively.
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Economic Theories of Justice
Vol. 11 (2019), pp. 665–684More LessSocial justice considerations are incorporated into welfare economics via properties of the social welfare function and measures of individual utility. The ethical issues underlying various approaches are illustrated through intriguing paradoxes that have emerged in the literature. Such puzzles point to the tensions among certain important values (such as respecting preferences, giving priority to the worse off, personal responsibility, and informational simplicity) and suggest the relevant ways in which reasonable compromise can be sought. Welfare economics is now able to accommodate a large range of conceptions of justice, including utilitarianism and various forms of egalitarianism and libertarianism.
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Machine Learning Methods That Economists Should Know About
Vol. 11 (2019), pp. 685–725More LessWe discuss the relevance of the recent machine learning (ML) literature for economics and econometrics. First we discuss the differences in goals, methods, and settings between the ML literature and the traditional econometrics and statistics literatures. Then we discuss some specific methods from the ML literature that we view as important for empirical researchers in economics. These include supervised learning methods for regression and classification, unsupervised learning methods, and matrix completion methods. Finally, we highlight newly developed methods at the intersection of ML and econometrics that typically perform better than either off-the-shelf ML or more traditional econometric methods when applied to particular classes of problems, including causal inference for average treatment effects, optimal policy estimation, and estimation of the counterfactual effect of price changes in consumer choice models.
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Weak Instruments in Instrumental Variables Regression: Theory and Practice
Vol. 11 (2019), pp. 727–753More LessWhen instruments are weakly correlated with endogenous regressors, conventional methods for instrumental variables (IV) estimation and inference become unreliable. A large literature in econometrics has developed procedures for detecting weak instruments and constructing robust confidence sets, but many of the results in this literature are limited to settings with independent and homoskedastic data, while data encountered in practice frequently violate these assumptions. We review the literature on weak instruments in linear IV regression with an emphasis on results for nonhomoskedastic (heteroskedastic, serially correlated, or clustered) data. To assess the practical importance of weak instruments, we also report tabulations and simulations based on a survey of papers published in the American Economic Review from 2014 to 2018 that use IV. These results suggest that weak instruments remain an important issue for empirical practice, and that there are simple steps that researchers can take to better handle weak instruments in applications.
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Taking State-Capacity Research to the Field: Insights from Collaborations with Tax Authorities
Vol. 11 (2019), pp. 755–781More LessNo modern state can exist in the long term without effective taxation. Recent research emerging from close collaboration of academics with tax authorities has shed new light on how states can build such tax capacity. Using both randomized and natural experiments, these partnerships have not only opened access to new types of data but have also stimulated new perspectives and research questions. While much of research in public finance has historically assumed that a tax in the law is a tax that is collected, exciting new research takes an empirical look inside the black box of tax administration. It addresses issues ranging from the role of information and digitalization to taxpayer behavior or to the link between taxation and citizens’ relationship to the state. This article provides a brief overview of some of this research, as well as practical advice for those interested in implementing research in partnership with tax authorities or other large public entities.
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Free Movement, Open Borders, and the Global Gains from Labor Mobility
Vol. 11 (2019), pp. 783–808More LessStraightforward economic arguments point to the potential for large global output gains from the movement of labor from less to more productive locations. Yet the politics of receiving countries seems resistant, characterized rather by efforts to limit migration or to stop it altogether. In this article we examine the foundations of claims of large welfare gains through free mobility, studying implications of liberalizing migration for world welfare under a variety of models, paying attention not only to overall gains but also to how gains are distributed and reviewing attempts to quantify the benefits. We conclude by asking how far considerations beyond economics motivate keenness to impose restrictions on migration.
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Monetary Policy, Macroprudential Policy, and Financial Stability
Vol. 11 (2019), pp. 809–832More LessThis review reexamines from a theoretical perspective the role of monetary and macroprudential policies in addressing the build-up of risks in the financial system. We construct a stylized general equilibrium model in which the key friction comes from a moral hazard problem in firms’ financing that banks’ equity capital serves to ameliorate. Tight monetary policy is introduced by open market sales of government debt, and tight macroprudential policy by an increase in capital requirements. We show that both policies are useful, but macroprudential policy is more effective in fostering financial stability and leads to higher social welfare.
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Has Dynamic Programming Improved Decision Making?
Vol. 11 (2019), pp. 833–858More LessDynamic programming (DP) is a powerful tool for solving a wide class of sequential decision-making problems under uncertainty. In principle, it enables us to compute optimal decision rules that specify the best possible decision in any situation. This article reviews developments in DP and contrasts its revolutionary impact on economics, operations research, engineering, and artificial intelligence with the comparative paucity of its real-world applications to improve the decision making of individuals and firms. The fuzziness of many real-world decision problems and the difficulty in mathematically modeling them are key obstacles to a wider application of DP in real-world settings. Nevertheless, I discuss several success stories, and I conclude that DP offers substantial promise for improving decision making if we let go of the empirically untenable assumption of unbounded rationality and confront the challenging decision problems faced every day by individuals and firms.
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The International Monetary and Financial System
Vol. 11 (2019), pp. 859–893More LessInternational currencies fulfill different roles in the world economy, with important synergies across those roles. We explore the implications of currency hegemony for the external balance sheet of the United States, the process of international adjustment, and the predictability of the US dollar exchange rate. We emphasize the importance of international monetary spillovers and of the exorbitant privilege, and we analyze the emergence of a new Triffin dilemma.
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Universal Basic Income: Some Theoretical Aspects
Vol. 11 (2019), pp. 895–928More LessIn this article, we review the desirability and feasibility of a universal basic income (UBI) scheme from the theoretical point of view. We first discuss the possible theoretical justifications of UBI, contrasting the unconditionality of UBI with the many conditions that typically accompany other welfare policies. These justifications range from pure normative reasons to practical reasons due to the problem of screening beneficiaries and imperfections in institutions in charge of implementing tax and welfare policies. Next, we explore the conditions that determine the feasibility and size of a UBI. The broad picture that emerges from our review is that both normative and practical considerations make UBI easier to defend as a tool of poverty alleviation in developing countries than as a tool to achieve social justice in developed ones.
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Universal Basic Income in the United States and Advanced Countries
Vol. 11 (2019), pp. 929–958More LessWe discuss the potential role of universal basic incomes (UBIs) in advanced countries. A feature of advanced economies that distinguishes them from developing countries is the existence of well-developed, if often incomplete, safety nets. We develop a framework for describing transfer programs that is flexible enough to encompass most existing programs as well as UBIs, and we use this framework to compare various UBIs to the existing constellation of programs in the United States. A UBI would direct much larger shares of transfers to childless, nonelderly, nondisabled households than existing programs, and much more to middle-income rather than poor households. A UBI large enough to increase transfers to low-income families would be enormously expensive. We review the labor supply literature for evidence on the likely impacts of a UBI. We argue that the ongoing UBI pilot studies will do little to resolve the major outstanding questions.
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Universal Basic Income in the Developing World
Vol. 11 (2019), pp. 959–983More LessShould developing countries give all of their citizens enough money to live on? Interest in this idea has grown enormously in recent years, reflecting both positive results from a number of existing cash transfer programs and dissatisfaction with the perceived limitations of piecemeal, targeted approaches to reducing extreme poverty. We discuss what we know (and what we do not) about three questions: what recipients would likely do with the incremental income, whether this would unlock further economic growth, and whether giving the money to everyone (as opposed to targeting it) would be wise.
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