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Annual Review of Economics - Early Publication
Reviews in Advance appear online ahead of the full published volume. View expected publication dates for upcoming volumes.
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A Practical Guide to Weak Instruments
First published online: 26 April 2024More LessWe survey the weak instrumental variables (IV) literature with the aim of giving simple advice to applied researchers. This literature focuses heavily on the problem of size inflation in two-stage least squares (2SLS) two-tailed t-tests that arises if instruments are weak. A common standard for acceptable instrument strength is a first-stage F of 10, which renders this size inflation modest. However, 2SLS suffers from other important problems that exist at much higher levels of instrument strength. In particular, 2SLS standard errors tend to be artificially small in samples where the 2SLS estimate is close to ordinary least squares (OLS). This power asymmetry means the t-test has inflated power to detect false positive effects when the OLS bias is positive. The Anderson-Rubin (AR) test avoids this problem and should be used in lieu of the t-test even with strong instruments. We illustrate the practical importance of this issue in IV papers published in the American Economic Review from 2011 to 2023. Use of the AR test often reverses t-test results. In particular, IV estimates that are close to OLS and significant according to the t-test are often insignificant according to AR. We also show that for first-stage F in the 10–20 range there is a high probability that OLS estimates will be closer to the truth than 2SLS. Hence we advocate a higher standard of instrument strength in applied work.
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Automation: Theory, Evidence, and Outlook
First published online: 25 April 2024More LessThis article reviews the literature on automation and its impact on labor markets, wages, factor shares, and productivity. I first introduce the task model and explain why this framework offers a compelling way to think about recent labor market trends and the effects of automation technologies. The task model clarifies that automation technologies operate by substituting capital for labor in a widening range of tasks. This substitution reduces costs, creating a positive productivity effect, but it also reduces employment opportunities for workers displaced from automated tasks, creating a negative displacement effect. I survey the empirical literature and conclude that there is wide qualitative support for the implications of task models and the displacement effects of automation. I conclude by discussing shortcomings of the existing literature and avenues for future research.
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Experiments About Institutions
First published online: 25 April 2024More LessInstitutions are a key determinant of economic growth, but the critical junctures in which institutions can change are not precisely defined. For example, such junctures are often identified ex post, raising several methodological problems: a selection on the outcome of institutional change; an inability to study beliefs, which are central to coordination and thus the process of institutional change; and an inability to conduct experiments to identify causal effects. We argue that critical junctures are identifiable in real time as moments of deep uncertainty about future institutions. Consistent with this conception, the papers reviewed (a) examine changes to institutions, i.e., the fundamental rules of the game; (b) are real-time studies of plausible critical junctures; and (c) use field experiments to achieve causal identification. We also advocate for more systematic measurement of beliefs about future institutions to identify critical junctures as they happen and provide an empirical proof of concept. Such work is urgent given contemporary critical junctures arising from democratic backsliding, state fragility, climate change, and conflicts over the rights of the marginalized.
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Fertility in High-Income Countries: Trends, Patterns, Determinants, and Consequences
First published online: 17 April 2024More LessHigh-income countries have generally experienced falling fertility in recent decades. In most of these countries, the total fertility rate is now below the level that implies a stable population in the long run. This has led to concerns among economists, policymakers, and the wider public about the economic consequences of low fertility and population decline. In this contribution, we aim to (a) describe the main determinants of low fertility in high-income countries, (b) assess its potential economic consequences, (c) discuss adjustment mechanisms for individuals and economies, (d) propose a simple economic framework to analyze the long-run economic impact of low fertility, and (e) draw lessons for economic policymakers to react appropriately. While the economic challenges of low fertility are substantial, a thoughtful and consistent policy response can mitigate most of the adverse consequences.
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Industrial Policy and the Great Divergence
First published online: 09 April 2024More LessWe discuss recent work evaluating the role of the government in shaping the economy during the long nineteenth century, a practice we refer to as industrial policy. States deployed a vast variety of different policies aimed primarily, but not exclusively, at fostering industrialization. A thin but growing literature has started to evaluate the economic effects of these policies, but many questions remain open for study.
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