Knowledge that Transforms

We demonstrate that aggregate employment and consumption can increase without a corresponding movement in productivity in a model with heterogeneous agents where the only aggregate disturbance is a productivity shock. The interaction between incomplete capital markets and indivisible labor results in a low employment-productivity correlation and creates a time-varying wedge between the marginal rate of substitution (for commodity consumption and hours) and productivity. Our results caution against viewing the measured wedge as an inefficiency due to a failure of labor-market clearing or as a fundamental driving force behind business cycles. (JEL D31, E32, J22, J24, J31)

An Estimate Dynamic Model of Entry, Exit, and Growth in Oligopoly Retail Markets by Victor Aguirregabiria, Pedro Mira and Hernan Roman. Published in volume 97, issue 2, pages 449-454 of American Economic Review, May 2007

Putnam defines social capital as “features of social organization, such as networks, norms and social trust that facilitate coordination and cooperation ” (Putnam 1995: 67). Social networks are typically associated with social trust and with norms that promote coordination and cooperation for mutual benefit. Strong ties between individuals, infused with norms of reciprocity and trust, are often thought to help cooperation among them. They would enable these groups and society as a whole to deal smoothly and effectively with multiple social and economic issue. Other authors have noted that, in different contexts, strongly bonded groups may have adverse consequences for others (such as Portes and Landolt (1996)) or for themselves (see for instance Akerlof (1976) or Basu (1986)). Based on our earlier work on risk sharing in groups and networks (Genicot and

The Spike at Benefit Exhaustion: Leaving the Unemployment System or Starting a New Job? by David Card, Raj Chetty and Andrea Weber. Published in volume 97, issue 2, pages 113-118 of American Economic Review, May 2007

If Exchange Rates are Random Walks, Then Almost Everything We Say About Monetary Policy is Wrong by Fernando Alvarez, Andrew Atkeson and Patrick J. Kehoe. Published in volume 97, issue 2, pages 339-345 of American Economic Review, May 2007

This essay examines the problem of inference within a rational expectations model from two perspectives: that of an econometrician and that of the economic agents within the model. The assumption of rational expectations has been and remains an important component to quantitative research. It endows economic decision makers with knowledge of the probability law implied by the economic model. As such, it is an equilibrium concept. Imposing rational expectations removed from consideration the need for separately specifying beliefs or subjective components of uncertainty. Thus, it simplified model specification and implied an array of testable implications that are different from those considered previously. It reframed policy analysis by questioning the effectiveness of policy levers that induce outcomes that differ systematically from individual beliefs.

Testing for Indeterminacy: An Application to U.S. Monetary Policy: Reply by Thomas A. Lubik and Frank Schorfheide. Published in volume 97, issue 1, pages 530-533 of American Economic Review, March 2007

Many individuals' choices and valuations involve a degree of uncertainty/imprecision. This paper reports an experiment designed to obtain some measure of imprecision and to examine the extent to which it can explain preference reversals of two opposite forms, one of which appears not to have been reported previously. The model of imprecision we examine not only predicts both patterns but also provides an account of earlier results that are otherwise not well explained. The results suggest that any successful descriptive theory of choice and valuation will need to allow in some way for the imprecision surrounding people's decisions. (JEL C91, D11, D81)

This paper estimates a general equilibrium model of school quality and household residential and school choice for economies with multiple public school districts and private (religious and nonsectarian) schools. The estimates, obtained through full-solution methods, are used to simulate two large-scale private school voucher programs in the Chicago metropolitan area: universal vouchers and vouchers restricted to nonsectarian schools. In the simulations, both programs increase private school enrollment and affect household residential choice. Under nonsectarian vouchers, however, private school enrollment expands less than under universal vouchers, and religious school enrollment declines for large nonsectarian vouchers. Fewer households benefit from nonsectarian vouchers. (JEL H75, I21, I22)

Paul Glimcher (2003) and Colin Camerer, George Loewenstein, and Drazen Prelec (2005) make powerful cases in favor of neuroeconomic research. Yet in their equally powerful defense of standard “Mindless Economics,” Faruk Gul and Wolfgang Pesendorfer (forthcoming) point to the profound language gap between the two contributing disciplines. For example, for an economist, risk aversion captures preferences among wealth lotteries. From the neuroscientific viewpoint, it is a broader concept related to fear responses and the amygdala. Furthermore, as economic models make no predictions concerning brain activity, neurological data can neither support nor refute these models. Rather than looking to connect such distinct abstractions, Gul and Pesendorfer (forthcoming) argue for explicit separation: “The requirement that economic theories simultaneously account for economic data and brain imaging data places an unreasonable burden on economic theories.” We share the conviction of Glimcher (2003) and Camerer, Loewenstein, and Prelec (2005) concerning the potential value of neuroeconomics, yet we believe that the field will live up to its potential only if a common conceptual language can be agreed upon. Hence, we face the Gul and Pesendorfer challenge head on by developing theories that simultaneously account for behavioral and brain imaging data. The principal innovation lies in our use of the decision theorists’ standard axiomatic methodology in this highly nonstandard setting. This removes any linguistic confusion by defining concepts directly in terms of their empirical counterparts. It also allows us to pinpoint how to design experiments directed to the central tenets of the theory, rather than to particular parametrizations. If these experimental tests reveal the theory to be wanting, then knowing which axiom is The Neuroeconomic Theory of Learning