Knowledge that Transforms

In Poor Economics, Abhijit Banerjee and Esther Duflo eschew grand theorizing about poverty reduction in favor of an approach in which intelligently designed and tested small interventions, based on a scientific understanding of the lives of the poor, marginally improve their welfare. In so doing, they describe the findings from the recent large literature describing the behavior and institutions of the poor and the consequences of policy and experimental interventions targeted to poverty populations. In this review, I assess whether “thinking small” with its associated policy regime of transfers, subsidies, and nudges, is both a practical and effective policy prescription for “fighting” poverty and whether the set of studies that have focused on populations that have not escaped poverty has improved our fundamental understanding of both the consequences and causes of poverty. (JEL I32, I38, O15)

The Mirrlees Review is an ambitious and comprehensive analysis of the British tax system with detailed recommendations for reform. This review essay focuses on those issues that are also likely to be of interest to an American reader. The Review has the technical sophistication that readers would expect from a team of ten economists, chaired by James Mirrlees, the distinguished theorist who received the Nobel Prize for his contributions to the theory of optimal taxation. But it is written for a broader audience, explaining concepts like deadweight loss and the elasticity of tax revenue with respect to tax rates and doing so without any mathematics. (JEL D64, E21, E62, H24, H25)

The publication of Daniel Kahneman's book, Thinking, Fast and Slow, is a major intellectual event. The book summarizes, but also integrates, the research that Kahneman has done over the past forty years, beginning with his path-breaking work with the late Amos Tversky. The broad theme of this research is that human beings are intuitive thinkers and that human intuition is imperfect, with the result that judgments and choices often deviate substantially from the predictions of normative statistical and economic models. In this review, I discuss some broad ideas and themes of the book, describe some economic applications, and suggest future directions for research that the book points to, especially in decision theory. (JEL A12, D03, D80, D87)

Abhijit Banerjee and Esther Duflo offer a coherent vision for an economics of poverty and antipoverty policy. Their economics is grounded in an effort to understand the economic and psychological complexities in the lives of poor people, informed by social experiments and field observations. Their preferred policies entail small reforms at the margin, also informed by experiments—specifically randomized control trials. While the book provides some interesting insights, I question how far its approach will get us in fighting global poverty. (JEL I32, I38, O15, P36)

In the United States, health care technology has contributed to rising survival rates, yet health care spending relative to GDP has also grown more rapidly than in any other country. We develop a model of patient demand and supplier behavior to explain these parallel trends in technology growth and cost growth. We show that health care productivity depends on the heterogeneity of treatment effects across patients, the shape of the health production function, and the cost structure of procedures such as MRIs with high fixed costs and low marginal costs. The model implies a typology of medical technology productivity: (I) highly cost-effective “home run” innovations with little chance of overuse, such as anti-retroviral therapy for HIV, (II) treatments highly effective for some but not for all (e.g., stents), and (III) “gray area” treatments with uncertain clinical value such as ICU days among chronically ill patients. Not surprisingly, countries adopting Category I and effective Category II treatments gain the greatest health improvements, while countries adopting ineffective Category II and Category III treatments experience the most rapid cost growth. Ultimately, economic and political resistance in the United States to ever-rising tax rates will likely slow cost growth, with uncertain effects on technology growth. (JEL H51, I11, I18, O31)

All economists should be conversant with “what happened?” during the financial crisis of 2007–09. We select and summarize sixteen documents, including academic papers and reports from regulatory and international agencies. This reading list covers the key facts and mechanisms in the build-up of risk, the panics in short-term-debt markets, the policy reactions, and the real effects of the financial crisis. (JEL E32, E44, E52, G01, G21, G28)

A new meta-field of “forensic economics” has begun to emerge, uncovering evidence of hidden behavior in a variety of domains. Examples include teachers cheating on exams, road builders skimping on materials, violations of U.N. sanctions, unnecessary heart surgeries, and racial biases in employment decisions, traffic stops, auto retailing, and even sports judging. In each case, part of the contribution of economic analysis is in uncovering evidence of wrongdoing. Although research questions differ, forensic economic work shares commonalities in approaches and limitations. This article seeks to draw out the common threads, with the hope of stimulating further research across fields. (JEL K13)

This paper reports some of the recent developments in the econometric analysis of semimartingales estimated using high frequency financial returns. It describes a simple yet powerful methodology to decompose asset returns sampled at high frequency into their base components (continuous, small jumps, large jumps), determine the relative magnitude of the components, and analyze the finer characteristics of these components such as the degree of activity of the jumps. We incorporate to effect of market microstructure noise on the test statistics, apply the methodology to high frequency individual stock returns, transactions and quotes, stock index returns and compare the qualitative features of the estimated process for these different data and discuss the economic implications of the results.(JEL C58, G12, G13)

Financial advice could play an essential role in well-functioning markets for retail financial products, given that many consumers find it difficult to evaluate the complex products on offer. However, conflicts of interest, which are pervasive in some parts of the industry, can turn advice into a curse rather than a blessing for consumers, especially when consumers are not sufficiently wary. Through a simple model of financial advice, we overview the pros and cons of various policy interventions, such as imposing mandatory disclosure, banning commissions, and regulating contract cancellation terms. (JEL D14, D18, G21, G28)

The recent financial crisis has generated many distinct perspectives from various quarters. In this article, I review a diverse set of twenty-one books on the crisis, eleven written by academics, and ten written by journalists and one former Treasury Secretary. No single narrative emerges from this broad and often contradictory collection of interpretations, but the sheer variety of conclusions is informative, and underscores the desperate need for the economics profession to establish a single set of facts from which more accurate inferences and narratives can be constructed. (JEL E32, E44, E52, G01, G21, G28)