Knowledge that Transforms

The lead article in the inaugural issue of the AER examines the common property resource problem as applied to water in the Western United States.

This paper estimates the technological progress that has occurred since 1980 in the automobile industry and the trade-offs faced when choosing between fuel economy, weight, and engine power characteristics. The results suggest that if weight, horsepower, and torque were held at their 1980 levels, fuel economy could have increased by nearly 60 percent from 1980 to 2006. Once technological progress is considered, meeting the CAFE standards adopted in 2007 will require halting the trend in weight and engine power characteristics, but little more. In contrast, the standards recently announced by the new administration, while attainable, require nontrivial "downsizing.” JEL: L50, L60

The consumption growth beta of an investment strategy that goes long in high interest rate currencies and short in low interest rate currencies is large and significant. Consumption risk price differs significantly from zero, even after accounting for the sampling uncertainty introduced by the estimation of the consumption betas. The constant in the regression of average returns on consumption betas is not significant. Additionally, this investment strategy's consumption and market betas increase during recessions and times of crisis, when risk prices are high, implying that the unconditional betas understate its riskiness. JEL: C58, E21, F31, G11, G12

This paper uses newly available data on plant level regulatory status linked to the Census Longitudinal Business Database to measure the impact of changes in county level environmental regulations on plant and sector employment levels. Estimates from a variety of specifications suggest a strong connection between changes in environmental regulatory stringency and both employment growth and levels in the affected sectors. The preferred estimates suggest that changes in county level regulatory status due to the 1990 Clean Air Act Amendments reduced the size of the regulated sector by as much as 15 percent in the 10 years following the changes.

Under its health reform legislation, Massachusetts has achieved near universal insurance coverage, along with significant gains in health care access and affordability. This paper examines the impacts of health reform in Massachusetts on differences in coverage, access, and affordability for women and men. We find that both women and men gained under health reform, with the gender gap in insurance coverage narrowed as men's coverage increased relative to that of women. However, the gaps in access and affordability of care have not narrowed—women in Massachusetts continue to report more unmet need for care and problems affording care than men.

Medicare Part D relies upon drug plan competition. Plans have enormous scope to design benefits and to set premiums, but they may not charge differential premiums based on risk. We use the formulary and benefit design of all Medicare prescription drug plans and pharmacy claims data to construct a simulation model of out-of-pocket drug spending. We use this simulation model to examine individual incentives in Medicare Part D for adverse selection. We find that high drug users have much stronger incentives to enroll in generous plans than do low users, thus there is significant scope for adverse selection.

Lustig and Verdelhan (2007) argue that the excess returns to borrowing US dollars and lending in foreign currency “compensate US investors for taking on more US consumption growth risk,” yet the stochastic discount factor corresponding to their benchmark model is approximately uncorrelated with the returns they study. Hence, one cannot reject the null hypothesis that their model explains none of the cross sectional variation of the expected returns. Given this finding, and other evidence, I argue that the forward premium puzzle remains a puzzle. JEL: C58, E21, F31, G11, G12

Existing indicators of technical change are plagued by shortcomings. I present new measures based on books published in the field of technology that resolve many of these problems and use them to identify the impact of technology shocks on economic activity. They are positively linked to changes in R&D and scientific knowledge, and capture the new technologies' commercialization dates. Changes in information technology are found to be important sources of economic fluctuations in the post-WWII period, and total factor productivity, investment, and, to a lesser extent, labor are all shown to increase following a positive technology shock.

Many everyday decisions are made without full examination of all available options, and, as a result, the best available option may be missed. We develop a search-theoretic choice experiment to study the impact of incomplete consideration on the quality of choices. We find that many decisions can be understood using the satisficing model of Herbert Simon (1955): most subjects search sequentially, stopping when a “satisficing” level of reservation utility is realized. We find that reservation utilities and search order respond systematically to changes in the decision making environment.

Written in celebration of the 100th anniversary of the American Economic Review, this paper recounts the history of the journal. The recounting has an analytic core that sees the American Economic Association as an organization supplying goods and services to its members, one of which is the Review. Early in its history the Review was a multipurpose publication with highly disparate content. Over time the economics profession expanded and more economics research was produced, primarily in the form of journal articles. Editors accommodated this shift by allocating more resources to the refereeing and editing process and more space to research papers.