Knowledge that Transforms

The original purpose of the former was to help post-World War II reconstruction, the purpose of the latter was to help revive global trade while averting the “beggar-thy-neighbor ” exchange rate policies that characterized the inter-war years. Over the years, the World Bank has refocused on helping poor countries grow while the Fund broadly attempts to foster country policies that ensure macroeconomic stability and limit adverse spillovers to the rest of the world. It still is in the world’s self interest to reduce poverty and economic instability in all countries, not just because their effects spread through trade but also because they can be sources of conflict and terrorism, of politically difficult immigration and of environmental degradation. But can multilateral financiers like the World Bank and the IMF help attain these goals? In the past, they contributed through loans and through economic advice, with the former being the lever through which multilateral institutions forced countries to accept the latter. Over the years, the value of both contributions has eroded, as I will discuss. Multilateral institutions will have to change, doing old tasks in new ways as also performing new tasks such as slowing climate change. Critical to their transformation will be the attitudes of the countries that play the largest role in their governance. These then are the subject of the rest of the paper.

How and to what extent “neuroeconomic” data (broadly interpreted as data other than standard choice data) should be used in advancing economic theory is open to question. Several authors have attempted to make use of such nonstandard data to shed light on the process of economic decision making. John W. Payne, James R. Bettman, and Eric. J. Johnson (1993), Miguel Costa Gomes, Vincent P. Crawford, and Bruno Broseta (2001), and Xavier Gabaix et al. (2006) have used MouseLab software in order to determine the manner in which people use information. Joseph Wang, Michael Spezio, and Colin Camerer (2006) make use of eye-tracking data for the same purpose. More dramatically, researchers such as Paul William Glimcher, Joseph Kable, and Kenway Louie (2007) are using brain-scanning data in an attempt to constrain economic models of discounting and time preference. Camerer (forthcoming) presents an excellent review of economic research involving nonstandard data. In opposition to this trend, Faruk Gul and Wolfgang Pesendorfer (forthcoming) present a strong critique of the use of nonchoice data within economics. They put forward two specific arguments that users of “neuroeconomic” data must refute if their work is to be taken seriously. First—economic models were designed only to explain choices. Thus, nonchoice data can be used neither to confirm nor deny a particular economic model. Second, it is by and large true that economists are interested in choice behavior. Any two models will either make different predictions for choice, in which case they can be differentiated by standard choice data, or they will not, in which case an economist will not be interested in differentiating between them. Economic Insights from “Neuroeconomic” Data

We examine the risky choices of contestants in the popular TV game show "Deal or No Deal" and related classroom experiments. Contrary to the traditional view of expected utility theory, the choices can be explained in large part by previous outcomes experienced during the game. Risk aversion decreases after earlier expectations have been shattered by unfavorable outcomes or surpassed by favorable outcomes. Our results point to reference-dependent choice theories such as prospect theory, and suggest that path-dependence is relevant, even when the choice problems are simple and well defined, and when large real monetary amounts are at stake.

In a wide variety of settings, spiteful preferences would constitute an obstacle to cooperation, trade, and thus economic development. This paper shows that spiteful preferences - the desire to reduce another's material payoff for the mere purpose of increasing one's relative payoff - are surprisingly widespread in experiments conducted in one of the least developed regions in India (Uttar Pradesh). In a one-shot trust game, the authors find that a large majority of subjects punish cooperative behavior although such punishment clearly increases inequality and decreases the payoffs of both subjects. In experiments to study coordination and to measure social preferences, the findings reveal empirical patterns suggesting that the willingness to reduce another's material payoff - either for the sake of achieving more equality or for the sake of being ahead - is stronger among individuals belonging to high castes than among those belonging to low castes. Because extreme social hierarchies are typically accompanied by a culture that stresses status-seeking, it is plausible that the observed social preference patterns are at least partly shaped by this culture. Thus, an exciting question for future research is the extent to which different institutions and cultures produce preferences that are conducive or detrimental to economic development.

Since Schelling, it has often been assumed that players make use of salient decision labels to achieve coordination. Consistent with previous work, we find that given equal payoffs, salient labels yield frequent coordination. However, given even minutely asymmetric payoffs, labels lose much of their effectiveness and miscoordination abounds. This raises questions about the extent to which the effectiveness of focal points based on label salience persists beyond the special case of symmetric games. The patterns of miscoordination we observe vary with the magnitude of payoff differences in intricate ways that suggest nonequilibrium accounts based on “level-k” thinking and “team reasoning.” (JEL C72, C92)

Existing empirical evidence suggests that real exchange rates exhibit hump-shaped dynamics. I show that this is a robust fact across nine large, developed economies. This fact can help explain why sticky price business cycle models have been unable to match the persistence of the real exchange rate. I show that, in response to a number of different real shocks, a two-country sticky price business cycle model yields hump-shaped dynamics for the real exchange rate. The hump-shaped dynamics generated by the model are a powerful source of endogenous persistence that allows the model to match the long half-life of the real exchange rate. (JEL F31)

This paper analyzes how US presidential candidates should allocate resources across states to maximize the probability of winning the election, by developing and estimating a probabilistic-voting model of political competition under the Electoral College system. Actual campaigns act in close agreement with the model. There is a 0.9 correlation between equilibrium and actual presidential campaign visits across states, both in 2000 and 2004. The paper shows how presidential candidate attention is affected by the states' number of electoral votes, forecasted state-election outcomes, and forecast uncertainty. It also analyzes the effects of a direct national popular vote for president. (JEL D72)

How Big Are Total Individual Income Tax Expenditures, and Who Benefits from Them? by Leonard E. Burman, Christopher Geissler and Eric J. Toder. Published in volume 98, issue 2, pages 79-83 of American Economic Review, May 2008

Historically in the United States, a child's gender has affected the level of education he or she is likely to receive, the occupation he or she will choose, and the wages he or she will be paid (e.g., Francine D. Blau 1998). A growing body of research examines how child gender may be associated with differential treatment by parents from birth, which could contribute to differences by gender in these adult market outcomes.1 One strand of this literature has found associations between child gender and parents' marriage formation and dissolution, with implications for the living arrangements of children. Fathers are more likely to be present in the home if a child is male; the presence of sons decreases the probability of divorce; and a nonmarital birth is more likely followed by marriage if the child