Knowledge that Transforms

Capital in the Twenty-First Century by Thomas Piketty provides a unified theory of the functioning of the capitalist economy by linking theories of economic growth and functional and personal income distributions. It argues, based on the long-run historical data series, that the forces of economic divergence (including rising income inequality) tend to dominate in capitalism. It regards the twentieth century as an exception to this rule and proposes policies that would make capitalism sustainable in the twenty-first century.

Is there a way to understand why some global environmental externalities are addressed effectively, whereas others are not? The transaction costs of defining the property rights to mitigation benefits and costs is a useful framework for such analysis. This approach views international cooperation as a contractual process among country leaders to assign those property rights. Leaders cooperate when it serves domestic interests to do so. The demand for property rights comes from those who value and stand to gain from multilateral action. Property rights are supplied by international agreements that specify resource access and use, assign costs and benefits including outlining the size and duration of compensating transfer payments, and determining who will pay and who will receive them. Four factors raise the transaction costs of assigning property rights: (i) scientific uncertainty regarding mitigation benefits and costs; (ii) varying preferences and perceptions across heterogeneous populations; (iii) asymmetric information; and (iv) the extent of compliance and new entry. These factors are used to examine the role of transaction costs in the establishment and allocation of property rights to provide globally valued national parks, implement the Convention on the International Trade in Endangered Species of Wild Fauna and Flora, execute the Montreal Protocol to manage emissions that damage the stratospheric ozone layer, set limits on harvest of highly-migratory ocean fish stocks, and control greenhouse gas emissions.

China's long-term economic dynamics pose a formidable challenge to economic historians. The Qing Empire (1644–1911), the world's largest national economy before 1800, experienced a tripling of population during the seventeenth and eighteenth centuries with no signs of diminishing per capita income. While the timing remains in dispute, a vast gap emerged between newly rich industrial nations and China's lagging economy in the wake of the Industrial Revolution. Only with an unprecedented growth spurt beginning in the late 1970s did this great divergence separating China from the global leaders substantially diminish, allowing China to regain its former standing among the world's largest economies. This essay develops an integrated framework for understanding that entire history, including both the divergence and the recent convergent trend. We explain how deeply embedded political and economic institutions that contributed to a long process of extensive growth before 1800 subsequently prevented China from capturing the benefits associated with the Industrial Revolution. During the twentieth century, the gradual erosion of these historic constraints and of new obstacles erected by socialist planning eventually opened the door to China's current boom. Our analysis links China's recent development to important elements of its past, while using recent success to provide fresh perspectives on the critical obstacles undermining earlier modernization efforts, and their eventual removal.

There is a widespread belief that changes in expectations may be an important independent driver of economic fluctuations. The news view of business cycles offers a formalization of this perspective. In this paper we discuss mechanisms by which changes in agents' information, due to the arrival of news, can cause business cycle fluctuations driven by expectational change, and we review the empirical evidence aimed at evaluating their relevance. In particular, we highlight how the literature on news and business cycles offers a coherent way of thinking about aggregate fluctuations, while at the same time we emphasize the many challenges that must be addressed before a proper assessment of the role of news in business cycles can be established.

This review provides a critical survey of psychology-and-economics (“behavioral-economics”) research in contract theory. First, I introduce the theories of individual decision making most frequently used in behavioral contract theory, and formally illustrate some of their implications in contracting settings. Second, I provide a more comprehensive (but informal) survey of the psychology-and-economics work on classical contract-theoretic topics: moral hazard, screening, mechanism design, and incomplete contracts. I also summarize research on a new topic spawned by psychology and economics, exploitative contracting, that studies contracts designed primarily to take advantage of agent mistakes.

We review the main identification strategies and empirical evidence on the role of expectations in the New Keynesian Phillips curve, paying particular attention to the issue of weak identification. Our goal is to provide a clear understanding of the role of expectations that integrates across the different papers and specifications in the literature. We discuss the properties of the various limited-information econometric methods used in the literature and provide explanations of why they produce conflicting results. Using a common dataset and a flexible empirical approach, we find that researchers are faced with substantial specification uncertainty, as different combinations of various a priori reasonable specification choices give rise to a vast set of point estimates. Moreover, given a specification, estimation is subject to considerable sampling uncertainty due to weak identification. We highlight the assumptions that seem to matter most for identification and the configuration of point estimates. We conclude that the literature has reached a limit on how much can be learned about the New Keynesian Phillips curve from aggregate macroeconomic time series. New identification approaches and new datasets are needed to reach an empirical consensus.

This paper uses firm-level survey data matched with official tax records to estimate the unobserved true sales of formal firms in Mongolia. Taking into account firm-level incentives to comply with taxes and a production function technology linking unobserved true sales with observable firm-level production characteristics, we derive a multiple-indicators, multiple-causes model predicting true sales. We find that firms underreport sales to the tax office by 38.6%, but firm-level survey data also suffer from significant underreporting. Finally, we compare our approach with two alternative approaches of measuring underreporting and discuss the practical implications of the findings for firm-level analyses of underreporting.

Physician-induced demand, whereby physicians alter patient treatment for personal gain, lies at the heart of concerns about publicly provided health care. However, little is known about how payment systems affect the ultimate outcome of patient health. Exploiting a unique policy induced variation in Denmark, I investigate the impact of physician payment contracts on infant health. In a difference-in-differences framework, I find that firstborn infants exposed in the womb to the care of general practitioners with capitation contracts have poorer infant health outcomes than infants exposed to fee-for-service contracts. The firstborn children of younger women primarily drive the effects.

In this paper, I construct product-level U.S.-manufacturing-imports data for new products. I show that consistent with product cycles, the North's new-products exports to the United States, relative to its old-products exports, grow faster than the South's for over a decade; then the South catches up with the North, and this pattern is reversed. This finding holds up in parametric, nonparametric, and semiparametric estimations, and only when new products are properly identified and old products within the same industries are used as controls. There is also evidence that product cycles become shorter over time and they are technology related.

In this paper, we explore whether information from firm-level data can improve forecasts of aggregate productivity growth. We generate firm-level productivity measures and aggregate them into time-series components that capture within-firm productivity and the productivity contribution of reallocation. We show that these components improve aggregate total factor productivity forecasts in a simple univariate setting, even when firm-level data are available with a time lag. Lagged firm-level information also improves aggregate productivity forecasts when we combine results from a variety of different multivariate forecasting models using Bayesian model averaging techniques.