Knowledge that Transforms

A number of major social policy interventions have been introduced recently in the United States. The new Temporary Assistance for Needy Families (TANF) program, introduced in 1996, was advertised changing the welfare system as we know it. The new Medicare prescription drug benefit, introduced in 2006, was the largest expansion of Medicare in its history. Developing countries are also fertile ground for innovative new policies. Mexico introduced a program in 1997 (Progresa) that provided subsidies to poor rural households contingent upon the school attendance of their children. The distinction between ex post and ex ante policy evaluation is important. Ex post policy evaluation occurs upon or after the policy has been implemented. It is ubiquitous in the social sciences. Such studies make use of existing policy variation. Examples include the study of minimum wage effects on labor market outcomes, the study of the impact of welfare benefits on labor market and demographic outcomes, and the study of how divorce laws affect marital stability. The development of methodological approaches to ex post program evaluation using nonexperimental methods is an active area of research (Petra Todd 2006). There is little methodological or applied research explicitly concerned with ex ante policy evaluation using nonexperimental methods, which is perhaps surprising given its potential value. Interventions that require ex ante evaluation are those that are outside the historical experience. These include a large change in the parameters of existing programs such doubling the (real) minimum wage, adding new features to an existing program such the Medicare drug benefit program, or introducing a completely new program such Progresa. The nonexperimental approach to ex ante policy evaluation must be an extrapolation from existing policy or policy-relevant variation.' Because of that, and unlike ex post evaluation, ex ante valuation must rely on parametric and/or behavioral assumptions (theory).

We study a one-dimensional Hotelling-Downs model of electoral competition with the following innovation: a fraction of candidates have “character” and are exogenously committed to a campaign platform; this is unobservable to voters. Character is desirable, and a voter's utility is a convex combination of standard policy preferences and her assessment of a candidate's character. This structure induces a signaling game between strategic candidates and voters, since a policy platform affects voters' utilities not only directly, but also indirectly through inferences about a candidate's character. The model generates a number of predictions, starting with a failure of the median voter theorem.

Revealing Preferences Graphically: An Old Method Gets a New Tool Kit by Syngjoo Choi, Raymond Fisman, Douglas M. Gale and Shachar Kariv. Published in volume 97, issue 2, pages 153-158 of American Economic Review, May 2007

How Occupied France Financed Its Own Exploitation in World War II by Filippo Occhino, Kim Oosterlinck and Eugene N. White. Published in volume 97, issue 2, pages 295-299 of American Economic Review, May 2007

The positive correlation between real investment rates and real income levels across countries is driven largely by differences in the price of investment relative to output. The high relative price of investment in poor countries is due to the low price of consumption goods in those countries. Investment prices are no higher in poor countries. Thus, the low real investment rates in poor countries are not driven by high tax or tariff rates on investment. Poor countries, instead, appear to be plagued by low efficiency in producing investment goods and in producing consumer goods to trade for them.

We show that it is impossible to achieve collusion in a duopoly when (a) goods are homogenous and firms compete in quantities; (b) new, noisy information arrives continuously, without sudden events; and (c) firms are able to respond to new information quickly. The result holds even if we allow for asymmetric equilibria or monetary transfers. The intuition is that the flexibility to respond quickly to new information unravels any collusive scheme. Our result applies to both a simple stationary model and a more complicated one, with prices following a mean-reverting Markov process, as well as to models of dynamic cooperation in many other settings.

This paper investigates how market structure affects efficiency and several dimensions of liquidity in an asset market. To this end, we generalize the search-theoretic model of financial intermediation of Darrell Duffie et al. (2005) to allow for entry of dealers and unrestricted asset holdings.

We measure the welfare gain from removing aggregate consumption fluctuations in a model where each individual faces incomplete consumption insurance. We show that, because this welfare gain is a convex function of the overall consumption risk—aggregate plus idiosyncratic—each individual faces, to gauge the magnitude of the gain, it is important to match individuals' overall risk prior to any policy. In an economy calibrated to match individuals' overall risk, even removing 10 percent of aggregate fluctuations can result in a large welfare gain. Further, large gains do not necessarily depend on the countercyclical nature of idiosyncratic risk.

Community Size and Network Closure by Hunt Allcott, Dean Karlan, Markus M. Möbius, Tanya S. Rosenblat and Adam Szeidl. Published in volume 97, issue 2, pages 80-85 of American Economic Review, May 2007

We investigate the “generalized second-price” (GSP) auction, a new mechanism used by search engines to sell online advertising. Although GSP looks similar to the Vickrey-Clarke-Groves (VCG) mechanism, its properties are very different. Unlike the VCG mechanism, GSP generally does not have an equilibrium in dominant strategies, and truth-telling is not an equilibrium of GSP. To analyze the properties of GSP, we describe the generalized English auction that corresponds to GSP and show that it has a unique equilibrium. This is an ex post equilibrium, with the same payoffs to all players as the dominant strategy equilibrium of VCG.