In a recent paper in this Review, Lester Thurow presents empirical evidence in apparent contradiction with the conventional life cycle consumption theory enunciated by Franco Modigliani and Richard Brumberg, Menahem Yaari, and James Tobin. That theory predicts no necessary relationship between consumption and income receipts at any age, but Thurow demonstrates a strong relationship and shows that income and consumption expenditure both peak in the age interval 45-54. Thurow's principal explanation for his finding is that credit restrictions prevent consumers from borrowing as much against their future income as they desire at the going interest rate. As long as income tends to increase with age, and discounted future income cannot be fully transferred at the borrowing rate, a consumer's effective net worth increases with age which causes increasing consumption with age. Based on this argument, Thurow recommends government intervention into the consumption loan to allow for optimal adjustment of consumption. Keizo Nagatani explains the same facts by building a model based on the uncertainty of future income. By adjusting expected future income for risk, a consumer will buy less than he would in a riskless environment with the same expected income stream. However, being the typical consumer, he realizes his expected income, and he successively revises his consumption plan upward since his realized income exceeds his risk adjusted income forecast. For this reason, his consumption expenditure and income streams are closely related. Both authors relax a standard neoclassical assumption to obtain their theoretical results: Thurow assumes imperfect credit markets while Nagatani invokes uncertainty.' However, their different explanations lead to different policy implications, since Nagatani's results provide no basis for government intervention to break down institutional barriers in the credit market.2 In this paper, we present an alternative neoclassical model which can explain Thurow's results without resort to either credit imperfections or uncertainty. Rather than treating income as exogenously given, we view earnings as resulting from a life cvcle labor supply decision. If individuals are free to set their hours of work, and if wage rates change systematicallv over the life cycle, the path of consumption of goods will depend on the wage rate at each age unless goods and leisure are independent of each other in utility. There is strong empirical evidence that * Columbia University and the National Bureau of Economic Research. This research was sponsored by a IU.S. Department of Labor Manpower Administration dissertation grant. I am deeply indebted to Edmund Phelps for comments, and to members of my dissertation committee at Princeton: Orley Ashenfelter, Stanley Black, Richard Quandt, Albert Rees, and Harry Kelejian. I retain responsibility for all errors. This paper is not an official National Bureau publication since the findings reported herein have not yet undergone the full critical review accorded the National Bureau's studies, including approval of the Board of Directors. 1 Both authors also discuss alternative explanations such as family composition effects, shifts in preferences, and measurement errors. 2 One might argue that some portion of the risk adjustment of income in the Nagatani model is due to market imperfection. However, in the presence of uncertainty, imperfection is not a well-defined operational concept and specific policy recommendations are more difficult to obtain. I am indebted to Phelps for this point.

This paper summarizes the contributions of microeconometrics to economic knowledge. Four main themes are developed. (1) Microeconometricians developed new tools to respond to econometric problems raised by the analysis of the new sources of micro data produced after the Second World War. (2) Microeconometrics improved on aggregate time-series methods by building models that linked economic models for individuals to data on individual behavior. (3) An important empirical regularity detected by the field is the diversity and heterogeneity of behavior. This heterogeneity has profound consequences for economic theory and for econometric practice. (4) Microeconometrics has contributed substantially to the scientific evaluation of public policy.

This paper examines the argument presented in The Bell Curve. A central argument is that one factor--g--accounts for correlation across test scores and performance in society. Another central argument is that g cannot be manipulated. These arguments are combined to claim that social policies designed to improve social performance cannot be effective. A reanalysis of the evidence contradicts this story. The factors that explain wages receive different weights than the factors that explain test scores. More than g is required to explain either. Other factors besides g contribute to social performance, and they can be manipulated.

This paper uses the marginal treatment effect (MTE) to unify the nonparametric literature on treatment effects with the econometric literature on structural estimation using a nonparametric analog of a policy invariant parameter; to generate a variety of treatment effects from a common semiparametric functional form; to organize the literature on alternative estimators; and to explore what policy questions commonly used estimators in the treatment effect literature answer. A fundamental asymmetry intrinsic to the method of instrumental variables (IV) is noted. Recent advances in IV estimation allow for heterogeneity in responses but not in choices, and the method breaks down when both choice and response equations are heterogeneous in a general way.

Accounting for individual-level heterogeneity in the response to treatment is a major development in the econometric literature on program evaluation. A substantial body of empirical evidence demonstrates that econometric models fit on individual-level data manifest heterogeneity in treatment effects that is present even after conditioning on observables. An important distinction is the one between evaluation models where participation in the program being evaluated is based, at least in part, on unobserved idiosyncratic responses to treatment and models where participation is not based on unobserved idiosyncratic responses. This is the distinction between selection on unobservables and selection on observables. The validity of entire classes of evaluation estimators hinges on whether or not they allow agents to act on unobserved idiosyncratic responses. In a wide variety of applications, the available evidence suggests that not only are ex post (postenrollment) responses heterogeneous, but that ex ante decisions to participate in programs are based, in part, on these heterogeneous responses (Heckman and Vytlacil, 2000b, 2001).