Knowledge that Transforms

This article provides an overview of recent research into the macroeconomic costs and benefits of monetary unification. We are primarily interested in Europe's monetary union. Given that unification entails the loss of a policy instrument, its potential benefits have to be found elsewhere. Unification may serve as a vehicle for beneficial institutional changes. In particular, it may be a route toward an independent monetary policy, which alleviates the scope for political pressure to relax monetary policy. Unification also eliminates harmful monetary policy spillovers and competitive devaluations. We explore how disagreement between the monetary and fiscal authorities about their policy objectives can lead to extreme macroeconomic outcomes. Further, we pay considerable attention to the desirability (or not) of fiscal constraints and fiscal coordination in a monetary union. Monetary commitment and fiscal free riding play a key role in this regard. Similar free-riding issues also feature prominently in the analysis of how unification influences structural reforms. We end with a brief discussion of monetary unification outside Europe. The cost–benefit trade-off of unification may differ substantially between industrialized and less-developed countries, where differences in fiscal needs and, hence, the reliance on seigniorage revenues may dominate the scope for unification.

This paper provides (for the nonspecialist) a highly streamlined discussion of the main issues, and controversies, in the design of climate mitigation policy. The first part of the paper discusses how much action to reduce greenhouse gas emissions at the global level is efficient under both the cost-effectiveness and welfare-maximizing paradigms. We then discuss various issues in the implementation of domestic emissions control policy, instrument choice, and incentives for technological innovation. Finally, we discuss alternative policy architectures at the international level. (JEL Q54, Q58)

Two recent papers, Deaton (2009) and Heckman and Urzua (2009), argue against what they see as an excessive and inappropriate use of experimental and quasi-experimental methods in empirical work in economics in the last decade. They specifically question the increased use of instrumental variables and natural experiments in labor economics and of randomized experiments in development economics. In these comments, I will make the case that this move toward shoring up the internal validity of estimates, and toward clarifying the description of the population these estimates are relevant for, has been important and beneficial in increasing the credibility of empirical work in economics. I also address some other concerns raised by the Deaton and Heckman–Urzua papers. (JEL C21, C31)

This essay reviews the theoretical and empirical literature on quality disclosure and certification. After comparing quality disclosure with other quality assurance mechanisms and describing a brief history of quality disclosure, we address two sets of theoretical issues. First, why don't sellers voluntarily disclose through a process of “unraveling” and, given the lack of unraveling, is it desirable to mandate seller disclosure? Second, when we rely on certifiers to act as the intermediary of quality disclosure, do certifiers necessarily report unbiased and accurate information? We further review empirical evidence on these issues, with a particular focus on healthcare, education, and finance. The empirical review covers quality measurement, the effect of third-party disclosure on consumer choice and seller behavior, as well as the economics of certifiers. (JEL D18, K32, L15, M31)

There is currently much debate about the effectiveness of foreign aid and about what kind of projects can engender economic development. There is skepticism about the ability of econometric analysis to resolve these issues or of development agencies to learn from their own experience. In response, there is increasing use in development economics of randomized controlled trials (RCTs) to accumulate credible knowledge of what works, without overreliance on questionable theory or statistical methods. When RCTs are not possible, the proponents of these methods advocate quasi-randomization through instrumental variable (IV) techniques or natural experiments. I argue that many of these applications are unlikely to recover quantities that are useful for policy or understanding: two key issues are the misunderstanding of exogeneity and the handling of heterogeneity. I illustrate from the literature on aid and growth. Actual randomization faces similar problems as does quasi-randomization, notwithstanding rhetoric to the contrary. I argue that experiments have no special ability to produce more credible knowledge than other methods, and that actual experiments are frequently subject to practical problems that undermine any claims to statistical or epistemic superiority. I illustrate using prominent experiments in development and elsewhere. As with IV methods, RCT-based evaluation of projects, without guidance from an understanding of underlying mechanisms, is unlikely to lead to scientific progress in the understanding of economic development. I welcome recent trends in development experimentation away from the evaluation of projects and toward the evaluation of theoretical mechanisms. (JEL C21, F35, O19)

Most nations have experienced an internal armed conflict since 1960. Yet while civil war is central to many nations' development, it has stood at the periphery of economics research and teaching. The past decade has witnessed a long overdue explosion of research into war's causes and consequences. We summarize progress, identify weaknesses, and chart a path forward. Why war? Existing theory is provocative but incomplete, omitting advances in behavioral economics and making little progress in key areas, like why armed groups form and cohere, or how more than two armed sides compete. Empirical work finds that low per capita incomes and slow economic growth are both robustly linked to civil war. Yet there is little consensus on the most effective policies to avert conflicts or promote postwar recovery. Cross-country analysis of war will benefit from more attention to causal identification and stronger links to theory. We argue that micro-level analysis and case studies are also crucial to decipher war's causes, conduct, and consequences. We bring a growth theoretic approach to the study of conflict consequences to highlight areas for research, most of all the study of war's impact on institutions. We conclude with a plea for new and better data. (JEL D72, D74, O17)

This paper is a survey of the literature on boards of directors, with an emphasis on research done subsequent to the Benjamin E. Hermalin and Michael S. Weisbach (2003) survey. The two questions most asked about boards are what determines their makeup and what determines their actions? These questions are fundamentally intertwined, which complicates the study of boards because makeup and actions are jointly endogenous. A focus of this survey is how the literature, theoretical as well as empirical, deals—or on occasions fails to deal—with this complication. We suggest that many studies of boards can best be interpreted as joint statements about both the director-selection process and the effect of board composition on board actions and firm performance. (JEL G34, L25)

We document a positive correlation between stock market capitalization and price levels (wages) within the group of countries with poorly developed stock markets and a negative correlation between these two variables within the group of countries with more developed stock markets. This paper argues that there is a causal relationship behind these correlations. Stock markets initially stimulate growth, pushing the demand for nontradables and increasing prices and wages. Stock markets also promote a shift toward more capital-intensive technologies in the tradable sector, increasing the migration of workers to services and eventually putting downward pressure on wages and prices.

Universities are engaged in many activities, primarily research and teaching. Many states have instituted performance measures that focus on evaluating a university's success in teaching. We suggest that multitasking may be important in this context, and we consider research outcomes after adoption. We find striking results that depend on university status. Research activity is higher at flagship institutions after the adoption of performance measures. Most of this increase in activity is with respect to the level of research funding and the number of articles produced. In contrast, research funding and the number of publications is dramatically lower at nonflagship institutions. There is some evidence that citations per publication at nonflagship institutions are higher after the adoption of performance standards. The evidence suggests that universities have become more specialized since the introduction of these programs.