Knowledge that Transforms

Chris Miller’s book is a historian’s account of Mikhail Gorbachev’s efforts to save the Soviet economy. Miller focuses on the question of why Gorbachev did not follow Deng Xiaoping and did not manage to reform the economy. Miller argues that it was not for the lack of understanding (Gorbachev did invest in learning China’s approach to reform and did understand it well), nor for the lack of trying. In fact, Gorbachev did try to implement Deng’s agricultural and industrial enterprise reforms. However, Gorbachev’s reforms were blocked by powerful vested interests. An inability to tackle the agricultural and industrial lobbies eventually resulted in the bankruptcy and collapse of the Soviet Union. While I generally agree with the political economy argument, I discuss a number of alternative explanations. I also discuss sources of Gorbachev’s weak state capacity and offer an evaluation of Gorbachev’s and post-Gorbachev reform efforts and mistakes based on the political economy research carried out in the last twenty-five years. ( JEL D72, O57, P21, P23, P24, P26)

All economists should buy and read The Moral Economy by Samuel Bowles. The book challenges basic premises of economic theory and questions policies based on monetary incentives. Incentives not only crowd out intrinsic motivations, they erode the ethical and moral codes necessary for the workings of markets. Bowles boldly suggests that successful policies must combine incentives and moral messages, exploiting complementarities between the two. This essay argues that to achieve this objective, economists must study the local institutions and social context and engage untraditional data to uncover the interplay of incentives and identity. ( JEL A11, A13, D04, D83, E60, Z13)

In Happiness for All? Unequal Hopes and Lives in the Pursuit of the American Dream, Carol Graham raises disquieting ideas about today’s United States. The challenge she puts forward is an important one. Here we review the intellectual case and offer additional evidence. We conclude broadly on the author’s side. Strikingly, Americans appear to be in greater pain than citizens of other countries, and most subgroups of citizens have downwardly trended happiness levels. There is, however, one bright side to an otherwise dark story. The happiness of black Americans has risen strongly since the 1970s. It is now almost equal to that of white Americans. (JEL D31, I12, I31, J15, Z13)

I argue that there exists a coherent and relevant tradition in economic thought that I label “price theory.” I define it as neoclassical microeconomic analysis that reduces rich and often incompletely specified models into “prices” (approximately) sufficient to characterize solutions to simple allocative problems. I illustrate this definition by highlighting distinctively price theoretic approaches to prominent research practices (diagrams and problems sets) and substantive research topics (e.g. selection markets and media slant). I trace the origins of price theory from the early nineteenth century through its segregation into the Chicago School in the last quarter of the twentieth. I argue that price theory plays a valuable complementary role to two traditions, “reductionism” and “empiricism,” with which I contrast it and show how this contribution of price theory has fueled a resurgence in this style of research in fields ranging from market design to international trade. Approximations critical to price theory are less formally developed than tools used in other methodological traditions, suggesting a research agenda to clarify the accuracy and range of validity of these methods.(JEL B13, B21, B41, D00, D47, F10)

We provide an introduction to the recent developments of dynamic mechanism design, with a primary focus on the quasilinear case. First, we describe socially optimal (or efficient) dynamic mechanisms. These mechanisms extend the well-known Vickrey– Clark–Groves and D’Aspremont–Gérard–Varet mechanisms to a dynamic environment. Second, we discuss revenue optimal mechanisms. We cover models of sequential screening and revenue-maximizing auctions with dynamically changing bidder types. We also discuss models of information management where the mechanism designer can control (at least partially) the stochastic process governing the agents’ types. Third, we consider models with changing populations of agents over time. After discussing related models with risk-averse agents and limited liability, we conclude with a number of open questions and challenges that remain for the theory of dynamic mechanism design. ( JEL D44, D81, D82)

Spatial economics aims to explain why there are peaks and troughs in the spatial distribution of wealth and people, from the international and regional to the urban and local. The main task is to identify the microeconomic underpinnings of centripetal forces, which lead to the concentration of economic activities, and centrifugal forces, which bring about the dispersion of economic activities at the regional and urban levels. Transportation matters at both scales, but in a different way. The emphasis is on the interregional flows of goods and passenger trips at the regional level and on individual commuting at the urban level. ( JEL F12, L13, R12, R23, R30, R40)

Over two dozen different terms for identification appear in the econometrics literature, including set identification, causal identification, local identification, generic identification, weak identification, identification at infinity, and many more. This survey: (i) gives a new framework unifying existing definitions of point identification; (ii) summarizes and compares the zooful of different terms associated with identification that appear in the literature; and (iii) discusses concepts closely related to identification, such as normalizations and the differences in identification between structural models and causal, reduced form models. ( JEL C01, C20, C50)

Caste plays a role at every stage of an Indian's economic life, in school, university, the labor market, and into old age. The influence of caste extends beyond private economic activity into the public sphere, where caste politics determines access to public resources. The aggregate evidence indicates that there has been convergence in education, occupations, income, and access to public resources across caste groups in the decades after independence. Some of this convergence is likely due to affirmative action, but caste-based networks could also have played an equalizing role by exploiting the opportunities that became available in a globalizing economy. Ethnic networks were once active in many advanced economies but ceased to be salient once markets developed. With economic development, it is possible that caste networks will cease to be salient in India. The affirmative action programs may also be rolled back and (statistical) discrimination in urban labor markets may come to an end if and when there is convergence across caste groups. In the interim period, however, it is important to understand the positive and negative consequences of caste involvement across a variety of spheres in the Indian economy. (JEL G22, J15, J71, O15, O17, Z13)

This overview examines critically the post-9/11 empirical literature on terrorism. Major contributions by both economists and political scientists are included. We focus on five main themes: the changing nature of terrorism, the organization of terrorist groups, the effectiveness of counterterrorism policies, modern drivers or causes of terrorism, and the economic consequences of terrorism. In so doing, we investigate a host of questions that include: How do terrorist groups attract and retain members? What determines the survival of terrorist groups? Is poverty a root cause of terrorism? What counterterrorism measures work best? In the latter regard, we find that many counterterrorism policies have unintended negative consequences owing to attack transference and terrorist backlash. This suggests the need for novel policies such as service provision to counter some terrorist groups’ efforts to provide such services. Despite terrorists’ concerted efforts to damage targeted countries’ economies, the empirical literature shows that terrorism has had little or no effect on economic growth or GDP except in small terrorism-plagued countries. At the sectoral level, terrorism can adversely affect tourism and foreign direct investment, but these effects are rather transient and create transference of activities to other sectors, thus cushioning the consequences. (JEL F21, F52, H56, K42, Z31)

Given a game with uncertain payoffs, information design analyzes the extent to which the provision of information alone can influence the behavior of the players. Information design has a literal interpretation, under which there is a real information designer who can commit to the choice of the best information structure (from her perspective) for a set of participants in a game. We emphasize a metaphorical interpretation, under which the information design problem is used by the analyst to characterize play in the game under many different information structures. We provide an introduction to the basic issues and insights of a rapidly growing literature in information design. We show how the literal and metaphorical interpretations of information design unify a large body of existing work, including that on communication in games (Myerson 1991), Bayesian persuasion (Kamenica and Gentzkow 2011), and some of our own recent work on robust predictions in games of incomplete information. ( JEL C70, D82, D83)