Knowledge that Transforms

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)

The magnitude and the direction of net international capital flows do not fit neoclassical models. The fifty U.S. states comprise an integrated capital market with very low barriers to capital flows, which makes them an ideal testing ground for neoclassical models. We develop a simple frictionless open economy model with perfectly diversified ownership of capital and find that capital flows among the states are consistent with the model. Therefore, the small size and “wrong” direction of net international capital flows are likely due to frictions associated with national borders, not to inherent flaws in the neoclassical model.

This paper studies the persistence of innovation in Dutch manufacturing using an unbalanced panel of firm data from four waves of the Community Innovation Survey between 1994 and 2002. We estimate by maximum likelihood a dynamic type 2 tobit model accounting for individual effects and handling the initial conditions problem. We find true persistence in the probability of innovating in the high-tech category of industries and spurious persistence in the low-tech category. Furthermore, past innovation output intensity affects, albeit to a small extent, current innovation output intensity in the high-tech category, while no such evidence is found in the low-tech category.

What is the role of transport improvements in globalization? We argue that the nineteenth century is the ideal testing ground for this question: freight rates fell on average by 50% while global trade increased 400% from 1870 to 1913. We estimate the first indices of bilateral freight rates for the period and directly incorporate these into a standard gravity model. We also take the endogeneity of bilateral trade and freight rates seriously and propose an instrumental variables approach. The results are striking as we find no evidence that the maritime transport revolution was the primary driver of the late nineteenth century global trade boom. Rather, the most powerful forces driving the boom were those of income growth and convergence.

This paper analyzes a 1992 decrease in U.S. federal income tax withholding that shifted the timing of income tax payments while leaving ultimate tax burdens unchanged. Consequently income typically received as a lump-sum refund on filing a tax return was shifted into the previous year's monthly income. This paper considers the impact of the withholding change in the context of mental accounting and finds a decrease in the probability that households contributed to a tax-preferred retirement account. Additional robustness tests show that short-term saving did not simultaneously increase and that the main findings are not driven by liquidity constraints.