Knowledge that Transforms

I discuss the measurement of world poverty and inequality, with particular attention to the role of purchasing power parity (PPP) price indexes from the International Comparison Project. Global inequality increased with the latest revision of the ICP, and this reduced the global poverty line relative to the US dollar. The recent large increase of nearly half a billion poor people came from an inappropriate updating of the global poverty line, not from the ICP revisions. Even so, PPP comparisons between widely different countries rest on weak theoretical and empirical foundations. I argue for wider use of self-reports from international monitoring surveys, and for a global poverty line that is truly denominated in US dollars. (JEL C43, D31, I31, I32, F31)

Crises and sharp economic downturns, while undesirable, provide economists with a unique opportunity to test and hone economic theory. Indeed, some of the most influential advance ments in economic thought, including Milton Friedman’s monetarist tradition, John Maynard Keynes’ fiscal theory, and Irving Fisher’s debtdeflation hypothesis, emerged from analysis of the Great Depression. The current economic malaise, which we refer to as “The Great Recession,” provides another watershed moment to reevaluate our core economic beliefs. However, in contrast to our peers in previous crises, we are fortunate to have access to large-scale microeconomic datasets and advancements in computational capacity. These advantages allow for a more rigorous analysis of the current recession and therefore a more informed understanding of its origins, propagation, and consequences. Our purpose is to highlight how a micro-level analysis of the Great Recession provides us with important clues to understand the origins of the crisis, the link between credit and asset prices, the feedback effect from asset prices to the real economy, and the role of household leverage in explaining the downturn. We hope that our discussion also serves as an example of the useful ness of incorporating microeconomic data and techniques in answering traditional macroeco nomic questions. I. What Were the Origins of the Credit Cycle: Credit Demand or Credit Supply?

"One Discriminatory Rent" or "Double Jeopardy": Multicomponent Negotiation for New Car Purchases by Meghan R. Busse and Jorge M. Silva-Risso. Published in volume 100, issue 2, pages 470-74 of American Economic Review, May 2010

We design a field experiment to explore the use of social comparison to increase contributions to an online community. We find that, after receiving behavioral information about the median user's total number of movie ratings, users below the median demonstrate a 530 percent increase in the number of monthly movie ratings, while those above the median decrease their ratings by 62 percent. When given outcome information about the average user's net benefit score, above-average users mainly engage in activities that help others. Our findings suggest that effective personalized social information can increase the level of public goods provision. (JEL C93, H41, L82)

Long Run Risk, the Wealth-Consumption Ratio, and the Temporal Pricing of Risk by Ralph S. J. Koijen, Hanno Lustig, Stijn Van Nieuwerburgh and Adrien Verdelhan. Published in volume 100, issue 2, pages 552-56 of American Economic Review, May 2010

(CEPR) Business Cycle Dating Committee date business cycle turning points using a small number of aggregate measures of real economic activity. For example, in its memorandum explaining the December 2007 peak (NBER Business Cycle Dating Committee 2008), the NBER committee mentioned that it considers five series, quarterly real GDP and the “big four ” monthly series, real personal income less transfers, real manufacturing and wholesaleretail trade sales, industrial production, and nonfarm employment. (These series do not in general receive equal weight.) In contrast, when the NBER research program on dating business cycles commenced, researchers examined turning points in hundreds of series and dated business cycles by detecting clusters of specific-cycle turning points; see Arthur Burns and Wesley Mitchell (1946, 13 and 77–80). The dating of turning points evidently has shifted from aggregating the turning points of many disaggregated series to using the turning points of a few highly aggregated series. This shift raises a methodological question: should reference cycle turning points be determined by aggregating then dating, or by dating then aggregating? This paper provides some preliminary evidence on the question of whether it is better to date then aggregate or aggregate then date using 270 monthly disaggregated real economic indicators. The questions considered in this paper parallel those in the large literature on forecasting

On the job search is a key feature of real life labor markets. Yet, traditional equilibrium unemployment theory has not been able to account for on-thejob search in a satisfactory manner. In this paper we present an equilibrium model which includes on-thejob search as an optimal response to search frictions and differences in firm productivity. Our model is laid out in detail in ongoing research by Garibaldi and Moen (2009). In our model, on-the-job search is an optimal response to firm heterogeneity and search frictions in the labor market. The model has three key elements. First, it applies the competitive search equilibrium concept, initially proposed by Moen (1997). Thus, firms post wages and vacancies to minimize search and waiting costs, and the labor market is endogenously separated into submarkets. Second, firms have convex costs of maintaining vacancies (in our simulations, the number of vacancies per firm is fixed). Third, contracting between a firm and its employees is efficient, so that their joint income is maximized. The model tends toward an equilibrium characterization in which there is a job ladder in the labor market. Low productivity firms pay low wages, face high turnover rates, grow slowly and hire directly from the unemployment pool. More efficient firms pay higher wages, grow more quickly and hire from the employment pool. This characterization is qualitatively consistent with a variety of stylized facts about industry dynamics and worker ows: 1) workers move from low-wage to high-wage occupations, 2) more productive firms are larger and pay higher wages than less productive firms, 3) job-to-job mobility falls with average firm size and worker tenure, 4) wages increase with firm size, and 5) wages are higher in fast-growing firms. We also show that compared to traditional labor market models, our equilibrium model with on-thejob search delivers unexpected effects, even though

We study costless pre-play communication of intentions among inexperienced players. Using the level-k model of strategic thinking to describe players' beliefs, we fully characterize the effects of preplay communication in symmetric 2×2 games. One-way communication weakly increases coordination on Nash equilibrium outcomes, although average payoffs sometimes decrease. Two-way communication further improves payoffs in some games but is detrimental in others. Moving beyond the class of symmetric 2 × 2 games, we find that communication facilitates coordination in common interest games with positive spillovers and strategic complementarities, but there are also games in which any type of communication hampers coordination. (JEL C72, D83)

Oliver E. Williamson delivered his Prize Lecture on 8 December 2009 at Aula Magna, Stockholm University. He was introduced by Professor Bertil Holmlund, Chairman of the Economic Sciences Prize Committee.

An underexplored area within economics education is the influence that student motivation, fears, and feeling of control may have on learning outcomes and affective measures such as interest and enjoyment. This neglect in the economics literature is particularly striking given that such topics have received much attention in educational psychology over the past few decades. This study applies tools and concepts from educational psychology in an inquiry into their influence in introductory and intermediate microeconomics. Specifically, I investigate the roles of achievement goals, locus of control, and fear of failure in influencing student learning outcomes and affinity for economics. According Eric M. Anderman and Christopher A. Wolters (2006, 370), achievement goal theory “has emerged as a prominent explanatory theory within the motivation literature over the last 25 years” whose main interest is concerned with reasons why students choose to engage in particular tasks. Within achievement goal theory students are said to be motivated to either develop a skill, termed mastery orientation, or demonstrate a skill, termed performance orientation. Students with a mastery orientation focus on learning and understanding, while students with a performance orientation focus on creating an aura of competence (Avi Kaplan and Martin L. Maehr 2007). For students with a performance orientation, competence is demonstrated through comparison with others, while for mastery oriented students, the comparison is to an internal standard or an absolute level (Kaplan and Maehr 2007). ReseaRch in economic education