Showing papers in "Journal of Economic Literature in 2009"

Gender Differences in Preferences

Abstract: This paper reviews the literature on gender differences in economic experiments. In the three main sections, we identify robust differences in risk preferences, social (other-regarding) preferences, and competitive preferences. We also speculate on the source of these differences, as well as on their implications. Our hope is that this article will serve as a resource for those seeking to understand gender differences and to use as a starting point to illuminate the debate on gender-specific outcomes in the labor and goods markets.

Healthy, Wealthy, and Wise: Socioeconomic Status, Poor Health in Childhood, and Human Capital Development

Abstract: There are many possible pathways between parental education, income, and health, and between child health and education, but only some of them have been explored in the literature. This essay focuses on links between parental socioeconomic status (as measured by education, income, occupation, or in some cases area of residence) and child health, and between child health and adult education or income. Specifically, I ask two questions: What is the evidence regarding whether parental socioeconomic status affects child health? And, what is the evidence relating child health to future educational and labor market outcomes? I show that there is now strong evidence of both links, suggesting that health could play a role in the intergenerational transmission of economic status.

Psychology and Economics: Evidence from the Field

Abstract: The research in Psychology and Economics (a.k.a. Behavioral Economics) suggests that individuals deviate from the standard model in three respects: (1) nonstandard prefer- ences, (2) nonstandard beliefs, and (3) nonstandard decision making. In this paper, I survey the empirical evidence from the field on these three classes of deviations. The evidence covers a number of applications, from consumption to finance, from crime to voting, from charitable giving to labor supply. In the class of nonstandard preferences, I discuss time preferences (self-control problems), risk preferences (reference depen- dence), and social preferences. On nonstandard beliefs, I present evidence on overcon- fidence, on the law of small numbers, and on projection bias. Regarding nonstandard decision making, I cover framing, limited attention, menu effects, persuasion and social pressure, and emotions. I also present evidence on how rational actors—firms, employers, CEOs, investors, and politicians—respond to the nonstandard behavior described in the survey. Finally, I briefly discuss under what conditions experience and market interactions limit the impact of the nonstandard features.

The Wealth of Cities: Agglomeration Economies and Spatial Equilibrium in the United States

Abstract: *Empirical research on cities starts with a spatial equilibrium condition: workers and fi rms are assumed to be indifferent across space. This condition implies that research on cities is different from research on countries, and that work on places within countries needs to consider population, income, and housing prices simultaneously. Housing supply elasticity will determine whether urban success reveals itself in the form of more people or higher incomes. Urban economists generally accept the existence of agglomeration economies, which exist when productivity rises with density, but estimating the magnitude of those economies is diffi cult. Some manufacturing fi rms cluster to reduce the costs of moving goods, but this force no longer appears to be important in driving urban success. Instead, modern cities are far more dependent on the role that density can play in speeding the fl ow of ideas. Finally, urban economics has some insights to offer related topics such as growth theory, national income accounts, public economics, and housing prices. (JEL R11, R23, R31, R32)

Effects of Privatization and Ownership in Transition Economies

Abstract: The paper evaluates the effects of privatization in the post-communist economies and China. In post-communist economies privatization to foreign owners results in a rapid improvement in performance of firms, while performance effects of privatization to domestic owners are less impressive and vary across regions, coinciding with differences in policies and institutional development. In China relatively more estimates suggest that privatization to domestic owners improves the level of performance. Concentrated private ownership has a stronger positive effect on performance than dispersed ownership in the post-communist economies, but foreign joint ventures rather than wholly owned foreign firms have a positive effect in China. Worker or collective ownership does not have a negative effect. In the post-communist economies new firms are equally or more efficient than firms privatized to domestic owners, and foreign start-ups are more efficient than domestic ones. Privatization is not associated with lower employment. When accompanied by complementary reforms, privatization has a positive effect on economic growth. Three factors appear to drive the more positive effect of privatization to foreign than domestic owners. Domestic managers have more limited skills and access to world markets, domestically privatized firms have been more subject to tunneling and in some countries new large shareholders artificially decreased performance. The important policy implication is that privatization per se does not guarantee improved performance, at least not in the short- to medium-run. Type of private ownership, corporate governance, access to know-how and markets, and the legal and institutional system matter for firm performance.

Federico Sturzenegger and

Abstract: In this paper, we evaluate what we have learned to date about the effects of privatization from the experiences during the last fifteen to twenty years in the postcommunist (transition) economies and, where relevant, China. We distinguish separately the impact of privatization on efficiency, profitability, revenues, and other indicators and distinguish between studies on the basis of their econometric methodology in order to focus attention on more credible results. The effect of privatization is mostly positive in Central Europe, but quantitatively smaller than that to foreign owners and greater in the later than earlier transition period. In the Commonwealth of Independent States, privatization to foreign owners yields a positive or insignificant effect while privatization to domestic owners generates a negative or insignificant effect. The available papers on China find diverse results, with the effect of nonstate ownership on total factor productivity being mostly positive but sometimes insignificant or negative.

The Economics and Law of Sovereign Debt and Default

Abstract: This paper surveys the recent literature on sovereign debt and relates it to the evolu- tion of the legal principles underlying the sovereign debt market and the experience of the most recent debt crises and defaults. It finds limited support for theories that explain the feasibility of sovereign debt based on either external sanctions or exclu- sion from the international capital market and more support for explanations that emphasize domestic costs of default. The paper concludes that there remains a case for establishing institutions that reduce the cost of default but the design of such institutions is not a trivial task.

Beyond GDP: The Quest for a Measure of Social Welfare

Abstract: This paper critically examines the various approaches to the measurement of individual well-being and social welfare that have been considered for the construction of alternatives to GDP. Special attention is devoted to recent developments in the analysis of sustainability, in the study of happiness, in the theory of social choice and fair allocation, and in the capability approach. It is suggested in the conclusion that, although convergence toward a consensual approach is not impossible, for the moment not one but three alternatives to GDP are worth developing. ( JEL I31, E23, E01)

Toward a Theory of Regulation for Developing Countries: Following Jean-Jacques Laffont's Lead

Abstract: The efficient operation and expansion of infrastructures in developing countries is crucial for growth and poverty reduction. However, recent reforms aimed at improving the performance of these sectors have had limited success. Evidence suggests that, in many instances, this was because the traditional regulatory theory relied on by policymakers was not suitable for the institutional context in developing countries. This article surveys more recent theoretical work focusing on problems with regulation in these countries. At the heart of the survey is the work of Jean-Jacques Laffont, who, in the last decade of his life, set about developing a theoretical framework for regulation in developing countries. We consider the implications of his work, which focused on the key institutional limitations faced in developing countries. We then discuss where experience suggests that there are important omissions from this modeling, bringing in extensions and alternative approaches pursued by other authors. We conclude by summarizing the key ways in which regulatory policy will be different when institutions are weak. Overall, we find that an understanding of the institutional context and its implications are crucial when designing a regulatory framework for developing countries.

Can the West Save Africa

Abstract: In the new millennium, the Western aid effort toward Africa has surged due to writ- ings by well-known economists, a celebrity mass advocacy campaign, and decisions by Western leaders to make Africa a major foreign policy priority. This survey contrasts the predominant "transformational" approach (West comprehensively saves Africa) to occasional swings to a "marginal" approach (West takes one small step at a time to help individual Africans). Evaluation of "one step at a time" initiatives is generally easier than that of transformational ones either through controlled experiments (although these have been oversold) or simple case studies where it is easier to attribute outcomes to actions. We see two themes emerge from the literature survey: (1) escalation—as each successive Western transformational effort has yielded disappointing results (as judged at least by stylized facts, since again the econometrics are shaky), the response has been to try an even more ambitious effort and (2) the cycle of ideas—rather than a progressive testing and discarding of failed ideas, we see a cycle in aid ideas in many areas in Africa, with ideas going out of fashion only to come back again later after some lapse long enough to forget the previous disappointing experience. Both escalation and cyclicality of ideas are symptomatic of the lack of learning that seems to be characteristic of the "transfor- mational" approach. In contrast, the "marginal" approach has had some successes in improving the well-being of individual Africans, such as the dramatic fall in mortality.

Law and Finance "at the Origin"

Abstract: What are the key determinants of financial development and growth? A large literature debates the relative importance of countries' legal and political environment. In this paper, I present evidence from ancient Rome, where an early form of shareholder company, the societas publicanorum, developed. I show that the societas publicano- rum flourished in a legally underdeveloped but politically supportive environment (Roman Republic) and disappeared when Roman law reached its height of legal sophistication but the political environment grew less supportive (Roman Empire). In the Roman case, legal development appears to have mattered little as long as the law as practiced was flexible and adapted to economic needs. The "law as practiced," in turn, reflected prevalent political interests. After discussing parallels in more recent history, I provide a brief overview of the literature on law and finance and on politics and finance. The historical evidence suggests that legal systems may be less of a technological constraint for growth than previously thought—at least "at the origin.".

The Age of Milton Friedman

Abstract: Between 1980 and 2005, as the world embraced free market policies, living standards rose sharply, while life expectancy, educational attainment, and democracy improved and absolute poverty declined. Is this a coincidence? A collection of essays edited by Balcerowicz and Fischer argues that indeed reliance on free market forces is key to economic growth. A book by Stiglitz and others disagrees. I review and compare the two arguments.

Learning from Schelling s Strategy of Conflict

Abstract: Thomas Schelling's Strategy of Confl ict is a masterpiece that should be recognized as one of the most important and infl uential books in social theory. This paper reviews some of the important ideas in Strategy of Confl ict and considers some of the broader impact that this book has had on game theory, economics, and social theory. By his emphasis on the critical importance of information and commitment in strate- gic dynamics, Schelling played a vital role in stimulating the development of non- cooperative game theory. More broadly, Schelling's analysis of games with multiple equilibria has redefi ned the scope of economics and its place in the social sciences. (JEL D74, F51, H56)

Finance and Politics: A Review Essay Based on Kenneth Dam's Analysis of Legal Traditions in The Law-Growth Nexus

Abstract: Strong financial markets are widely thought to propel economic development, with many in finance seeing legal tradition as fundamental to protecting investors suffi ciently for finance to flourish. Kenneth Dam finds that the legal tradition view inac curately portrays how legal systems work, how laws developed historically, and how government power is allocated in the various legal traditions. Yet, after probing the legal origins' literature for inaccuracies, Dam does not deeply develop an alternative hypothesis to explain the world's differences in financial development. Nor does he challenge the origins core data, which could be origins' trump card. Hence, his analy sis will not convince many economists, despite that his legal learning suggests con ceptual and factual difficulties for the legal origins explanations. Yet, a dense political economy explanation is already out there and the origins-based data has unexplored weaknesses consistent with Dams contentions. Knowing if the origins view is truly fundamental, flawed, or secondary is vital for financial development policy making because policymakers who believe it will pick policies that imitate what they think to be the core institutions of the preferred legal tradition. But if they have mistaken views, as Dam indicates they might, as to what the legal traditions' institutions really are and which types of laws are effective, or what is really most important to financial development, they will make policy mistakes?potentially serious ones.

What Do (and Don't) We Know about the Value Added Tax? A Review of Richard M. Bird and Pierre-Pascal Gendron's The VAT in Developing and Transitional Countries

Abstract: The VAT has taken the tax world by storm over the last fifty years, but left little trace in the academic literature. Bird and Gendron provide an impressively informed and informative account of the VAT experience in lower income countries, largely vin- dicating the tax and standard advice for its design. But they rightly stress too that dominant "expert opinion" on the VAT remains troublingly uninformed by serious analysis and evidence. This article focuses on some of these gaps and recent attempts to start filling them.

Globalization and the Welfare State: A Review of Hans-Werner Sinn s Can Germany Be Saved?

Abstract: What are the challenges that globalization makes on welfare states and how should welfare states respond? How should welfare states be designed to enable countries to reap the benefits of globalization? These are the main themes of H ans-Werner Sinn s book, Can Germany Be Saved? We view Germany as a case study of how a welfare state can go wrong in reacting to the pressures of globalization. We present two views of glo balization?the "specialization view" (of Sinn) and the "Great Reorganization view" (ours)?and examine the policy implications of each for the welfare state design.

A Review of Edward Luce's In Spite of the Gods: The Strange Rise of Modern India

Abstract: India poses a development puzzle on a grand scale. Sixty years of electoral democ- racy, thirty years of rapid growth, and a number of world class institutions (such as the Institutes of Technology or Election Commission) have led to talk of India as a superpower in a league with the United States and China. Yet, on many fronts, India's indicators of human well-being (e.g., malnutrition, immunization) are at, or below, those of much poorer sub-Saharan African countries. Measures of the administrative capacity of the state on basics like attendance, performance, and corruption reveal a potentially "flailing state" whose brilliantly formulated policies are disconnected from realities on the ground. This review essay of Ed Luce's In Spite of the Gods attempts to articulate the puzzle that is modern India and pose questions about the development trajectory of a country whose fortunes will shape our century.

Samuelson in Soviet Russia: A Report

Abstract: В настоящей статье эти трудности анализируются в трех разделах: 1) проблемы собственно перевода; 2) комментарии/примечания редакто­ ров; 3) вмешательство цензоров, исключивших из текста книги целый ряд фрагментов. Как примечания редактора, так и исключенные фрагменты свидетельствуют об атмосфере неуверенности, агрессии и страха, царящей в советской научной среде, и наш анализ призван обрисовать природу этих настроений. Очевидно, решение опубликовать перевод столь популярного на западе учебника сопровождалось стремлением оградить российского читателя от его вредного влияния.

Towards a Theory of Regulation for Developing Countries: Following Jean-Jacques Laffont's Lead

Abstract: The efficient operation and expansion of infrastructures in developing countries is crucial for growth and poverty reduction. However, recent reforms aimed at improving the performance of these sectors have had limited success. Evidence suggests that, in many instances, this was because the traditional regulatory theory relied on by policymakers was not suitable for the institutional context in developing countries. This article surveys more recent theoretical work focusing on problems with regulation in these countries. At the heart of the survey is the work of Jean-Jacques Laffont, who, in the last decade of his life, set about developing a theoretical framework for regulation in developing countries. We consider the implications of his work, which focused on the key institutional limitations faced in developing countries. We then discuss where experience suggests that there are important omissions from this modeling, bringing in extensions and alternative approaches pursued by other authors. We conclude by summarizing the key ways in which regulatory policy will be different when institutions are weak. Overall, we find that an understanding of the institutional context and its implications are crucial when designing a regulatory framework for developing countries. (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another versi (This abstract was borrowed from another version of this item.)

A Review of Michael Tomz's Reputation and International Cooperation: Sovereign Debt across Three Centuries

Abstract: Repudiation and expropriation pose obstacles to the international mobility of capital and thereby to efficient international allocation of resources. Tomz discusses the deter- minants of lending in the face of the threat of repudiation. Using history, he argues that debtor countries have sought a reputation for compliance with loan agreements to access future loans and that military or trade sanctions have been unimportant in sustaining lending. He discusses when and why banks have been more active as lenders relative to bondholders. This article situates Tomz's concerns in the broad themes of thought on obstacles to capital mobility and evaluates his arguments.