Showing papers in "Journal of Economic Perspectives in 2014"

Big Data: New Tricks for Econometrics

Abstract: Computers are now involved in many economic transactions and can capture data associated with these transactions, which can then be manipulated and analyzed. Conventional statistical and econometric techniques such as regression often work well, but there are issues unique to big datasets that may require different tools. First, the sheer size of the data involved may require more powerful data manipulation tools. Second, we may have more potential predictors than appropriate for estimation, so we need to do some kind of variable selection. Third, large datasets may allow for more flexible relationships than simple linear models. Machine learning techniques such as decision trees, support vector machines, neural nets, deep learning, and so on may allow for more effective ways to model complex relationships. In this essay, I will describe a few of these tools for manipulating and analyzing big data. I believe that these methods have a lot to offer and should be more widely known and used by econom...

Fluctuations in Uncertainty

Abstract: This review article tries to answer four questions: (i) what are the stylized facts about uncertainty over time; (ii) why does uncertainty vary; (iii) do fluctuations in uncertainty matter; and (iv) did higher uncertainty worsen the Great Recession of 2007-2009? On the first question both macro and micro uncertainty appears to rise sharply in recessions. On the second question the types of exogenous shocks like wars, financial panics and oil price jumps that cause recessions appear to directly increase uncertainty, and uncertainty also appears to endogenously rise further during recessions. On the third question, the evidence suggests uncertainty is damaging for short-run investment and hiring, but there is some evidence it may stimulate longer-run innovation. Finally, in terms of the Great Recession, the large jump in uncertainty in 2008 potentially accounted for about one third of the drop in GDP.

Informality and Development

Abstract: In developing countries, informal firms account for up to half of economic activity. They provide livelihood for billions of people. Yet their role in economic development remains controversial. Some, like Hernando De Soto (1989, 2000), see informal firms as an untapped reservoir of entrepreneurial energy, held back by government regulations. In this view, unleashing this energy by reducing entry regulations or improving property rights would fuel growth and development. Others, like Levy (2008), take a more cynical view, stressing the advantages enjoyed by informal firms and workers from avoiding taxes and regulations. A report from the McKinsey Global Institute describes informal firms as parasites competing unfairly with law-abiding formal firms (Farrell 2004). In this view, informality should be suppressed, not unleashed. Still others follow the development tradition of Lewis (1954), Harris and Todaro (1970), and more recently Rauch (1991) and see informality as a byproduct of poverty. From this dual perspective, formal and informal firms are fundamentally different. Productive formal entrepreneurs pay taxes and bear the cost of government regulation to reach new customers, raise capital, and access public goods. These entrepreneurs are often educated and find it more profitable to run bigger formal firms rather than the smaller informal ones. In contrast, informal entrepreneurs are typically uneducated and unproductive, and they run small businesses producing low-quality products for low-income customers using little capital and

The Role of Entrepreneurship in US Job Creation and Economic Dynamism

Abstract: The United States has long been viewed as having among the world’s most entrepreneurial, dynamic, and flexible economies. It is often argued that this dynamism and flexibility has enabled the US economy to adapt to changing economic circumstances and recover from recessions in a robust manner. While the evidence provides broad support for this view, the outcomes of entrepreneurship are more heterogeneous than commonly appreciated and appear to be evolving in ways that could raise concern. Evidence along a number of dimensions and a variety of sources points to a US economy that is becoming less dynamic. Of particular interest are declining business startup rates and the resulting diminished role for dynamic young businesses in the economy. We begin by describing how the concept of entrepreneurship is reflected in existing data on firm age and size. The recent addition of firm age to official statistics represents a dramatic improvement in the information available to entrepreneurship researchers. We then turn to a discussion of the role of startup firms in job creation. Business startups account for about 20 percent of US gross (total) job creation while high-growth businesses (which are disproportionately young)

From Sick Man of Europe to Economic Superstar: Germany's Resurgent Economy

Abstract: In the late 1990s and into the early 2000s, Germany was often called "the sick man of Europe." Indeed, Germany's economic growth averaged only about 1.2 percent per year from 1998 to 2005, including a recession in 2003, and unemployment rates rose from 9.2 percent in 1998 to 11.1 percent in 2005. Today, after the Great Recession, Germany is described as an "economic superstar." In contrast to most of its European neighbors and the United States, Germany experienced almost no increase in unemployment during the Great Recession, despite a sharp decline in GDP in 2008 and 2009. Germany's exports reached an all-time record of $1.738 trillion in 2011, which is roughly equal to half of Germany's GDP, or 7.7 percent of world exports. Even the euro crisis seems not to have been able to stop Germany's strengthening economy and employment. How did Germany, with the fourth-largest GDP in the world transform itself from "the sick man of Europe" to an "economic superstar" in less than a decade? We present evidence that the specific governance structure of the German labor market institutions allowed them to react flexibly in a time of extraordinary economic circumstances, and that this distinctive characteristic of its labor market institutions has been the main reason for Germany's economic success over the last decade.

Slicing Up Global Value Chains

Abstract: In an already classic study of the iPod, Dedrick, Kramer, and Linden (2010) n an already classic study of the iPod, Dedrick, Kramer, and Linden (2010) discuss how the iPod is assembled in China from several hundred components discuss how the iPod is assembled in China from several hundred components and parts that are sourced from around the world. This production network is and parts that are sourced from around the world. This production network is led by Apple, a US-based company, which is estimated to capture between one-third led by Apple, a US-based company, which is estimated to capture between one-third and one-half of an iPod’s retail price. Asian fi rms like Toshiba from Japan and and one-half of an iPod’s retail price. Asian fi rms like Toshiba from Japan and Samsung from South Korea capture another major part as profi ts from manufacSamsung from South Korea capture another major part as profi ts from manufacturing high-value components, such as the hard-disk drive, display, and memory. In turing high-value components, such as the hard-disk drive, display, and memory. In contrast, assembling and testing activities by Chinese workers is estimated to capture contrast, assembling and testing activities by Chinese workers is estimated to capture no more than 2 percent. Other studies of tablets, mobile telephones, and laptops no more than 2 percent. Other studies of tablets, mobile telephones, and laptops suggest a similar pattern of specialization; advanced nations deliver capital and suggest a similar pattern of specialization; advanced nations deliver capital and high-skilled labor, capturing most of the value, while emerging countries contribute high-skilled labor, capturing most of the value, while emerging countries contribute low-skilled activities that add little value: in another vivid example, Ali-Yrkko, low-skilled activities that add little value: in another vivid example, Ali-Yrkko, Rouvinen, Seppala, and Yla-Anttila (2011) discuss the Nokia N95 smartphone. Rouvinen, Seppala, and Yla-Anttila (2011) discuss the Nokia N95 smartphone. Such case studies are mainly conducted for high-end electronics and for one point Such case studies are mainly conducted for high-end electronics and for one point in time, which raises obvious questions about the extent to which they represent broader in time, which raises obvious questions about the extent to which they represent broader patterns. How pervasive is the process of international production fragmentation for a patterns. How pervasive is the process of international production fragmentation for a

Why Do Developing Countries Tax So Little

Abstract: The power to tax is taken for granted in a great deal of mainstream public finance. In considering limits to taxation, traditional research in the field focuses on limits imposed by incentive constraints, which are tied to asymmetric information or to politics and political institutions. The limits to taxation are rarely tied to the administrative capacity of the state. But incentive constraints alone cannot explain the vast differences in the levels of taxation that we see across the world and across time. Low-income countries typically collect taxes of between 10 to 20 percent of GDP, while the average for high-income countries is more like 40 percent. In essence, our view on these patterns is similar to that taken by Joseph Schumpeter (1918) almost a century ago, when he noted: “The fiscal history of a people is above all an essential part of its general history. An enormous influence on the fate of nations emanates from the economic bleeding which the needs of the state necessitates, and from the use to which the results are put.” In order to understand taxation, economic development, and the relationships between them, we need to think about the forces that drive the development process. Poor countries

Taxing across Borders: Tracking Personal Wealth and Corporate Profits

Abstract: Globalization is making it increasingly easy for corporations to shift profits to low-tax countries. Modern technology has also made it simpler for wealthy individuals to move funds to undeclared bank accounts in offshore tax havens. Both issues have featured prominently in the news and global economic debates since the financial crisis, but the arguments tend to be based on relatively little empirical evidence. Measuring the costs of tax havens to foreign governments is fraught with difficulties. However, balance of payments data and corporate filings show that US companies are shifting profits to Bermuda, Luxembourg, and similar countries on a large and growing scale. About 20 percent of all US corporate profits are now booked in such havens, a tenfold increase since the 1980s. This profit-shifting is typically done within the letter of the law and thus would be best described as tax avoidance rather than fraud. I attempt to quantify its cost for government coffers by taking a fresh look at the most recent macroeconomic evidence and combining it in a systematic manner. Over the last 15 years, the effective corporate tax rate of US companies has declined from 30 to 20 percent, and about two-thirds of this decline can be attributed to increased profit-shifting to low-tax jurisdictions. Wealthy individuals, too, use tax havens, sometimes legally—to benefit from banking services not available in their home country—and sometimes illegally—to evade taxes. A number of changes have sought, with some success, to curb that form of tax evasion over the last years. Yet the available evidence from Switzerland and

Five Facts about Value-Added Exports and Implications for Macroeconomics and Trade Research

Abstract: Due to the rise of global supply chains, gross exports do not accurately measure the amount of value added exchanged between countries. I highlight five facts about differences between gro...

From micro to macro via production networks

Abstract: Amodern economy is an intricately linked web of specialized production units, each relying on the flow of inputs from their suppliers to produce their own output, which in turn is routed towards other downstream units. In this essay, I argue that the structure of this production network is key in determining whether and how microeconomic shocks—affecting only a particular firm or technology along the chain—propagate throughout the economy and shape aggregate outcomes. Therefore, understanding the structure of this production network can better inform both academics on the origins of aggregate fluctuations and policy makers on how to prepare for and recover from adverse shocks that disrupt these production chains. Two recent events have brought to the forefront the importance of interconnections between firms and sectors in aggregate economic performance. Consider first the 2011 earthquake in Japan. While the triple tragedy of the earthquake, the ensuing tsunami, and the near nuclear meltdown at Fukushima surely resulted in a significant destruction of human and physical capital, its effects would have been largely restricted to the affected areas were it not for the disruption of national

Entrepreneurship as Experimentation

Abstract: Entrepreneurship research is on the rise but many questions about the fundamental nature of entrepreneurship still exist. We argue that entrepreneurship is about experimentation; the proba...

The Missing “Missing Middle”

Abstract: The notion that the distribution of firm size in poor countries is characterized by a bimodal distribution with a “missing middle” is a widely accepted fact in development economics (for example, see Krueger 2013). The idea of the missing middle is that there are a large number of small firms, some large firms, but very few medium-sized firms. The purported fact about the missing middle is cited as evidence for two broad stories of why many countries are poor. Perhaps surprisingly, these models look for the cause of the missing middle in two fundamentally different places. One approach suggests that small firms are disfavored in low-income countries— for example, by a lack of access to financial capital—and thus face difficulties in growing to become middle-sized firms. The other approach posits a “dual economy” of large high-productivity firms and small low-productivity firms, and then suggests that larger firms are disfavored in low-income countries—for example, by having to bear large fixed costs of regulation—which make it difficult for middle-sized firms to become established. We begin by reviewing these theories of development based on the purported fact of a “missing middle.” We then explore the evidence on distribution of firm sizes in more detail and challenge the presumption that a “missing middle” occurs at all. We present three main facts. First, there is in fact no evidence of a missing middle in detailed and comprehensive data on the size of manufacturing firms in India, Indonesia, or Mexico, regardless of how we slice the data. To be sure, there

Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics

Abstract: There is a growing body of evidence that many entrepreneurs seem to enter and persist in entrepreneurship despite earning low risk-adjusted returns. This has lead to attempts to provide explanations—using both standard economic theory and behavioral economics—for why certain individuals may be attracted to such an apparently unprofitable activity. Drawing on research in behavioral economics, in the sections that follow, we review three sets of possible interpretations for understanding the empirical facts related to the entry into, and persistence in, entrepreneurship. Differences in risk aversion provide a plausible and intuitive interpretation of entrepreneurial activity. In addition, a growing literature has begun to highlight the potential importance of overconfidence in driving entrepreneurial outcomes. Such a mechanism may appear at face value to work like a lower level of risk aversion, but there are clear conceptual differences—in particular, overconfidence likely arises from behavioral biases and misperceptions of probability distributions. Finally, nonpecuniary taste-based factors may be important in motivating both the decisions to enter into and to persist in entrepreneurship.

The Economics of Fair Trade

Abstract: Fair Trade is a labeling initiative aimed at improving the lives of the poor in developing countries by offering better terms to producers and helping them to organize. In this survey, we provide a critical overview of the economic theory behind Fair Trade, describing the potential benefits and potential pitfalls. We also provide an assessment of the empirical evidence of the impacts of Fair Trade to date.

When ideas trump interests: preferences, world views, and policy innovations

Abstract: The contemporary approach to political economy is built around vested interests ‐‐ elites, lobbies, and rent‐seeking groups which get their way at the expense of the general public. The role of ideas in shaping those interests is typically ignored or downplayed. Yet each of the three components of the standard optimization problem in political economy – preferences, constraints, and choice variables – rely on an implicit set of ideas. Once the manner in which ideas enter these frameworks is made explicit, a much richer and more convincing set of results can be obtained. In particular, new ideas about policy—or policy entrepreneurship—can exert an independent effect on equilibrium outcomes even in the absence of changes in the configuration of political power.

Agriculture in the Global Economy

Abstract: Agriculture is diverse and full of contradictions. The sector accounts for a griculture is diverse and full of contradictions. The sector accounts for a comparatively small share of the global economy, but remains central comparatively small share of the global economy, but remains central to the lives of a great many people. In 2012, of the world’s 7.1 billion to the lives of a great many people. In 2012, of the world’s 7.1 billion people, an estimated 1.3 billion (19 percent) were directly engaged in farming, people, an estimated 1.3 billion (19 percent) were directly engaged in farming, but agriculture (including the relatively small hunting/fi shing and forestry sectors) but agriculture (including the relatively small hunting/fi shing and forestry sectors) represented just 2.8 percent of overall income (World Bank 2012). However, in represented just 2.8 percent of overall income (World Bank 2012). However, in today’s middle- and low-income countries, where most of the world’s farmers are today’s middle- and low-income countries, where most of the world’s farmers are to be found, agriculture accounts for a much greater share of national income and to be found, agriculture accounts for a much greater share of national income and employment—for instance, in India, agriculture represents 18 percent of national employment—for instance, in India, agriculture represents 18 percent of national income and 54 percent of employment. income and 54 percent of employment. 1

Agricultural Biotechnology: The Promise and Prospects of Genetically Modified Crops

Abstract: For millennia, humans have modified plant genes in order to develop crops best suited for food, fiber, feed, and energy production. The earliest efforts, far predating Gregor Mendel’s 19th-century discoveries on trait inheritance, involved the selective breeding of plants with desirable characteristics, but the recombination of DNA in offspring was random. Consequently, plant breeding often took decades and frequently yielded crop varieties with unforeseen and undesirable properties. Today, conventional plant breeding remains inherently random and slow, constrained by the availability of desirable traits in closely related plant species. In contrast, agricultural biotechnology employs the modern tools of genetic engineering to reduce uncertainty and breeding time and to transfer traits from more distantly related plants. Arguments in support of and in opposition to the use of genetically engineered seeds have changed little since the technology emerged in the 1980s. On one side, critics express concerns that the technology imposes negative environmental effects and jeopardizes the health of those who consume the “frankenfoods.” On the other side, supporters emphasize potential gains from boosting output and lowering food prices for consumers. They argue that such gains are achieved contemporaneous with the adoption of farming practices that lower agrochemical use and lessen soil

Do Poverty Traps Exist? Assessing the Evidence

Abstract: Why did per capita incomes not increase in Burundi, Haiti, and Nicaragua countries? One possible explanation is a poverty trap, which can be understood as a set of self-reinforcing mechanisms whereby countries start poor and remain poor: poverty begets poverty, so that current poverty is itself a direct cause of poverty in the future. It implies that much poverty is needless, in the sense that a different equilibrium is possible and also that one-time policy efforts that break the poverty trap may have lasting effects. The concept of a poverty trap at the level of national economies is related to, and sometimes based on, microeconomic foundations that argue for the existence of poverty traps at the household level. The authors discuss behavioral poverty traps as a recent area of research for which the evidence is just starting to accumulate, and geographic poverty traps as the most likely form of a trap. The policy prescriptions that result are then quite different from the calls for a big push in aid or expansion of microfinance to allow people to overcome credit constraints.

The Economics of Guilds

Abstract: Occupational guilds in medieval and early modern Europe offered an effective institutional mechanism whereby two powerful groups, guild members and political elites, could collaborate in capturing a larger slice of the economic pie and redistributing it to themselves at the expense of the rest of the economy. Guilds provided an organizational mechanism for groups of businessmen to negotiate with political elites for exclusive legal privileges that allowed them to reap monopoly rents. Guild members then used their guilds to redirect a share of these rents to political elites in return for support and enforcement. In short, guilds enabled their members and political elites to negotiate a way of extracting rents in the manufacturing and commercial sectors, rents that neither party could have extracted on its own. First, I provide an overview of where and when European guilds arose, what occupations they encompassed, how large they were, and how they varied across time and space. I then examine how guild activities affected market competition, commercial security, contract enforcement, product quality, human capital, and technological innovation. The historical findings on guilds provide strong support for the view that institutions arise and survive for centuries not because they are efficient but because they serve the distributional interests of powerful groups.

Page Limits on Economics Articles: Evidence from Two Journals

Abstract: Over the past four decades the median length of the papers published in the “top five” economic journals has grown by nearly 300 percent. We study the effects of a page limit policy introd...

Political Campaigns and Big Data

Abstract: have become increasingly reliant on analyzing large and detailed datasets to create the necessary predictions. While the adoption of these new analytic methods has the necessary predictions. While the adoption of these new analytic methods has not radically transformed how campaigns operate, the improved effi ciency gives not radically transformed how campaigns operate, the improved effi ciency gives data-savvy campaigns a competitive advantage. This has led the political parties to data-savvy campaigns a competitive advantage. This has led the political parties to engage in an arms race to leverage ever-growing volumes of data to create votes. engage in an arms race to leverage ever-growing volumes of data to create votes. This paper describes the utility and evolution of data in political campaigns. This paper describes the utility and evolution of data in political campaigns. The techniques used as recently as a decade or two ago by political campaigns The techniques used as recently as a decade or two ago by political campaigns to predict the tendencies of citizens appear extremely rudimentary by current to predict the tendencies of citizens appear extremely rudimentary by current standards. At that time, citizens’ likely support was gauged primarily by their party standards. At that time, citizens’ likely support was gauged primarily by their party affi liations and the “performance” of the precincts in which they lived (that is, what affi liations and the “performance” of the precincts in which they lived (that is, what

US Manufacturing: Understanding Its Past and Its Potential Future

Abstract: The development of the US manufacturing sector over the last half-century displays two striking and somewhat contradictory features: 1) the growth of real output in the US manufacturing se...

Networks in the Understanding of Economic Behaviors

Abstract: As economists endeavor to build better models of human behavior, they cannot ignore that humans are fundamentally a social species with interaction patterns that shape their behaviors. People's opinions, which products they buy, whether they invest in education, become criminals, and so forth, are all influenced by friends and acquaintances. Ultimately, the full network of relationships—how dense it is, whether some groups are segregated, who sits in central positions—affects how information spreads and how people behave. Increased availability of data coupled with increased computing power allows us to analyze networks in economic settings in ways not previously possible. In this paper, I describe some of the ways in which networks are helping economists to model and understand behavior. I begin with an example that demonstrates the sorts of things that researchers can miss if they do not account for network patterns of interaction. Next I discuss a taxonomy of network properties and how they im...

Global Biofuels: Key to the Puzzle of Grain Market Behavior

Abstract: These jumps in the prices of these three major grains have also revealed the These jumps in the prices of these three major grains have also revealed the chaotic state of economic analysis of agricultural commodity markets. Economists chaotic state of economic analysis of agricultural commodity markets. Economists and scientists have engaged in a blame game, apportioning percentages of responand scientists have engaged in a blame game, apportioning percentages of responsibility for price spikes to bewildering lists of factors, which include a surge in meat sibility for price spikes to bewildering lists of factors, which include a surge in meat consumption caused by unprecedented increases of income of the vast populations consumption caused by unprecedented increases of income of the vast populations of China and India; idiosyncratic regional droughts and fi res; speculative bubbles; a of China and India; idiosyncratic regional droughts and fi res; speculative bubbles; a new “fi nancialization” of grain markets; the slowdown of global agricultural research new “fi nancialization” of grain markets; the slowdown of global agricultural research spending; jumps in costs of energy and fertilizers; shifts in interest rates; the decline spending; jumps in costs of energy and fertilizers; shifts in interest rates; the decline of the dollar; the surge in biofuels demands; bans on genetically modifi ed plants; of the dollar; the surge in biofuels demands; bans on genetically modifi ed plants; and climate change. Several observers have claimed to identify a “perfect storm” in and climate change. Several observers have claimed to identify a “perfect storm” in the grain markets in 2007/2008, a confl uence of some of the factors listed above. the grain markets in 2007/2008, a confl uence of some of the factors listed above. The continuing confused state of the economics of grain price volatility may The continuing confused state of the economics of grain price volatility may seem odd. After all, grain markets have many of the features of textbook competiseem odd. After all, grain markets have many of the features of textbook competitive models. The products are relatively uniform. Their primary producers and tive models. The products are relatively uniform. Their primary producers and ultimate consumers are atomistic price takers. Prices and outputs in the United ultimate consumers are atomistic price takers. Prices and outputs in the United States and other developed countries are unusually well measured by the standards States and other developed countries are unusually well measured by the standards of most goods and services in the world economy, with data freely available from of most goods and services in the world economy, with data freely available from

The Lewis Model: A 60-Year Retrospective

Abstract: The Lewis (1954) model of economic development is one of the rare 60 year-old papers still featured on many graduate economics reading lists. However, like many classics, the original paper, “Economic Development with Unlimited Supplies of Labor,” is probably read less frequently than it is cited. There are numerous commentaries and glosses available that save readers the trouble of wrestling with the original—even though Lewis’s writing was lucid and engaging. In particular, many development textbooks offer verbal or graphic summaries of the Lewis model, but the summaries often lose the richness of the original. Lewis’s (1954) paper bundles together theories of growth, structural transformation, inequality and distribution, wage determination, and population. The proliferation of ideas in the Lewis paper was not an accident. Lewis (p. 139) telegraphed his intention in the first paragraph of the paper, where he wrote: “This essay is written in the classical tradition, making the classical assumption, and asking the classical question. The classics, from Smith to Marx, all assumed, or argued, that an unlimited supply of labour was available at subsistence wages. They then inquired how production grows through time. They found the answer in capital accumulation, which they explained in terms of their analysis of the distribution of income. Classical systems thus determined simultaneously income distribution and income growth, with the relative prices of commodities as a minor by-product.” This paper was not a modest undertaking, and Lewis himself clearly viewed it as a major contribution.

American Farms Keep Growing: Size, Productivity, and Policy

Abstract: Commercial agriculture in the United States is comprised of several hundred thousand farms, and these farms continue to become larger and fewer. The size of commercial farms is sometimes best-measured by sales, in other cases by acreage, and in still other cases by quantity produced of specific commodities, but for many commodities, size has doubled and doubled again in a generation. This article summarizes the economics of commercial agriculture in the United States, focusing on growth in farm size and other changes in size distribution in recent decades. I also consider the relationships between farm size distributions and farm productivity growth and farm subsidy policy.

Competing in Advanced Manufacturing: The Need for Improved Growth Models and Policies

Abstract: The United States has underinvested for several decades in a set of productivity-enhancing assets necessary for the long-term health of its manufacturing sector. Conventional characterizations of the process of bringing new advanced manufacturing products to market usually leave out two important elements: One is “proof-of-concept research” to establish broad “technology platforms” that can then be used as a basis for developing actual products. The second is a technical infrastructure of “infratechnologies” that include the analytical tools and standards needed for measuring and classifying the components of the new technology; metrics and methods for determining the adequacy of the multiple performance attributes of the technology; and the interfaces among hardware and software components that must work together for a complex product to perform as specified. If the public–private dynamics are not properly aligned to encourage proof-of-concept research and needed infratechnologies, then promisin...

Community networks and the process of development

Abstract: Anyone who has spent time in a developing country knows the importance of social connections, which can help individuals land jobs, and provide them with credit and other forms of support. At first glance, it might appear that such connections distort the economy by giving select individuals an unfair advantage. However, modern economics provides another perspective on this phenomenon, arguing that when markets function imperfectly, networks of socially connected individuals can enhance economic efficiency. For example, when the ability of new hires cannot be observed by the firm, incumbent workers will refer competent members of their community to their employers. These new hires will work diligently both so as not to let down the workers that referred them, and also to avoid the social sanctions they would face from their network if they were caught shirking. In this example, social connections solve information and commitment problems. Unlike information networks, which can be organized around casual acquaintances or even anonymous online communities, networks that solve commitment problems must be based on strong social ties to support the sanctions that are needed to maintain cooperative behavior (Karlan, Mobius, Rosenblat, and Szeidl 2009; Dhillon, Iverson, and Torsvik 2013). Commitment networks will thus typically be organized around close-knit communities that have been in place for long periods of time, sometimes spanning multiple generations. Depending on the context, these communities could be based on kinship (for example, castes in India

How Can Scandinavians Tax So Much

Abstract: American visitors to Scandinavian countries are often puzzled by what they observe: despite large income redistribution through distortionary taxes and transfers, these are very high-income countries. They rank among the highest in the world in terms of income per capita, as well as most other economic and social outcomes. The economic and social success of Scandinavia poses important questions for economics and for those arguing against large redistribution based on its supposedly detrimental effect on economic growth and welfare. To form a basis for the discussion, Table 1 shows tax revenues and income tax rates in the three Scandinavian countries—Denmark, Norway, and Sweden— as compared to other European countries and the United States. We see that the tax-to-GDP ratio and the tax rates on income are much higher in Scandinavia than elsewhere. The top marginal tax rates are about 60–70 percent in the Scandinavian countries as opposed to only 43 percent in the United States. The contrast is even more striking when considering the so-called “participation tax rate,” which is the effective average tax rate on labor force participation when accounting for the distortions due to income taxes, payroll taxes, consumption taxes, and means-tested transfers. This tax rate is around 80 percent in the Scandinavian countries, implying that an average worker entering employment will be able to increase consumption by only 20 percent of earned income due to the combined effect of higher taxes and lower transfers. By contrast, the average worker in the United States gets to keep 63 percent of earnings when accounting for the full effect of the tax and

Management Practices, Relational Contracts and the Decline of General Motors

Abstract: General Motors was once regarded as the best-managed and most successful firm in the world. However, between 1980 and 2009, GM's US market share fell from 46 to 20 percent, and in 2009 the firm went bankrupt. We argue that the conventional explanation for this decline—namely high legacy labor and healthcare costs—is seriously incomplete, and that GM's share collapsed for many of the same reasons that many highly successful American firms of the 1960s were forced from the market, including a failure to understand the nature of the competition they faced and an inability to respond effectively once they did. We focus particularly on the problems GM encountered in developing the relational contracts essential to modern design and manufacturing, and we discuss a number of possible causes for these difficulties. We suggest that GM's experience may have important implications for our understanding of the role of management in the modern, knowledge-based firm and for the potential revival of manufacturi...