Pub Date : 2021-08-05DOI: 10.1146/annurev-economics-081720-114422
Alessandra Casella,Antonin Macé
Voters have strong incentives to increase their influence by trading votes, acquiring others’ votes when preferences are strong in exchange for giving votes away when preferences are weak. But is vote trading welfare improving or welfare decreasing? For a practice long believed to be central to collective decisions, the lack of a clear answer is surprising. We review the theoretical literature and, when available, its related experimental tests. We begin with the analysis of logrolling, the exchange of votes for votes. We then focus on vote markets, where votes can be traded against a numeraire. We conclude with procedures allowing voters to shift votes across decisions—that is, allowing one to trade votes with oneself only. We find that vote trading and vote markets are typically inefficient; more encouraging results are obtained by allowing voters to allocate votes across decisions.
{"title":"Does Vote Trading Improve Welfare?","authors":"Alessandra Casella,Antonin Macé","doi":"10.1146/annurev-economics-081720-114422","DOIUrl":"https://doi.org/10.1146/annurev-economics-081720-114422","url":null,"abstract":"Voters have strong incentives to increase their influence by trading votes, acquiring others’ votes when preferences are strong in exchange for giving votes away when preferences are weak. But is vote trading welfare improving or welfare decreasing? For a practice long believed to be central to collective decisions, the lack of a clear answer is surprising. We review the theoretical literature and, when available, its related experimental tests. We begin with the analysis of logrolling, the exchange of votes for votes. We then focus on vote markets, where votes can be traded against a numeraire. We conclude with procedures allowing voters to shift votes across decisions—that is, allowing one to trade votes with oneself only. We find that vote trading and vote markets are typically inefficient; more encouraging results are obtained by allowing voters to allocate votes across decisions.","PeriodicalId":47891,"journal":{"name":"Annual Review of Economics","volume":"323 ","pages":"57-86"},"PeriodicalIF":5.6,"publicationDate":"2021-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138515135","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-08-05DOI: 10.1146/annurev-economics-121020-032425
Giovanni Maggi,Ralph Ossa
Modern trade agreements no longer emphasize basic trade liberalization but instead focus on international policy coordination in a much broader sense. In this review we introduce the emerging literature on the political economy of such deep integration agreements. We organize our discussion around three main points. First, the political conflict surrounding trade agreements is moving beyond the classic antagonism of exporter interests who gain from trade and import-competing interests who lose from trade. Second, there is a more intense popular backlash against deep integration agreements than there was against shallow integration agreements. Finally, the welfare economics of trade agreements has become more complex, in the sense that the goal of achieving freer trade is no longer sufficient as a guide to evaluating the efficiency of international agreements.
{"title":"The Political Economy of Deep Integration","authors":"Giovanni Maggi,Ralph Ossa","doi":"10.1146/annurev-economics-121020-032425","DOIUrl":"https://doi.org/10.1146/annurev-economics-121020-032425","url":null,"abstract":"Modern trade agreements no longer emphasize basic trade liberalization but instead focus on international policy coordination in a much broader sense. In this review we introduce the emerging literature on the political economy of such deep integration agreements. We organize our discussion around three main points. First, the political conflict surrounding trade agreements is moving beyond the classic antagonism of exporter interests who gain from trade and import-competing interests who lose from trade. Second, there is a more intense popular backlash against deep integration agreements than there was against shallow integration agreements. Finally, the welfare economics of trade agreements has become more complex, in the sense that the goal of achieving freer trade is no longer sufficient as a guide to evaluating the efficiency of international agreements.","PeriodicalId":47891,"journal":{"name":"Annual Review of Economics","volume":"26 3","pages":"19-38"},"PeriodicalIF":5.6,"publicationDate":"2021-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138519868","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-08-05DOI: 10.1146/annurev-economics-081020-044812
Jesús Fernández-Villaverde,Pablo A. Guerrón-Quintana
We review the current state of the estimation of dynamic stochastic general equilibrium (DSGE) models. After introducing a general framework for dealing with DSGE models, the state-space representation, we discuss how to evaluate moments or the likelihood function implied by such a structure. We discuss, in varying degrees of detail, recent advances in the field, such as the tempered particle filter, approximated Bayesian computation, Hamiltonian Monte Carlo, variational inference, and machine learning. These methods show much promise but have not been fully explored by the DSGE community yet. We conclude by outlining three future challenges for this line of research.
{"title":"Estimating DSGE Models: Recent Advances and Future Challenges","authors":"Jesús Fernández-Villaverde,Pablo A. Guerrón-Quintana","doi":"10.1146/annurev-economics-081020-044812","DOIUrl":"https://doi.org/10.1146/annurev-economics-081020-044812","url":null,"abstract":"We review the current state of the estimation of dynamic stochastic general equilibrium (DSGE) models. After introducing a general framework for dealing with DSGE models, the state-space representation, we discuss how to evaluate moments or the likelihood function implied by such a structure. We discuss, in varying degrees of detail, recent advances in the field, such as the tempered particle filter, approximated Bayesian computation, Hamiltonian Monte Carlo, variational inference, and machine learning. These methods show much promise but have not been fully explored by the DSGE community yet. We conclude by outlining three future challenges for this line of research.","PeriodicalId":47891,"journal":{"name":"Annual Review of Economics","volume":"25 4","pages":"229-252"},"PeriodicalIF":5.6,"publicationDate":"2021-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138519892","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-08-05DOI: 10.1146/annurev-economics-082019-023513
Ariel Pakes
This review considers conceptual issues underlying empirical work on markets. It is divided in three parts. The first part reviews the analysis of demand and equilibrium in retail markets and then considers recent advances in the analysis of markets that require different assumptions: markets where adverse selection and moral hazard may be important, vertical markets with bargaining, and markets wherein a centralized allocation mechanism replaces prices. The second part considers the analysis of cost and production. It reviews the simultaneity and selection issues in production function estimation and then considers the distinction between revenue- and quantity-generating functions and its implications for the analysis of markups, as well as the empirical analysis of fixed costs and its implications for the analysis of product repositioning. The review concludes by considering issues that arise due to the complexity of the empirical analysis of market dynamics and appropriate ways of dealing with them.
{"title":"A Helicopter Tour of Some Underlying Issues in Empirical Industrial Organization","authors":"Ariel Pakes","doi":"10.1146/annurev-economics-082019-023513","DOIUrl":"https://doi.org/10.1146/annurev-economics-082019-023513","url":null,"abstract":"This review considers conceptual issues underlying empirical work on markets. It is divided in three parts. The first part reviews the analysis of demand and equilibrium in retail markets and then considers recent advances in the analysis of markets that require different assumptions: markets where adverse selection and moral hazard may be important, vertical markets with bargaining, and markets wherein a centralized allocation mechanism replaces prices. The second part considers the analysis of cost and production. It reviews the simultaneity and selection issues in production function estimation and then considers the distinction between revenue- and quantity-generating functions and its implications for the analysis of markups, as well as the empirical analysis of fixed costs and its implications for the analysis of product repositioning. The review concludes by considering issues that arise due to the complexity of the empirical analysis of market dynamics and appropriate ways of dealing with them.","PeriodicalId":47891,"journal":{"name":"Annual Review of Economics","volume":"649 ","pages":"397-421"},"PeriodicalIF":5.6,"publicationDate":"2021-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138515131","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Should choice be offered in social insurance programs? This review presents a conceptual framework that identifies the key forces determining the social value of offering choice. We show that the value of offering choice is higher the larger the variation in individual valuations for extra insurance is, but it gets reduced by both selection on risk and selection on moral hazard. Besides adverse selection, the implementation of choice-based policies is further challenged by the presence of choice frictions or the obligation to offer basic uncompensated care. All these inefficiencies can be seen as externalities that do not rationalize the absence of providing choice per se but point to the need for regulatory policies and suggest the potential value of corrective pricing à la Pigou. Applying this framework to the existing evidence on these forces in the context of unemployment insurance, we find that offering insurance choice can be valuable even in the presence of significant adverse selection. We conclude by showing how this framework can constitute a fruitful guide for further empirical research in different insurance domains.
{"title":"Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design","authors":"Nathaniel Hendren,Camille Landais,Johannes Spinnewijn","doi":"10.1146/annurev-economics-090820-111716","DOIUrl":"https://doi.org/10.1146/annurev-economics-090820-111716","url":null,"abstract":"Should choice be offered in social insurance programs? This review presents a conceptual framework that identifies the key forces determining the social value of offering choice. We show that the value of offering choice is higher the larger the variation in individual valuations for extra insurance is, but it gets reduced by both selection on risk and selection on moral hazard. Besides adverse selection, the implementation of choice-based policies is further challenged by the presence of choice frictions or the obligation to offer basic uncompensated care. All these inefficiencies can be seen as externalities that do not rationalize the absence of providing choice per se but point to the need for regulatory policies and suggest the potential value of corrective pricing à la Pigou. Applying this framework to the existing evidence on these forces in the context of unemployment insurance, we find that offering insurance choice can be valuable even in the presence of significant adverse selection. We conclude by showing how this framework can constitute a fruitful guide for further empirical research in different insurance domains.","PeriodicalId":47891,"journal":{"name":"Annual Review of Economics","volume":"91 2","pages":"457-486"},"PeriodicalIF":5.6,"publicationDate":"2021-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138519875","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-08-05DOI: 10.1146/annurev-economics-081720-120019
Steven T. Berry,Giovanni Compiani
This article reviews recent developments in the study of firm and industry dynamics, with a special emphasis on the econometric endogeneity of market structure. The endogeneity of market structure follows from the presence of serially correlated unobservable shocks to the profitability of firms’ dynamic decisions, a feature common to many empirical settings. Methods that ignore endogeneity can lead to misleading parameter estimates and misleading counterfactual results. We pay particular attention to extensions of standard two-step methods that leverage instrumental variables to address endogeneity in both single-agent and oligopoly models. A first step set-identifies dynamic policy functions together with serial correlation parameters, and a second step quickly solves for profit function parameters using an extension of existing forward-simulation methods. We discuss how these new methods provide a general solution to initial-conditions problems and how they can yield practical estimation strategies.
{"title":"Empirical Models of Industry Dynamics with Endogenous Market Structure","authors":"Steven T. Berry,Giovanni Compiani","doi":"10.1146/annurev-economics-081720-120019","DOIUrl":"https://doi.org/10.1146/annurev-economics-081720-120019","url":null,"abstract":"This article reviews recent developments in the study of firm and industry dynamics, with a special emphasis on the econometric endogeneity of market structure. The endogeneity of market structure follows from the presence of serially correlated unobservable shocks to the profitability of firms’ dynamic decisions, a feature common to many empirical settings. Methods that ignore endogeneity can lead to misleading parameter estimates and misleading counterfactual results. We pay particular attention to extensions of standard two-step methods that leverage instrumental variables to address endogeneity in both single-agent and oligopoly models. A first step set-identifies dynamic policy functions together with serial correlation parameters, and a second step quickly solves for profit function parameters using an extension of existing forward-simulation methods. We discuss how these new methods provide a general solution to initial-conditions problems and how they can yield practical estimation strategies.","PeriodicalId":47891,"journal":{"name":"Annual Review of Economics","volume":"191 10","pages":"309-334"},"PeriodicalIF":5.6,"publicationDate":"2021-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138519877","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-08-05DOI: 10.1146/annurev-economics-070220-032416
Dani Rodrik
There is compelling evidence that globalization shocks, often working through culture and identity, have played an important role in driving up support for populist movements, particularly of the right-wing kind. I start with an empirical analysis of the 2016 presidential election in the United States to show that globalization-related attitudinal variables were important correlates of the switch to Trump. I then provide a conceptual framework that identifies four distinct channels through which globalization can stimulate populism, two each on the demand and supply sides of politics. I evaluate the empirical literature with the help of this framework, discussing trade, financial globalization, and immigration separately. I conclude the review by discussing some apparently anomalous cases in which populists have been against, rather than in favor of, trade protection.
{"title":"Why Does Globalization Fuel Populism? Economics, Culture, and the Rise of Right-Wing Populism","authors":"Dani Rodrik","doi":"10.1146/annurev-economics-070220-032416","DOIUrl":"https://doi.org/10.1146/annurev-economics-070220-032416","url":null,"abstract":"There is compelling evidence that globalization shocks, often working through culture and identity, have played an important role in driving up support for populist movements, particularly of the right-wing kind. I start with an empirical analysis of the 2016 presidential election in the United States to show that globalization-related attitudinal variables were important correlates of the switch to Trump. I then provide a conceptual framework that identifies four distinct channels through which globalization can stimulate populism, two each on the demand and supply sides of politics. I evaluate the empirical literature with the help of this framework, discussing trade, financial globalization, and immigration separately. I conclude the review by discussing some apparently anomalous cases in which populists have been against, rather than in favor of, trade protection.","PeriodicalId":47891,"journal":{"name":"Annual Review of Economics","volume":"67 1","pages":"133-170"},"PeriodicalIF":5.6,"publicationDate":"2021-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138519871","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-08-05DOI: 10.1146/annurev-economics-080218-025532
Oleg Itskhoki
The real exchange rate (RER) measures relative price levels across countries, capturing deviations from purchasing power parity (PPP). RER is a key variable in international macroeconomic models as it is central to equilibrium conditions in both goods and asset markets. It is also one of the most starkly behaving variables empirically, tightly comoving with the nominal exchange rate and virtually uncorrelated with most other macroeconomic variables, nominal or real. This review lays out an equilibrium framework of RER determination, focusing separately on each building block and discussing corresponding empirical evidence. We emphasize home bias and incomplete pass-through into prices with expenditure switching and goods market clearing, imperfect international risk sharing, country budget constraint, and monetary policy regime. We show that RER is inherently a general equilibrium variable that depends on the full model structure and policy regime, and therefore partial theories like PPP are insufficient to explain it. We also discuss issues of stationarity and predictability of exchange rates.
{"title":"The Story of the Real Exchange Rate","authors":"Oleg Itskhoki","doi":"10.1146/annurev-economics-080218-025532","DOIUrl":"https://doi.org/10.1146/annurev-economics-080218-025532","url":null,"abstract":"The real exchange rate (RER) measures relative price levels across countries, capturing deviations from purchasing power parity (PPP). RER is a key variable in international macroeconomic models as it is central to equilibrium conditions in both goods and asset markets. It is also one of the most starkly behaving variables empirically, tightly comoving with the nominal exchange rate and virtually uncorrelated with most other macroeconomic variables, nominal or real. This review lays out an equilibrium framework of RER determination, focusing separately on each building block and discussing corresponding empirical evidence. We emphasize home bias and incomplete pass-through into prices with expenditure switching and goods market clearing, imperfect international risk sharing, country budget constraint, and monetary policy regime. We show that RER is inherently a general equilibrium variable that depends on the full model structure and policy regime, and therefore partial theories like PPP are insufficient to explain it. We also discuss issues of stationarity and predictability of exchange rates.","PeriodicalId":47891,"journal":{"name":"Annual Review of Economics","volume":"663 ","pages":"423-455"},"PeriodicalIF":5.6,"publicationDate":"2021-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138515128","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-08-05DOI: 10.1146/annurev-economics-092220-103354
Tarek A. Hassan,Tony Zhang
This article reviews the literature on currency and country risk with a focus on their macroeconomic origins and implications. A growing body of evidence shows that countries with safer currencies enjoy persistently lower interest rates and a lower required return to capital. As a result, they accumulate relatively more capital than countries with currencies that international investors perceive as risky. Whereas earlier research focused mainly on the role of currency risk in generating violations of uncovered interest parity and other financial anomalies, more recent evidence points to important implications for the allocation of capital across countries, the efficacy of exchange rate stabilization policies, the sustainability of trade deficits, and the spillovers of shocks across international borders.
{"title":"The Economics of Currency Risk","authors":"Tarek A. Hassan,Tony Zhang","doi":"10.1146/annurev-economics-092220-103354","DOIUrl":"https://doi.org/10.1146/annurev-economics-092220-103354","url":null,"abstract":"This article reviews the literature on currency and country risk with a focus on their macroeconomic origins and implications. A growing body of evidence shows that countries with safer currencies enjoy persistently lower interest rates and a lower required return to capital. As a result, they accumulate relatively more capital than countries with currencies that international investors perceive as risky. Whereas earlier research focused mainly on the role of currency risk in generating violations of uncovered interest parity and other financial anomalies, more recent evidence points to important implications for the allocation of capital across countries, the efficacy of exchange rate stabilization policies, the sustainability of trade deficits, and the spillovers of shocks across international borders.","PeriodicalId":47891,"journal":{"name":"Annual Review of Economics","volume":"644 ","pages":"281-307"},"PeriodicalIF":5.6,"publicationDate":"2021-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138515132","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-08-05DOI: 10.1146/annurev-economics-080217-053409
Flávio Cunha, Eric R. Nielsen, Benjamin Williams
This article reviews recent developments in the econometrics of early childhood human capital and investments. We start with a discussion about the lack of cardinality in test scores, the reasons it matters for empirical research on human capital, and the approaches researchers have used to address this problem. Next, we discuss how the literature has accounted for the errors in human capital measurements and investments. Then, we focus on the estimation of production functions of human capital. We present two different specifications of the production function and discuss when to use one versus the other. We describe how researchers have addressed cardinality, measurement errors, and endogeneity of inputs to estimate the technology of skill formation. Finally, we take stock of the work to date, and we identify opportunities for new research directions in this field.
{"title":"The Econometrics of Early Childhood Human Capital and Investments","authors":"Flávio Cunha, Eric R. Nielsen, Benjamin Williams","doi":"10.1146/annurev-economics-080217-053409","DOIUrl":"https://doi.org/10.1146/annurev-economics-080217-053409","url":null,"abstract":"This article reviews recent developments in the econometrics of early childhood human capital and investments. We start with a discussion about the lack of cardinality in test scores, the reasons it matters for empirical research on human capital, and the approaches researchers have used to address this problem. Next, we discuss how the literature has accounted for the errors in human capital measurements and investments. Then, we focus on the estimation of production functions of human capital. We present two different specifications of the production function and discuss when to use one versus the other. We describe how researchers have addressed cardinality, measurement errors, and endogeneity of inputs to estimate the technology of skill formation. Finally, we take stock of the work to date, and we identify opportunities for new research directions in this field.","PeriodicalId":47891,"journal":{"name":"Annual Review of Economics","volume":"1 1","pages":""},"PeriodicalIF":5.6,"publicationDate":"2021-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41412175","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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