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The Econometric Model for Causal Policy Analysis. Annual Review of Economics (IF 5.97) Pub Date : 2022-06-29 James Heckman,Rodrigo Pinto
This paper discusses the econometric model of causal policy analysis and two alternative frameworks that are popular in statistics and computer science. By employing the alternative frameworks uncritically, economists ignore the substantial advantages of an econometric approach, resulting in less informative analyses of economic policy. We show that the econometric approach to causality enables economists
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Helicopter Money: What Is It and What Does It Do? Annual Review of Economics (IF 5.97) Pub Date : 2022-04-28 Ricardo Reis,Silvana Tenreyro
We review the different meanings of helicopter money, both in the literature and in the public debate around it, and we clarify the conditions under which helicopter money can have an impact on real activity. To do so, we set out a simple model that encapsulates a number of potential channels of policy transmission. The model provides a taxonomy of possibilities for helicopter money to affect the economy
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The Economics of the COVID-19 Pandemic in Poor Countries Annual Review of Economics (IF 5.97) Pub Date : 2022-04-28 Edward Miguel,Ahmed Mushfiq Mobarak
The COVID-19 pandemic has upended health and living standards around the world. This article provides an interim overview of these effects, with a particular focus on low- and middle-income countries (LMICs). Economists have explained how the pandemic is likely to have different consequences for LMICs and demands distinct policy responses compared to those of rich countries. We survey the rapidly expanding
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How Economic Development Influences the Environment Annual Review of Economics (IF 5.97) Pub Date : 2022-04-18 Seema Jayachandran
Reducing global poverty and addressing climate change and other environmental crises are among the most important challenges facing humanity today. This review discusses one way in which these problems are intertwined: how economic development affects the environment. I synthesize recent micro-empirical research on the environmental effects of economic development in low- and middle-income countries
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The Affordable Care Act After a Decade: Industrial Organization of the Insurance Exchanges Annual Review of Economics (IF 5.97) Pub Date : 2022-04-18 Benjamin Handel,Jonathan Kolstad
The regulated insurance exchanges set up in the Affordable Care Act (ACA) were designed to deliver affordable, efficient health coverage through private insurers. It is crucial to study the complex industrial organization (IO) of these exchanges in order to assess their impacts during the first decade of the ACA and to project their effects going forward. We revisit the inherent market failures in
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Risks and Global Supply Chains: What We Know and What We Need to Know Annual Review of Economics (IF 5.97) Pub Date : 2022-04-08 Richard Baldwin,Rebecca Freeman
Recent supply disruptions catapulted the issue of risk in global supply chains (GSCs) to the top of policy agendas and created the impression that shortages would have been less severe if GSCs had been either shorter and more domestic or more diversified. But is this right? We start our answer by reviewing studies that look at risks to and from GSCs and at how GSCs have recovered from past shocks.
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The Impact of Health Information and Communication Technology on Clinical Quality, Productivity, and Workers Annual Review of Economics (IF 5.97) Pub Date : 2022-04-04 Ari Bronsoler,Joseph Doyle,John Van Reenen
The adoption of health information and communication technology (HICT) has surged over the past two decades. We survey the medical and economic literature on HICT adoption and its impact on clinical outcomes, productivity, and the health care workforce. We find that HICT improves clinical outcomes and lowers health care costs; however, ( a) the effects are modest so far, ( b) it takes time for these
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The Great Divide: Education, Despair, and Death Annual Review of Economics (IF 5.97) Pub Date : 2022-04-01 Anne Case,Angus Deaton
Deaths of despair, morbidity, and emotional distress continue to rise in the United States, largely borne by those without a college degree—the majority of American adults—for many of whom the economy and society are no longer delivering. Concurrently, all-cause mortality in the United States is diverging by education in a way not seen in other rich countries. We review the rising prevalence of pain
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Empirical Models of Industry Dynamics with Endogenous Market Structure Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 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
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The Political Economy of Deep Integration Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 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
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Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 Nathaniel Hendren,Camille Landais,Johannes Spinnewijn
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
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The Elusive Peace Dividend of Development Policy: From War Traps to Macro Complementarities Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 Dominic Rohner,Mathias Thoenig
This article reviews the literature on civil conflict and development with a focus on the socioeconomic consequences of violence and on promising policies for fostering peace. We make four main points. First, one of the reasons conflict is still often overlooked as key factor for development is that conflict costs are typically underestimated, in particular the shadow costs of deterrence. Second, there
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Estimating DSGE Models: Recent Advances and Future Challenges Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 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
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Theoretical Foundations of Relational Incentive Contracts Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 Joel Watson
This article describes the emerging game-theoretic framework for modeling long-term contractual relationships with moral hazard. The framework combines self-enforcement and external enforcement, accommodating alternative assumptions regarding how actively the parties initially set and renegotiate the terms of their contract. A progression of theoretical components is reviewed, building from the recursive
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Why Does Globalization Fuel Populism? Economics, Culture, and the Rise of Right-Wing Populism Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 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
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Directed Technical Change in Labor and Environmental Economics Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 David Hémous,Morten Olsen
It is increasingly evident that the direction of technological change responds to economic incentives. We review the literature on directed technical change in the context of environmental economics and labor economics, and we show that these fields have much in common both theoretically and empirically. We emphasize the importance of a balanced growth path and show that the lack of such a path is
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Uncertainty Spillovers for Markets and Policy Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 Lars Peter Hansen
We live in a world filled with uncertainty. In this essay, I show that featuring this phenomenon more in economic analyses adds to our understanding of how financial markets work and how best to design prudent economic policy. This essay explores methods that allow for a broader conceptualization of uncertainty than is typical in economic investigations. These methods draw on insights from decision
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Systemic Risk in Financial Networks: A Survey Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 Matthew O. Jackson,Agathe Pernoud
We provide an overview of the relationship between financial networks and systemic risk. We present a taxonomy of different types of systemic risk, differentiating between direct externalities between financial organizations (e.g., defaults, correlated portfolios, fire sales), and perceptions and feedback effects (e.g., bank runs, credit freezes). We also discuss optimal regulation and bailouts, measurements
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The Blossoming of Economic Epidemiology Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 David McAdams
Infectious diseases, ideas, new products, and other infectants spread in epidemic fashion through social contact. The COVID-19 pandemic, the proliferation of fake news, and the rise of antimicrobial resistance have thrust economic epidemiology into the forefront of public policy debate and reinvigorated the field. Focusing for concreteness on disease-causing pathogens, this review provides a taxonomy
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What Shapes the Quality and Behavior of Government Officials? Institutional Variation in Selection and Retention Methods Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 Claire S.H. Lim,James M. Snyder
In representative democracies, a variety of rules are employed to select and retain public officials to reflect public preferences over policies. We discuss the literature on selection and retention rules for government officials, focusing on low-information offices. First, we overview the historical origins and the scope of the variation in selection and retention rules. Second, we provide conceptual
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Large Games: Robustness and Stability Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 Ronen Gradwohl,Ehud Kalai
This review focuses on properties related to the robustness and stability of Nash equilibria in games with a large number of players. Somewhat surprisingly, these equilibria become substantially more robust and stable as the number of players increases. We illustrate the relevant phenomena through a binary-action game with strategic substitutes, framed as a game of social isolation in a pandemic environment
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A Helicopter Tour of Some Underlying Issues in Empirical Industrial Organization Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 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
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The International Aspects of Macroprudential Policy Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 Kristin J. Forbes
Countries are making more active use of macroprudential tools than in the past with the goal of improving the resilience of their broader financial systems. A growing body of evidence suggests that these tools can accomplish specific domestic goals and should reduce a country's vulnerability to many domestic and international shocks. The evidence also suggests, however, that these policies are not
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The Macroeconomics of Financial Speculation Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 Alp Simsek
I review the literature on financial speculation driven by belief disagreements from a macroeconomics perspective. To highlight unifying themes, I develop a stylized macroeconomic model that embeds several mechanisms. With short-selling constraints, speculation can generate overvaluation and speculative bubbles. Leverage can substantially inflate speculative bubbles, and leverage limits depend on perceived
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Inflation Inequality: Measurement, Causes, and Policy Implications Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 Xavier Jaravel
Does inflation vary across the income distribution? This article reviews the growing literature on inflation inequality, describing recent advances and opportunities for further research in four areas. First, new price index theory facilitates the study of inflation inequality. Second, new data show that inflation rates decline with household income in the United States. Accurate measurement requires
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The Economics of Currency Risk Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 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
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The Story of the Real Exchange Rate Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 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
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Emmanuel Farhi, Economist Par Excellence Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 Jean Tirole
Undoubtedly one of the best economists of his generation, Emmanuel Farhi transformed the theories of taxation, macroeconomics, and international finance. This essay describes his itinerary and his research style and attempts to pay tribute to his immense contribution to economics.
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The Econometrics of Early Childhood Human Capital and Investments Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 Flavio Cunha,Eric 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
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Does Vote Trading Improve Welfare? Annual Review of Economics (IF 5.97) Pub Date : 2021-08-05 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
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Trade Policy in American Economic History Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Douglas A. Irwin
This article reviews the broad changes in US trade policy over the course of the nation's history. Import tariffs have been the main instrument of trade policy and have had three main purposes: to raise revenue for the government, to restrict imports and protect domestic producers from foreign competition, and to reach reciprocity agreements that reduce trade barriers. Each of these three objectives—revenue
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An Econometric Perspective on Algorithmic Subsampling Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Sokbae Lee,Serena Ng
Data sets that are terabytes in size are increasingly common, but computer bottlenecks often frustrate a complete analysis of the data, and diminishing returns suggest that we may not need terabytes of data to estimate a parameter or test a hypothesis. But which rows of data should we analyze, and might an arbitrary subset preserve the features of the original data? We review a line of work grounded
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Political Effects of the Internet and Social Media Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Ekaterina Zhuravskaya,Maria Petrova,Ruben Enikolopov
How do the Internet and social media affect political outcomes? We review empirical evidence from the recent political economy literature, focusing primarily on work that considers traits that distinguish the Internet and social media from traditional off-line media, such as low barriers to entry and reliance on user-generated content. We discuss the main results about the effects of the Internet in
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Shotgun Wedding: Fiscal and Monetary Policy Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Marco Bassetto, Thomas J. Sargent
This review describes interactions between monetary and fiscal policies that affect equilibrium price levels and interest rates by critically surveying theories about (a) optimal anticipated inflat...
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Economics with a Moral Compass? Welfare Economics: Past, Present, and Future Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Amartya Sen, Angus Deaton, Tim Besley
This conversation between Nobel Laureates Amartya Sen and Angus Deaton, moderated by Annual Review of Economics Editorial Committee Member Tim Besley, focuses on bringing ethical issues into econom...
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Capital Flows and Leverage Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Şebnem Kalemli-Özcan, Jun Hee Kwak
This article surveys the literature on capital flows and leverage. We summarize results from the existing papers and document new facts. The empirical literature takes both a macro and a micro appr...
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Econometric Models of Network Formation Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Áureo de Paula
This article provides a selective review on the recent literature on econometric models of network formation. The survey starts with a brief exposition on basic concepts and tools for the statistical description of networks. I then offer a review of dyadic models, focussing on statistical models on pairs of nodes and describe several developments of interest to the econometrics literature. The article
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New Developments in Revealed Preference Theory: Decisions Under Risk, Uncertainty, and Intertemporal Choice Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Federico Echenique
This survey reviews recent developments in revealed preference theory. It discusses the testable implications of theories of choice that are germane to specific economic environments. The focus is on expected utility in risky environments; subjected expected utility and maxmin expected utility in the presence of uncertainty; and exponentially discounted utility for intertemporal choice. The testable
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Alternative Work Arrangements Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Alexandre Mas, Amanda Pallais
Alternative work arrangements, defined both by working conditions and by workers’ relationship to their employers, are heterogeneous and common in the U.S. This article reviews the literature on workers’ preferences over these arrangements, inputs to firms’ decision to offer them, and the impact of regulation. It also highlights several descriptive facts. Work arrangements have been relatively stable
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Robust Decision Theory and Econometrics Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Gary Chamberlain
This review uses the empirical analysis of portfolio choice to illustrate econometric issues that arise in decision problems. Subjective expected utility (SEU) can provide normative guidance to an ...
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Peer Effects in Networks: A Survey Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Yann Bramoullé, Habiba Djebbari, Bernard Fortin
We survey the recent, fast-growing literature on peer effects in networks. An important recurring theme is that the causal identification of peer effects depends on the structure of the network itself. In the absence of correlated effects, the reflection problem is generally solved by network interactions even in non-linear, heterogeneous models. By contrast, microfounda-tions are generally not identified
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Poverty and the Labor Market: Today and Yesterday Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Robert C. Allen
World Bank estimates put absolute poverty in Asia and Africa at 50–60% of the population in 1980 and at negligible levels in the developed world. This review investigates whether Asia was always so...
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Computing Economic Equilibria Using Projection Methods Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Alena Miftakhova, Karl Schmedders, Malte Schumacher
The analysis of dynamic economic models routinely leads to the mathematical problem of determining an unknown function for which no closed-form solution exists. Economists must then resort to metho...
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The Econometrics of Static Games Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Andrés Aradillas-López
This article reviews the econometrics of static games, with a focus on discrete-choice cases. These models have been used to study a rich variety of empirical problems, ranging from labor force par...
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Social Identity, Group Behavior, and Teams Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Gary Charness, Yan Chen
The issue of one's identity has loomed large recently and has unfortunately been used more and more as a wedge to separate subgroups. It is important to understand the ramifications of identity, bo...
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Modeling Imprecision in Perception, Valuation, and Choice Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Michael Woodford
Traditional decision theory assumes that people respond to the exact features of the options available to them, but observed behavior seems much less precise. This review considers ways of introduc...
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Aspirations and Economic Behavior Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Garance Genicot, Debraj Ray
This article reviews the literature on aspirations in economics, with a particular focus on socially determined aspirations. The core theory builds on two fundamental principles: (a) Aspirations ca...
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Social Identity and Economic Policy Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Moses Shayo
I review evidence that individuals associate themselves—or identify—with groups in two fundamental ways: ingroup bias and conformity to group norms. The evidence spans many spheres of economic acti...
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Taxation and the Superrich Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Florian Scheuer, Joel Slemrod
This article addresses the modern optimal tax progressivity literature, which clarifies the key role of the behavioral response to taxation and accounts for the incomes of the superrich being quali...
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Behavioral Implications of Causal Misperceptions Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Ran Spiegler
This review presents an approach to modeling decision making under misspecified subjective models. The approach is based on the idea that decision makers impose subjective causal interpretations on...
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Empirical Models of Lobbying Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Matilde Bombardini, Francesco Trebbi
This article offers a review of the recent empirical literature on lobbying within political economy. In surveying extant research, we emphasize quid pro quo and informational issues in special int...
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The Search Theory of Over-the-Counter Markets Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Pierre-Olivier Weill
I review the recent literature that applies search-and-matching theory to the study of over-the-counter financial markets. I formulate and solve a simple model to illustrate the typical assumptions...
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Informality: Causes and Consequences for Development Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Gabriel Ulyssea
This article reviews the economic literature on informality, its causes, and its consequences for development. It covers a comprehensive body of research that ranges from well-identified experiment...
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The Theory and Empirics of the Marriage Market Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Pierre-André Chiappori
This article reviews recent developments in the literature on marriage markets. A particular emphasis is put on frameworks based either on frictionless matching models with transfers or on search m...
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Revealed Preference Analysis of School Choice Models Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Nikhil Agarwal, Paulo Somaini
Preferences for schools are important determinants of equitable access to high-quality education, effects of expanded choice on school improvement, and school choice mechanism design. Standard meth...
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Nash Equilibrium in Discontinuous Games Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Philip J. Reny
We review the discontinuous games literature, with a sharp focus on conditions that ensure the existence of pure and mixed strategy Nash equilibria in strategic form games and of Bayes-Nash equilib...
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Social Networks and Migration Annual Review of Economics (IF 5.97) Pub Date : 2020-08-02 Kaivan Munshi
The frictions that restrict migration are among the largest sources of inefficiency in the global economy. The first step in designing policies to address these frictions is to understand the funda...
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Production Networks: A Primer Annual Review of Economics (IF 5.97) Pub Date : 2019-08-02 Vasco M. Carvalho, Alireza Tahbaz-Salehi
This article reviews the literature on production networks in macroeconomics. It presents the theoretical foundations for the roles of input-output linkages as a shock propagation channel and a mechanism for transforming microeconomic shocks into macroeconomic fluctuations. The article provides a brief guide to the growing literature that explores these themes empirically and quantitatively.
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Free Movement, Open Borders, and the Global Gains from Labor Mobility Annual Review of Economics (IF 5.97) Pub Date : 2019-08-02 Christian Dustmann, Ian P. Preston
Straightforward economic arguments point to the potential for large global output gains from the movement of labor from less to more productive locations. Yet the politics of receiving countries se...
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Bootstrap Methods in Econometrics Annual Review of Economics (IF 5.97) Pub Date : 2019-08-02 Joel L. Horowitz
The bootstrap is a method for estimating the distribution of an estimator or test statistic by re-sampling the data or a model estimated from the data. Under conditions that hold in a wide variety of econometric applications, the bootstrap provides approximations to distributions of statistics, coverage probabilities of confidence intervals, and rejection probabilities of hypothesis tests that are