bluuebunny/crossref_metadata_2025 huggingface dataset:
Theory, Experiment and Economics
Authors: Smith Vernon L
Published: August 2012

It is now over thirty years since research was initiated in the laboratory experimental study of market behavior and performance. This essay provides my interpretation of what the implications of this type of work are for the study of economics.
Puzzles: The Other Person's Envelope is Always Greener
Authors: Nalebuff Barry
Published: August 2012

The Puzzles feature in this issue is devoted to answering a puzzle that appeared in the Spring 1988 issue: “The Other Person's Envelope is Always Greener.” The response to this puzzle was overwhelming. Below, I recap the problem and then discuss the myriad of proposed solutions.
Anomalies: A Mean-Reverting Walk Down Wall Street
Authors: Bondt Werner F. M. De , Thaler Richard H
Published: August 2012

Stock prices do appear to be somewhat predictable. In particular, if one takes a long-term perspective (3–7 years) or examines individual securities that have experienced extreme price movements, then stock returns display significant negative serial correlation, in other words, prices are mean reverting. This column reviews some of this evidence.
Women's Quest for Economic Equality
Authors: Fuchs Victor R
Published: August 2012

The persistence of substantial gender inequality a quarter-century after the passage of major antidiscrimination legislation and several decades of massive social change poses a major problem for economic analysis and policy. Why are women at an economic disadvantage relative to men, and why is it so difficult for them to improve their relative position? The most popular answer—prejudice and exploitation by employers—is seriously incomplete. There is undoubtedly some prejudice and some exploitation, but the evidence in support of the employer explanation is weak, and there are many facts about work and wages that are inconsistent with it. This paper examines occupational segregation; hours of paid work; wages; sources of inequality; and the demand for children. Finally it discusses implications for policy.
Does the Market for Women's Labor Need Fixing?
Authors: Bergmann Barbara R
Published: August 2012

I will start by reviewing the evidence that discrimination against women is currently serious and has important consequences for their pay and status. Some of this evidence is of a variety that economists do not commonly examine or take account of. On the assumption that at least some readers will agree that some remedies might be called for, I go on to look at the virtues and defects of the remedies most commonly proposed—affirmative action and administered wage realignment under the rubric of “pay equity” or “comparable worth.”
Women and Affirmative Action
Authors: Leonard Jonathan S
Published: August 2012

This paper reviews evidence indicating that, as it has been enforced so far, affirmative action has contributed negligibly to women's progress in the workplace. Affirmative action can be modeled as a tax on employers whose female employment growth falls below a certain rate. Clearly, if labor supply shifts result in female employment growth greater than the regulatory standard, the tax constraint will not be binding. As we shall see, this may help explain an affirmative action program that is generally ineffective for women, although it has been effective for minorities. Federal anti-bias policies in general, and the system of affirmative action goals in particular, have been accused of instituting employment quotas. This paper reviews evidence on the homogenization of the workplace predicted by the quota theory, as well as considering more direct evidence on whether affirmative action goals are really quotas in lambs' clothing. I shall also review the slim evidence on the most fundamental and controversial criticism of affirmative action: that rather than reducing discrimination against women and minorities, it has induced discrimination against white males. A new methodology employing direct productivity measures rather than the traditional but limited wage equation residuals proves useful in exploring this issue.
Chaos: Significance, Mechanism, and Economic Applications
Authors: Baumol William J , Benhabib Jess
Published: August 2012

Chaos has become a subject of great interest to specialists and nonspecialists alike. Besides economics, it has entered the literature of geometry, physics, ecology and meteorology. This article seeks to describe what it is, how it works, and what it means for economics.
Women in the Labor Market and in the Family
Authors: Smith James P , Ward Michael
Published: August 2012

There are two themes in this paper. First, we argue that the conventional wisdom of an absence of any substantial labor market progress for women is mistaken. Instead, throughout this century, women's wages have been steadily rising relative to those of men, a progress likely to accelerate in the next few decades. Second, we contend that this labor market progress is not enough. Alongside their labor market advances, the relative economic plight of many women is worsening. The downside news is the increasing feminization of poverty, a reflection of the growing instability of the American family.
Distinguished Fellow: Reflections on Thomas Schelling
Authors: Zeckhauser Richard
Published: August 2012

Thomas Crombie Schelling thinks about the essence of phenomena. He distills such essences and demonstrates their presence in many important social phenomena. We shall chronicle three stages of his life, designated by the titles of his books: The Strategy of Conflict (1960); Micromotives and Macrobehavior (1978); and Choice and Consequence (1984).
Anomalies: Interindustry Wage Differentials
Authors: Thaler Richard H.
Published: August 2012

Firms advertise widely varying wages for jobs that appear to be very similar, such as secretary, data entry clerk, or “tele-marketing representative.” Students who graduate from Cornell's MBA program often receive offers from several firms in the same city with substantially different salaries. These observations seem to violate the law of one price, a fundamental component of the theory of competitive markets. The impression created by these casual bits of data is confirmed by more careful investigations. Some industries appear to pay higher wages than others, even when (measurable) labor quality is held constant. These interindustry wage differentials apply across occupations (if one occupation in an industry is high paid, then all other occupations tend to be) and over time. Why?
Budget Deficits and National Saving: Are Politicians Exogenous?
Authors: Gramlich Edward M
Published: August 2012

After years of relative abstinence, the United States has experimented with persistent budget deficits on a rather massive scale in the 1980s. Economists have generally been quite critical of this fiscal policy, though there are respectable minority views arguing that federal deficits are not so bad and quite possibly better than likely corrective measures. In this paper, I examine the evidence that the great deficit experiment is generating. I first look at the deficits themselves to see how high they really are, dealing with a number of measurement criticisms that have been raised from various quarters. I then discuss two critical responses to the deficits—that of private saving and that of public spending—to determine the impact of the deficits on national saving. A key issue that recurs throughout the discussion is whether the political behavior that leads to the deficits can be taken as exogenous: Are private households better viewed as responding to exogenous public sector deficits, or is something in the air causing both public deficits and a decline in private saving?
Distinguished Lecture on Economics in Government: Central Banking and Systemic Risks in Capital Markets
Authors: Brimmer Andrew F
Published: August 2012

Bagehot's conception of the last resort lending function of the central bank is shared by most economists today. On several occasions, the Federal Reserve has digressed from its overall strategy of monetary control to also undertake a tactical rescue of individual banks and segments of the capital market. On three other occasions, the Federal Reserve has intervened to counter systemic risks to the financial system beyond the arena of commercial banks. The events which prompted these actions were the threat to the commercial paper market triggered by the bankruptcy of the Penn Central Railroad in June 1970, the pressures on broker-dealer firms generated by the collapse of speculation in silver in early 1980, and the near failure of the clearing and settlement systems operated by stock and commodity exchanges which occurred during the stock market crash of 1987. I was a Member of the Board of Governors of the Federal Reserve System during the Penn Central episode, and I shared in the decisions to intervene. As a Public Governor of the Commodity Exchange, I helped to formulate the policies applied during the silver speculation and in the aftermath of the stock market collapse. The discussion which follows draws on those experiences.
The Ricardian Approach to Budget Deficits
Authors: Barro Robert J
Published: August 2012

In recent years there has been a lot of discussion about U.S. budget deficits. Many economists and other observers have viewed these deficits as harmful to the U.S. and world economies. The supposed harmful effects include high real interest rates, low saving, low rates of economic growth, large current-account deficits in the United States and other countries with large budget deficits, and either a high or low dollar (depending apparently on the time period). This crisis scenario has been hard to maintain along with the robust performance of the U.S. economy since late 1982. Persistent budget deficits have increased economists' interest in theories and evidence about fiscal policy. At the same time, the conflict between standard predictions and actual outcomes in the U.S. economy has, I think, increased economists' willingness to consider approaches that depart from the standard paradigm. In this paper, I will focus on the alternative theory that is associated with the name of David Ricardo.
A Neoclassical Perspective on Budget Deficits
Authors: Bernheim B. Douglas
Published: August 2012

Generally speaking, there are three schools of thought concerning the economic effects of budget deficits: Neoclassical, Keynesian, and Ricardian. It is remarkable that from among these three schools of thought, one can find support for every conceivable normative position. Whether one thinks of deficits as good, bad, or irrelevant therefore depends fundamentally on one's choice of a paradigm. Certainly, no single paradigm corresponds exactly to reality. Nevertheless, it is my view that the Neoclassical framework offers the most relevant insights into the economic effects of deficits. The new Administration would do well to focus on the goals of stimulating saving and capital accumulation, and to formulate a policy for gradually reducing permanent deficits.
Cash Distributions to Shareholders
Authors: Bagwell Laurie Simon , Shoven John B
Published: August 2012

Economists have long been puzzled by why firms pay dividends when alternative methods of rewarding shareholders and financiers exist which involve less taxes. This paper will highlight the fact that firms can distribute cash to equity holders in ways more lightly taxed than dividends. The two methods we examine are share repurchase programs and cash-financed mergers and acquisitions. So why should cash distributions from firms to shareholders ever take the form of dividends? This paper first provides evidence on the explosive growth in dividend cash payments, and then discusses how this evidence should affect theories about corporate finance.
Bequest and Wealth Accumulation: Are Some Pieces of the Puzzle Missing?
Authors: Kessler Denis , Masson André
Published: August 2012

The lively debate between Laurence J. Kotlikoff and Franco Modigliani presented in the Spring 1988 issue of this journal concerns an old question: what is the main motivation for saving and therefore for the accumulation of wealth? More specifically, what are the respective contributions to aggregate wealth of 1) saving for retirement (also known as “hump” saving); 2) precautionary savings (and “unintended” bequests) due to uncertainty about the length of life; and 3) planned bequests? If Modigliani's life-cycle hypothesis is to be viewed as a close to approximation of reality, then the bulk of existing wealth should have resulted from some combination of hump and precautionary saving. Our comment on this dispute attempts to advance two issues. First, the controversy involves an enormous gap between empirical estimates of the share of “inherited wealth” in total accumulation, even though the estimates are often based on the same data. We hope to clarify why the estimates vary so widely. Second, the Kotlikoff/Modigliani dispute is presented as an American issue, with little extension abroad. We will present some results from other countries that bear on the controversy.
How Auctions Work for Wine and Art
Authors: Ashenfelter Orley
Published: August 2012

At the first wine auction I ever attended, I saw the repeal of the law of one price. This empirical surprise led me to begin collecting data on wine auctions, to interview auctioneers, and even to buy a little wine. In the meantime I have also had the opportunity (with John Abowd) to observe and collect data on the auction sale of impressionist and contemporary paintings. This paper reports on some of the empirical regularities that I and others have observed in the actual operation of the auction markets for these items. In view of the rich and diverse array of theoretical literature on auctions, it seems high time economists began to spell out precisely what facts it is meant to explain.
Auctions as an Allocation Mechanism in Academia: The Case of Faculty Offices
Authors: Boyes William J , Happel Stephen K
Published: August 2012

A six-story addition to Arizona State University's College of Business was completed in 1983, causing entire departments to be uprooted and relocated. Faculty offices had to be reassigned as a result. What seemed to be a trivial problem, the allocation of offices, turned out to be a very complex one. This is the story of how that problem was resolved. The chairman of the Economics Department decided to rely on an auction as the allocation mechanism. The experiment was a raging success until the story was picked up by the school newspaper, the Phoenix media, and then by media elsewhere. The university administration was not able to deflect the allegation that public property had been sold. It was due only to the fact that the money collected had gone into a scholarship fund that the controversy eventually dissipated without serious recriminations. Since the initial reallocation in 1983, the negative aspects of the experiment have virtually disappeared and even the central administration now appears to think it novel and interesting.
Expected Revenue from Open and Sealed Bid Auctions
Authors: Riley John G
Published: August 2012

The first objective of this paper has been to explain why it is that expected seller revenue is the same under very different auction rules. The second objective has been to explain why revenue equivalence no longer holds once the central assumptions of risk aversion and independence of beliefs are modified. The effect of risk aversion is to make a sealed high bid auction more attractive from a seller's viewpoint. The effect of correlated beliefs is to favor open bidding. Which of the two factors dominates under plausible assumptions about risk aversion parameters and about the degree to which beliefs are correlated remains an important open question.
Understanding Real Business Cycles
Authors: Plosser Charles I
Published: August 2012

This brief essay is intended to provide readers with an introduction to the real business cycle approach to business fluctuations. It discusses the basic real business cycle framework; economic growth and business cycles; real business cycles and the 1954–1985 U.S. economy; government policies and suboptimal equilibrium; and the real business cycle research agenda. An appendix presents a more technical summary of the basic neoclassical model presented in the paper.
Robert Solow: An Affectionate Portrait
Authors: Samuelson Paul A
Published: August 2012

Solow is the consummate economist's economist. He does everything well and with apparent ease. What Ty Cobb was to baseball, Solow has been to our generation of economists. But with this difference: Cobb had a will to win that never let up. Solow acts as if he has nothing to prove. As an anthropologist who has spent a long lifetime observing achieving scholars and scientists, I can report how rare this relaxed approach is and how great must be the natural abilities of anyone with it who nevertheless attains the highest rung of the ladder.
The Political Economy of Trade Policy
Authors: Baldwin Robert E
Published: August 2012

International trade seems to be a subject where the advice of economists is routinely disregarded. Economists are nearly unanimous in their general opposition to protectionism, but the increase in U.S. protection in recent years in such sectors as automobiles, steel, textiles and apparel, machine tools, footwear and semiconductors demonstrates that economists lack political influence on trade policy. Two broad approaches have been developed to analyze the political economics of trade policy and the processes that generate protectionism. One approach emphasizes the economic self-interest of the political participants, while the other stresses the importance of the broad social concerns of voters and public officials. This paper outlines the nature of the two approaches, indicating how they can explain the above anomalies and other trade policy behavior, and concludes with observations about integrating the two frameworks, conducting further research, and making policy based on the analysis.
Research on the Economics Profession
Authors: Colander David
Published: August 2012

In this article, I survey some recent contributions to research on the profession, both to bring nonspecialists up to date on what is being done and to inform specialists of other researchers who are doing similar work. The economics profession is interesting to economists for a number of interrelated reasons: 1) For prurient and professional interest: It is fun to know about oneself and one's profession. 2) As a case study: If economic theory is correct, it should apply to the economics profession. Since economists have firsthand knowledge of the economics profession and relatively easy access to data, it makes an excellent case study. 3) Because one has an interest in the sociology of knowledge: Recent developments in methodology and philosophy of science have made a knowledge of the scientists an important aspect of a knowledge of science; they are the lens through which science is interpreted. Understanding the tendency of scientists to aim that lens in particular directions and to distort the reality they are studying is necessary if one is to interpret their analyses correctly. These three reasons are interrelated, of course, and knowledge for one reason is often useful for others. But the division provides a useful way of organizing research about the profession.
On the Demise of the Long Run
Authors: Helfgott Roy B
Published: August 2012

John Maynard Keynes observed that, “In the long run we are all dead,” but in terms of economic analysis, the long run also may be dead. The culprit is new technology that is wiping out many of the distinctions between the long and short run. As pointed out by Alfred Marshall a century ago, the amount of time needed to adjust to changed circumstances has been what distinguished the two runs. New technology—computer-aided design (CAD) and computer-aided manufacturing (CAM)—is likely to telescope the long run into the short run, and possibly even into the immediate market period. The key to the new technology, of course, is that it can be reprogrammed to perform a different operation, and this versatility of the new “programmable” automation distinguishes it from the old “hard” automation, in which a machine could perform only a single function.
Implications of the U.S. Current Account Deficit
Authors: Howard David H
Published: August 2012

In 1988, the United States recorded a deficit of about $135 billion on the current account of its balance of payments with the rest of the world. This paper presents an analytical framework for thinking about the current account deficit, explores causes of the current account deficit, and discusses the United States as a debtor nation and the issue of sustainability.
An Accountant Among Economists: Conversations with Sir John R. Hicks
Authors: Klamer Arjo
Published: August 2012

Sir John Hicks (1904-1989) has left an indelible impression on modern economic discourse. His Value and Capital (1939) stood as a model for neoclassical microeconomics as economists know it today. His condensation of Keynes's General Theory in the form of the IS / LM diagram became the core of Keynesian macroeconomics. In 1972, he was awarded the Nobel Prize (together with Kenneth Arrow) for his pioneering contributions to modern demand and welfare theory. Later, after his retirement from Oxford University in 1965, he seemed to change course. The older Hicks seemed to have drifted from the mainstream that the younger Hicks had helped to set into motion. The first of two conversations took place in Oxford in early December 1986. In June 1988 we talked again. I went to see Hicks in Blockley, a small village north of Oxford.
The Benefits of Asymmetric Markets
Authors: Scitovsky Tibor
Published: August 2012

Economists are often so mesmerized by the magic of perfect competition that they neglect or fail to notice other, equally important achievements of the real market economy around us, most of which seem to result from monopoly tempered by competition and competition tempered by monopoly. Here, we drop the one assumption underlying general equilibrium theory that does perhaps the most violence to reality: that all economic agents possess all the market information relevant to the transactions they enter or contemplate entering into. Knowledge is power, and those on the better informed side of the market can exploit the people on its other side. Such power is the main source of monopoly power, its exploitation yields monopoly profit, and rivalry among market participants who wield such power is the main form of monopolistic competition. The root cause of the unequal distribution of knowledge between buyers and sellers is the division of labor, which causes everybody to know more than others about their own specialty and less about other people's specialties than others know about them. The farther the division of labor proceeds, the wider becomes the gulf between the specialist's knowledge and the nonspecialist's ignorance of each specialty. Such disparity in the knowledge and preparedness of buyers and sellers to deal with each other and to stand up to each other is an important and unavoidable feature of today's market economy, which has received surprisingly little attention.
Optimal Taxation and Optimal Tax Systems
Authors: Slemrod Joel
Published: August 2012

In its current state, optimal tax theory is incomplete as a guide to action for critical issues in tax policy. It is incomplete because it has not yet come to terms with taxation as a system of coercively collecting revenues from individuals who will tend to resist. The coercive nature of collecting taxes implies that the resource cost of implementing a tax system is large. Furthermore, alternative tax systems differ greatly in the resource cost of operation. Differences in the ease of administering various taxes have been and will continue to be a critical determinant of appropriate tax policy. I will first walk the reader through three of the principal propositions of optimal tax theory, pointing out along the way the key assumptions of the restricted problem under consideration. Next, I comment on the influence of the theory on recent tax policy developments. I conclude by sketching an alternative to optimal taxation, which I call the theory of optimal tax systems. This theory embraces the insights of optimal taxation but also takes seriously the technology of raising taxes and the constraints placed upon tax policy by that technology. A theory of optimal tax systems has the promise of addressing some of the fundamental issues of tax policy in a more satisfactory way than the theory of optimal taxation.
A Strategy for Efficient Debt Reduction
Authors: Sachs Jeffrey D
Published: August 2012

Debt reduction, like bankruptcy, needs an institutional setting to bring it about, to overcome an inherent free-rider problem. Even when it is in the collective interests of the banks to reduce the debt, each individual bank is still tempted to insist on full repayment of its own claims, while free riding on concessions made to the debtor by the other banks. The banks have recently come to endorse the idea of “voluntary” debt reduction, in which each individual bank can choose whether to participate in a given debt reduction scheme. The Brady plan similarly has endorsed the concept of voluntary debt reduction. But because of the free rider problem, such voluntary schemes are doomed to failure. A more fruitful course would be the establishment of an International Debt Facility (IDF) to provide the necessary institutional framework for debt reduction. First, I will discuss the profound shortcomings of so-called “voluntary debt reduction” schemes, as now supported by the commercial banks. Second, I will outline the case for an IDF, and try to clear away much of the underbrush of misunderstanding that has slowed the adoption of the proposal.
Anomalies: Saving, Fungibility, and Mental Accounts
Authors: Thaler Richard H
Published: August 2012

Last New Year's day, after a long evening of rooting the right team to victory in the Orange Bowl, I was lucky enough to win $300 in a college football betting pool. I then turned to the important matter of splurging the proceeds wisely. Would a case of champagne be better than dinner and a play in New York? At this point my son Greg came in and congratulated me. He said, “Gee Dad, you should be pretty happy. With that win you can increase your lifetime consumption by $20 a year!” Greg, it seems, had studied the life-cycle theory of savings. The theory is simple, elegant, and rational—qualities valued by economists. Unfortunately, as Courant, Gramlich, and Laitner observe “for all its elegance and rationality, the life-cycle model has not tested out very well.” In this column, however, I focus on an assumption of the life-cycle model that has not received very much attention, but which, if modified, can allow the theory to explain many of the savings anomalies that have been observed. The key assumption is fungibility. This column will review a small portion of the empirical savings literature, with the objective of showing how violations of fungibility, and more generally the role of self-control, strongly influences saving behavior.
Symposium on New Institutions for Developing Country Debt
Authors: Rogoff Kenneth
Published: August 2012

Kenneth Rogoff provides a brief synopsis of the developing country debt problem.
Debt Relief and the International Enforcement of Loan Contracts
Authors: Eaton Jonathan
Published: August 2012

It is now apparent that the governments of many developing countries will not repay their debts as initially contracted. Creditors and creditor governments must now adjust to the realization that full repayment is either infeasible or that enforcing full payment is undesirable from the point of view of creditor countries as a whole. The question now is what to do with these debts. The Baker and Brady plans have increased U.S. government involvement in the debt crisis and have allocated public money toward its resolution. The Kenen plan, discussed in this issue, proposes still more public involvement and, in all likelihood, more public money. Each of these plans is an ad hoc response to the impasse that has arisen between some highly indebted countries and their private creditors, and aspects of each plan may help resolve this impasse. But none of these plans confronts the features of international capital markets that led to the crisis in the first place. My argument here is that the debt crisis that began in 1983 arose from defects in how international capital markets operated the previous decade. A goal of any redesign of the institutions involved in these markets should be not only to resolve the current crisis, but to keep it from happening again.
Organizing Debt Relief: The Need for a New Institution
Authors: Kenen Peter B
Published: August 2012

In March 1989, the new U.S. Secretary of the Treasury, Nicholas Brady, endorsed a change in strategy for dealing with developing country debt, calling for a three-year waiver of clauses in existing loan agreements that stand in the way of debt reduction “to accelerate sharply the pace of debt reduction and pass the benefits directly to the debtor nations,” and called on the IMF and World Bank to use some of their policy-based lending to aid the debt-reducing process. Events moved rapidly thereafter. Is there anything left to argue about? Unhappily, yes. Advocates of debt relief, like myself, maintain that the Brady plan will not go far enough. It relies too heavily on debtors and creditors to strike mutually beneficial bargains; it does not provide enough resources to generate the deep debt reductions that debtors need to solve their problems; and it does not shift risk forthrightly enough from private lenders to official creditors. I would correct the defects of the Brady plan by creating a new international institution to manage and finance the debt-reducing process or assign the task to an existing institution but give it enough resources to get the job done.
Work and Welfare: Lessons on Employment Programs
Authors: Gueron Judith M
Published: August 2012

The nation's social welfare policy reflects an ongoing effort to balance sometimes competing objectives—alleviating poverty and promoting self-sufficiency—in a manner consistent with underlying public values about the primacy of the family and the importance of work. Concern has been growing that the welfare system has not been doing this very well, and welfare reform once again moved towards the top of the policy agenda, resulting in passage of the Family Support Act of 1988 (FSA). This paper discusses what economists know about the potential of one central component of the new legislation: the effort to transform welfare from a means-tested entitlement into a reciprocal obligation, in which getting a welfare check would carry with it a requirement to look for and accept a job, or to participate in activities that prepare people for work. It sets the context for this discussion by briefly outlining why this approach to reform gained support and by summarizing major policy and program alternatives.
Micro-to-Macro Simulation: A Primer With a Labor Market Example
Authors: Bergmann Barbara R
Published: August 2012

Simulation models, now widely used in the physical sciences, can also help economists in depicting the actions and interactions of individuals and firms through time. This article provides an introduction to microsimulation: how it works, how to do it, its potential, and its drawbacks. It then allows readers, even those with no experience in computer programming, to work through the details of a simple microsimulation model. Readers can put this model on their PCs, watch it run through its paces, and experiment with their own modifications. With this model as an example, it should be fairly easy to create programs for new models on other subjects for use in theoretical exploration, empirical research, or classroom demonstrations. The demonstration model I present depicts the experience of individual workers during recession and recovery in the labor market. As the model runs, its internal” Census Bureau” performs surveys on the microlevel, and sums up to macrolevel variables. The model is simple, but it has some interesting applications. After explaining how to set it up, I use it to explore the effect of unemployment insurance on the level of unemployment and to point up a common fallacy in current labor market literature.
Distinguished Fellow: Houthakker's Contributions to Economics
Authors: Pollak Robert A
Published: August 2012

Hendrik Houthakker's contributions to economics defy capsule description. A better strategy than providing abstracts of the books and articles on his long and impressive vita is discussing one or two topics in detail, placing at least some of his contributions in perspective and discussing their relevance for current research. The first topic I have chosen, revealed preference, needs no justification. Houthakker made his professional reputation with his 1950 Economica article on revealed preference theory—the article that introduced the strong axiom of revealed preference. The second topic is the dynamics of demand, a more idiosyncratic choice which reflects both the importance of Houthakker's contributions and my own interests. The fact that such different topics could be chosen is, of course, testimony to the breadth and diversity of Houthakker's work. He is a fine and fitting choice as a Distinguished Fellow of the American Economic Association.
Socialist Economics: The Disequilibrium School and the Shortage Economy
Authors: van Brabant Jozef M
Published: August 2012

This article focuses on the debate between Richard Portes and János Kornai as the respective exponents of two interpretations of economic behavior in centrally planned economies: the disequilibrium school, and the theory of the shortage economy. My objective here is to elucidate for the nonspecialist the core features of the debate between the disequilibrium school and the shortage economy. Toward the end, I describe what might usefully be retained from this debate by economists who do not specialize in the study of centrally planned economies.
Puzzles: Queues, Coups and More
Authors: Nalebuff Barry
Published: August 2012

This is my ninth and last column of puzzles.
The Noise Trader Approach to Finance
Authors: Shleifer Andrei , Summers Lawrence H
Published: August 2012

This paper reviews an alternative to the efficient markets approach that we and others have recently pursued. Our approach rests on two assumptions. First, some investors are not fully rational and their demand for risky assets is affected by their beliefs or sentiments that are not fully justified by fundamental news. Second, arbitrage—defined as trading by fully rational investors not subject to such sentiment—is risky and therefore limited. The two assumptions together imply that changes in investor sentiment are not fully countered by arbitrageurs and so affect security returns. We argue that this approach to financial markets is in many ways superior to the efficient markets paradigm.
Anomalies: Preference Reversals
Authors: Tversky Amos , Thaler Richard H
Published: August 2012

The preference reversal phenomenon has been established in numerous studies during the last two decades, but its causes have only recently been uncovered. This phenomenon, or cluster of phenomena, challenges the traditional assumption that the decisionmaker has a fixed preference order that is captured accurately by any reliable elicitation procedure. If option A is priced higher than option B, we cannot always assume that A is preferred to B in a direct comparison. The evidence shows that different methods of elicitation could change the relative weighting of the attributes and give rise to different orderings.
Distinguished Lecture on Economics in Government: Data Quality and Public Policy
Authors: Norwood Janet L
Published: August 2012

The goal of a government statistical agency must be to produce data that are objective, relevant, accurate, and timely. But none of these criteria is absolute, and sometimes tradeoffs must be made among them. Timeliness and accuracy compete when we decide to issue preliminary results that are subject to revision. Accuracy and relevance compete when we decide whether to introduce data for states or local areas at the expense of reducing the reliability of national estimates. In making these choices, and in developing our statistical programs, we must manage a broad array of tasks. These can be divided into three broad areas of activity: 1) the management of economic design; 2) the management of statistical design; and 3) the management of the process by which we produce our final product. Let me review how we are addressing these issues at the Bureau of Labor Statistics.
Speculative Prices and Popular Models
Authors: Shiller Robert J
Published: August 2012

The key idea of rational expectations models is to assume that people know (or behave as if they know) the true model that describes the economy. However, popular economic models (the models that are used by the broad masses of economic actors to form their expectations) are obviously not the same as those held by economists. This paper reports on data collection effort on popular models, using questionnaire survey methods, with the purpose of understanding speculative markets. I will report here on my research to understand the U.S. stock market crash of October 1987; research Fumiko Konya, Yoshiro Tsutsui, and I undertook to understand the Japanese stock market crash of October 1987; research Karl Case and I undertook to understand recent real estate booms; and research John Pound and I undertook to understand the periodic “hot” markets for initial public offerings (IPO's) of common stock.
The Stock Market Boom and Crash of 1929 Revisited
Authors: White Eugene N
Published: August 2012

This paper will sort through many of the hypotheses offered to explain the 1929 boom and bust. Most of the factors cited by historians played trivial or insignificant roles. The central issue is whether fundamentals or a bubble drove the bull market upwards. An econometric resolution of this question is unlikely, for reasons that Flood and Hodrick explain in their contribution to this symposium. However, the qualitative evidence assembled in this paper favors the view that a bubble was present in the 1929 market.
In Honor of David Kreps, Winner of the John Bates Clark Medal
Authors: Tirole Jean
Published: August 2012

David Kreps is the winner of the 1989 John Bates Clark Medal, given to “that American economist under forty who is adjudged to have made a significant contribution to economic thought and knowledge.” I will try to explain where Kreps's contributions fit in the food chain of economic ideas, why they have a high nutritional content, and why they should be in the diet of the common economist. I will arbitrarily divide this review into three major themes of Kreps's work: individual decision making, game theory (foundational and applied), and asset pricing.
Puzzles: On the Economics of Crime and Confiscation
Authors: Bergstrom Ted
Published: August 2012

The puzzles in this column focus on the issues of crime and confiscation. Answers to all three puzzles can be found at the end of the column.
Anomalies: Foreign Exchange
Authors: Froot Kenneth A , Thaler Richard H
Published: August 2012

In what follows, we discuss the efficiency of foreign exchange markets. To manage what would otherwise be an enormous task, the question of efficiency is viewed below from the perspective of a single type of test: the test for what is called the forward discount bias. This test is easy to understand, and since it strongly rejects the null hypothesis, statistical power is not an issue. Naturally, in discussing this particular test we mention a variety of other empirical work designed to shed light on alternative explanations of the results.
Policy Watch: Tax Credits for Low-Income Workers with Children
Authors: Steuerle C. Eugene
Published: August 2012

The most important tax credits available to low-income households with children are the earned income tax credit (EITC), the child tax credit, and the child and dependent care tax credit (hereafter, child-care credit). Only the EITC and the child-care credit exist in current law in the United States. This note will discuss some equity and efficiency implications of four commonly stated purposes of these credits within the tax/transfer system: greater progressivity, adjustments for the presence of children, greater choice among goods and services, and greater work incentives for low-income individuals.
Government Failures in Development
Authors: Krueger Anne O
Published: August 2012

By the 1970s and early 1980s, governments in most developing countries were mired down in economic policies that were manifestly unworkable. Whether market failures had been present or not, most knowledgeable observers concluded that there had been colossal government failures. In many countries, there could be little question but that government failure significantly outweighed market failure. This essay focuses on insights relating directly to government behavior affecting economic activity and economic growth in developing countries. It briefly examines each of the following questions: 1) What is “the government”? 2) What is the comparative advantage of government? 3) What are the dynamics of government intervention? 4) Can a positive theory of political behavior be formulated that will help explain when and how alternative policies will evolve in the political arena?
Distingushed Fellow: Arthur S. Goldberger and Latent Variables in Econometrics
Authors: Chamberlain Gary
Published: August 2012

In 1988, Arthur Goldberger was honored as a Distinguished Fellow of the American Economic Association. The citation notes that “his early applications and analysis of empirical models brought understanding to a whole generation of econometricians.” Goldberger's later work on models with measurement error and latent variables led him into other fields, where he has had a profound influence: “His methodological and substantive findings, also in the area of behavioral genetics, stand as everlasting contributions of one who has successfully bridged the many gaps that separate the social disciplines.” This paper reviews one major element of Goldberger's work—the role of latent variables in econometrics.
Anomalies: Closed-End Mutual Funds
Authors: Lee Charles M. C , Shleifer Andrei , Thaler Richard H
Published: August 2012

The pricing of closed-end funds presents several puzzles. The following are the four sets of facts that any theory of closed-end fund pricing must address. 1) New funds appear on the market at a premium and move rapidly to a discount. 2) Closed-end funds usually trade at substantial discounts relative to their net asset values. 3) Discounts (and premia) are subject to wide variation, both over time and across funds. 4) When closed-end funds are terminated, either through merger, liquidation, or conversion to an open-end fund, prices converge to reported net asset value. These four puzzles raise basic questions about the operation of financial markets. How can prices diverge from fundamental values? Why don't the forces of arbitrage drive prices back in line? These are the questions we will try to address in this column.
Policy Watch: Economics and the Clean Air Act
Authors: Portney Paul R
Published: August 2012

The Clean Air Act, arguably the nation's most important environmental statute, is sure to be amended by the 101st Congress. In neither its current nor its likely new form does the Act feature much of a role for economic considerations. In fact, one approach that many economists would presumably favor—the balancing of benefits and costs in setting air quality or source discharge standards—has been found by courts to be inconsistent with the law (Lead Industries Association v. EPA, 1980). Here I describe the likely changes in the Clean Air Act and what is known (and, more often, not known) about their associated costs and benefits, and identify respects in which air quality regulation could be improved from an economic perspective.
The Role of Human Capital in Earnings Differences Between Black and White Men
Authors: O'Neill June
Published: August 2012

This article examines the factors underlying the differential in earnings between black men and white men, with a focus on the role of human capital. Since 1940, successive generations of black men entering the labor force have been increasingly more educated relative to white men, both in terms of years of school completed and in the quality of schooling obtained. This convergence in educational differences combined with the migration of blacks out of the South contributed to the narrowing in the racial gap in earnings over the 1940–80 period, particularly in the first half of the period. The discussion focuses on men, rather than on all blacks. The blackwhite wage gap has remained considerably larger among men than among women, making racial differences among men an issue of particular concern.
The Impact of Affirmative Action Regulation and Equal Employment Law on Black Employment
Authors: Leonard Jonathan S
Published: August 2012

Was affirmative action successful in increasing employment opportunities for blacks? In this paper, affirmative action will refer to the provisions of Lyndon Johnson's Executive Order 11246 in 1965, as amended by Richard Nixon's Executive Order 11375 [3 C.F.R. 169 (1974)]. Under Executive Order 11246, federal contractors agree “not to discriminate against any employee or applicant for employment because of race, color, religion, sex, nor national origin, and to take affirmative action to ensure that applicants are employed and employees are treated during employment without regard to their race, color, religion, sex or national origin” [3 C.F.R. 169 202(1) (1974)].
Bimetallism Revisited
Authors: Friedman Milton
Published: August 2012

Until recently, I shared what I take to be the conventional view of monetary economists about the relative merits of bimetallism and gold monometallism: namely, that bimetallism is an unstable and unsatisfactory monetary standard involving frequent shifts between alternative monometallic standards; that monometallism is preferable, and that gold monometallism is preferable to silver monometallism. In the course of doing research on U.S. monetary history during the nineteenth century, I discovered, much to my surprise, that the conventional view is dubious, if not outright wrong, with respect to both the superiority of monometallism over bimetallism and the superiority of gold monometallism over silver monometallism.
The When, the How and the Why of Mathematical Expression in the History of Economic Analysis
Authors: Mirowski Philip
Published: August 2012

In writings about the history of the use of mathematical expression in economics, there seems to be a conviction that the movement towards its current flowering was cumulative, inevitable, and indeed, natural. While, such notions are widely held among practicing economists, I want to argue that they are not historically valid. The deployment of mathematical expression in economic discourse enjoyed neither an inexorable nor unhindered progress, but rather was characterized by two primary ruptures in the history of economic thought, episodes marking the inflection points in the rise of mathematical discourse. The main reason for such a disjointed narrative is that, in the evolution of economic thought, most of the participants were not convinced that the subject matter intrinsically demanded mathematical expression, while those so enamored experienced great difficulty in creating a community which could agree upon a formalism which was thought to be well-suited to economic issues.