Reporter NATIONAL BUREAU of ECONOMIC RESEARCH

NBER Reporter NATIONAL BUREAU OF ECONOMIC RESEARCH

A quarterly summary of NBER research No. 1, March 2017

Program Report ALSO IN THIS ISSUE

“Pathways to Education” Program and Academic Outcomes The Program on Corporate Finance

Normalized high school graduation rate, percentage points +30

Students from Regent Park +25 Malcolm Baker * Program begins

+20

+15

+10 Narrowly interpreted, corporate finance is the study of the investment and financing policies of corporations. Because corporations are at +5 Students from other public housing the center of economic activity, the causes and consequences of corporate

0 2000 2001 2002 2003 2004 2005 2006 2007 finance — and hence the research activities of the program — touch almost Normalized to 0 starting in 2000 every aspect of micro- and macroeconomics, allowing the center of gravity Source: P. Oreopoulos, R. S. Brown, and A. Lavecchia, NBER Working Paper No. 20430 to shift from the narrow concerns of corporate managers. The NBER Program on Corporate Finance recently completed its Behavioral Barriers to Education 12 25th year. In his first program report, the founding director, Robert Vishny, Enterprise and Incentives for Innovation 16 described corporate finance as “institutionally oriented, with research often driven by issues of current importance” and the program’s empirical stud- The Impact of Contracting Out ies as “motivated by relevant, applied theory.”1 Back then, the takeover on Medicare and Medicaid 21 and restructuring wave of the late 1980s was salient; soon afterwards, in Macroeconomic Policy in a Liquidity Trap 25 the mid-1990s, it was cross-country comparisons of legal systems, gover- NBER News 30 nance, enforcement, and financial development, often with implications Conferences 32 for emerging institutions in the transitional economies of Eastern Europe Program and Working Group Meetings 34 and the former Soviet Union. The phenomena were studied with firm-level, market, and institutional data, and with then-novel empirical technologies. NBER Books 38 Notably, these included event studies and the quasi-experimental analysis of colonial legal origins. The applied theoretical lens was, for the most part, agency problems arising from the separation of ownership and control. The influence of “issues of current importance” remains as apparent now as in the program’s first report. The defining moment for corporate finance over the past decade has been the financial crisis of 2008. Broadly speaking, our program’s research has found its greatest impact in exploring the role of credit cycles, the fragility of financial institutions, the behavior of households, and the associated macroeconomic consequences. A boom and bust in credit conditions, stretched bank balance sheets, and contagious defaults in the mortgage market were the proximate causes of

* Malcolm Baker is director of the NBER’s Program on Corporate Finance and the Robert G. Kirby Professor of Business Administration at Harvard Business School, where he is unit head for finance.

Reporter OnLine at: www.nber.org/reporter the crisis, and the consequences were macroeconomic. So, credit markets, financial institu- NBER Reporter tions, and household finance, including their macroeconomic and regulatory implications, are the current centers of activity among NBER researchers in corporate finance. Traditional The National Bureau of Economic Research is a private, nonprofit research organization founded in 1920 and devoted to objective quantitative analysis of the topics of corporate investment and financing American economy. Its officers and board of directors are: are receiving less attention. In some ways, this President and Chief Executive Officer — James M. Poterba brings the program — which emerged from Controller — Kelly Horak the NBER Financial Markets and Monetary Corporate Secretary — Alterra Milone Economics program, which was founded in BOARD OF DIRECTORS the late 1970s and divided into Asset Pricing, Chairman — Martin B. Zimmerman Corporate Finance, and Monetary Economics in Vice Chairman — Karen N. Horn 1991 — back to its roots. Treasurer — Robert Mednick New empirical tools also have emerged. DIRECTORS AT LARGE Techniques have been imported from labor eco- Peter Aldrich Mohamed El-Erian Michael H. Moskow nomics and other fields. For example, NBER Elizabeth E. Bailey Jacob A. Frenkel Alicia H. Munnell researchers exploit discontinuities in policy, John H. Biggs Judith M. Gueron Robert T. Parry John S. Clarkeson Robert S. Hamada James M. Poterba which generate fruitful natural experiments, Don R. Conlan Peter Blair Henry John S. Reed and design randomized controlled trials in Kathleen B. Cooper Karen N. Horn Marina v. N. Whitman partnership with firms, government agencies, Charles H. Dallara Lisa Jordan Martin B. Zimmerman George C. Eads John Lipsky and nongovernmental organizations. The ris- Jessica P. Einhorn Laurence H. Meyer ing demand for empirical rigor in identifying policy-relevant causal mechanisms has meant a DIRECTORS BY UNIVERSITY APPOINTMENT microempirical shift, with the study of house - Timothy Bresnahan, Stanford Benjamin Hermalin, California, Berkeley hold financial products, for example, serving as Pierre-André Chiappori, Columbia Marjorie B. McElroy, Duke Alan V. Deardorff, Michigan Joel Mokyr, Northwestern an auspicious lamppost. At the same time, struc- Ray C. Fair, Yale Andrew Postlewaite, Pennsylvania tural estimation of theoretical models is often Edward Foster, Minnesota Cecilia Elena Rouse, Princeton used to tease out the macroeconomic implica- John P. Gould, Chicago Richard L. Schmalensee, MIT Mark Grinblatt, California, Los Angeles David B. Yoffie, Harvard tions of microempirical insights. Bruce Hansen, Wisconsin-Madison The program’s empirical studies are DIRECTORS BY APPOINTMENT OF OTHER ORGANIZATIONS grounded in a wider range of “relevant, applied Jean-Paul Chavas, Agricultural and Applied Economics Association theory.” The seminal work of Merton Miller and Martin Gruber, American Finance Association Franco Modigliani, approaching its 60th anni- Arthur Kennickell, American Statistical Association versary, continues to be the organizing frame- Jack Kleinhenz, National Association for Business Economics Robert Mednick, American Institute of Certified Public Accountants work for understanding the market imperfec- Alan L. Olmstead, Economic History Association tions that allow finance to create or destroy Peter L. Rousseau, American Economic Association value: whether in firms, as the authors origi- Gregor W. Smith, Canadian Economics Association William Spriggs, American Federation of Labor and nally intended, or more broadly in households, Congress of Industrial Organizations financial institutions, and the macroeconomy. Bart van Ark, The Conference Board Agency and information problems remain cen- The NBER depends on funding from individuals, corporations, and private tral imperfections, with a recent focus on con- foundations to maintain its independence and its flexibility in choosing its flicts of interest along the chain from savers to research activities. Inquiries concerning contributions may be addressed to James household borrowers; so do the costs of finan- M. Poterba, President & CEO, NBER, 1050 Massachusetts Avenue, Cambridge, MA 02138-5398. All contributions to the NBER are tax deductible. cial distress, fire sales, and the fragility of short- term financing, experienced on a systemic scale The Reporter is issued for informational purposes and has not been reviewed by with the 2008 failure of Lehman Brothers. the Board of Directors of the NBER. It is not copyrighted and can be freely repro- In a new trend, affiliates of the program duced with appropriate attribution of source. Please provide the NBER’s Public Information Department with copies of anything reproduced. have become increasingly attentive to behavioral factors, frequently delving into the role Requests for subscriptions, changes of address, and cancellations should be sent of bias in households, managers, investors, to Reporter, National Bureau of Economic Research, Inc., 1050 Massachusetts Avenue, Cambridge, MA 02138-5398 (please include the current mailing label), and, ultimately, markets. Traditional theoreti- or by email to [email protected]. Print copies of the Reporter are only mailed to cal lenses and new behavioral ones are at the subscribers in the U.S. and Canada; those in other nations may request electronic forefront of research that could help miti- subscriptions at www.nber.org/drsubscribe/. 2 NBER Reporter • No. 1, March 2017 gate the effect of the past crisis and Individuals for transmission of monetary policy. inform macroprudential regulation for Moving to savers, Adriano Rampini lowering the probability of a sequel. In The Corporate Finance program now and S. Viswanathan develop a theory of that sense, the organizing frameworks places more emphasis on individual actors household risk management that helps to and the research output of the NBER than it did in the past. These include explain why poorer households bear the Program on Corporate Finance have household borrowers, who account for brunt of macroeconomic fluctuations, and proven robust, relevant, and sometimes the majority of bank loans in the form perhaps also helps explain their demand central in fields that are outside the pro- of mortgages and credit card balances; for safe securities.4 Safety may be in the gram’s narrow mandate. household savers and investors, who pro- eye of the beholder: Nicola Gennaioli, In particular, corporate finance has vide bank and corporate funding; house- Andrei Shleifer, and Vishny; and Pedro played a key role in enhancing tradi- hold financial advisers, who provide guid- Bordalo, Gennaioli, and Shleifer, empha- tional macro models, some of which ance; and, of course, corporate managers, size the possibility that savers and inves- were narrowly focused on a single policy but with a focus not just on their func- tors neglect subtle risks, leading to the instrument. Tweaking the federal funds tion in allocating capital, but also on their manufacture and sale of securities that rate without completely understanding identities and beliefs. load up on subtle, unappreciated risks, its mechanism proved effective when Starting with borrowers, Hong Ru deliver the illusion of safety, and eventu- the global economic ally undermine the sta- engine required rou- Auto Loan Balances and Mortgage Loan Resets bility of the financial tine maintenance. But Mortgage rates reset (decline) for 5/1 ARMs but not 7/1 ARMs system as previously the economic break- Average outstanding auto debt balance of borrowers neglected risks are down of the financial $9,500 revealed.5 Consistent crisis revealed limi- First rate reset for 5/1 ARMs Second rate reset for 5/1 ARMs with risk neglect, tations of the New Jeffrey Wurgler and I; Keynesian models. 9,000 Rüdiger Fahlenbrach, Without an explicit Robert Prilmeier, and modeling of the finan- René Stulz; as well as cial sector, these mod- Matthew Baron and 8,500 els were less useful for 5/1 ARMs Wei Xiong find that restarting the engine. higher risk and less In contrast, the cor- 7/1 ARMs well-capitalized banks porate finance tool- 8,000 with faster loan growth kit proved essential in earn lower average analyzing the alphabet returns.6 soup of the Troubled 7,500 Households also 45 50 55 60 65 70 75 80 Asset Relief Program Mortgage loan age, months invest in risky securi- (TARP), Quantitative Source: B. J. Keys, T. Piskorski, A. Seru, and V. Yao, NBER Working Paper No. 20561 ties. Here, the salience Easing (QE), Home Figure 1 of past returns replaces Affordable Refinance apparent safety and Program (HARP), and many other regu- and Antoinette Schoar show how credit risk neglect. Bordalo, Gennaioli, and latory interventions. card companies use a combination of Shleifer7 develop a model built on Daniel This program report moves from salient teaser interest rates and back-end Kahneman and Amos Tversky’s 8 repre- small to large, from individuals to insti- fees located in the fine print to design sentativeness heuristic to illustrate how tutions to markets, and their influence on solicitations to appeal to unsophisticated investors extrapolate recent history. Itzhak the macroeconomy. Regulation perhaps households.2 Ex ante contract design of Ben-David, Justin Birru, and Viktor deserves a separate section, but I have this type can have ex post consequences: Prokopenya,9 in retail foreign exchange opted instead to embed the discussion of Benjamin Keys, Tomasz Piskorski, markets, and Robin Greenwood and regulatory analysis in context through- Amit Seru, and Vincent Yao show how Shleifer,10 in investor expectations data, out. Each topic could fill an entire report, households respond to resets in adjust- provide corroborating evidence. Investors and there are far too many papers to men- able mortgage rates, with the newfound increase risk-taking in response to their tion. I will cite only a few recent NBER liquidity lowering default, increasing new own past performance, despite the fact working papers in each area, with my sin- car consumption financed with auto debt, that past performance is not predictive: cere apologies to those I have missed, to as shown in Figure 1, and, for credit-con- Surveys of investor expectations are both earlier foundational work, and to related strained households, reducing high-cost positively correlated with past returns work outside of the program. credit card debt.3 This suggests a channel and negatively correlated with future

NBER Reporter • No. 1, March 2017 3 returns and ex ante proxies for future bear in corporate finance and investment. turns.23 Schoar and Luo Zuo also empha- returns, such as the dividend-price ratio. On the one hand, a household makes size the formative effects of macroeco- Extrapolative expectations are a plausible comparatively few decisions to finance a nomic conditions when CEOs enter the driver of credit- and equity-market-driven home or apply for a credit card. On the labor market.24 business cycles. other hand, the promotion of success- Whether these traits are optimally In principle, financial advisers should ful managers may itself select for biases matched to corporate circumstances is help unsophisticated households navigate like overconfidence. Ben-David, John harder to prove. Boards that chose CEOs borrowing, saving, and investing decisions. Graham, and Campbell Harvey compute with military experience, for example, However, Sendhil Mullainathan, Markus a direct measure of manager overconfi- may have needs for which this experience Noeth, and Schoar show that advisers dence from survey data: Realized mar- is particularly valuable. Carola Frydman tend not to de-bias their clients; instead ket returns fall within managers’ forecast and Dirk Jenter provide a contempo- they endorse return-chasing behavior and confidence intervals far too infrequently rary survey paper on the question of steer clients toward funds with high fees.11 to be consistent with correct ex ante cal- whether the assignment of managers to Mark Egan, Gregor Matvos, and Seru go ibration.15 Beyond the surveys, we can assets comes from organizational power further, documenting a high rate of mis- infer potential bias from corporate behav- or an efficient and competitive market conduct among financial advisers.12 Even ior. Greenwood and Samuel Hanson pro- for CEO labor.25 It is hard for traditional when fired from their institutions, sanc- vide evidence of extrapolation in ship- corporate finance to keep up with the tioned advisers are reemployed at high building, where prices and procurement standards for the identification of cau- rates by firms that disproportionately serve vary too strongly with current earnings, sality made possible by vast databases on unsophisticated retail clients. given their historical rates of mean rever- household financial decision making. The lack of sound professional advice sion and the high degree of competition points to the potential importance of in the transport sector.16 Kelly Shue and Institutions financial literacy education; decision sup- Richard Townsend find anchoring in the port with mandated presentation of rel- number of options granted.17 Yihui Pan, Leaving aside the individuals evant facts and figures; libertarian pater- Tracy Wang, and Michael Weisbach find involved, corporate finance is concerned nalism with carefully chosen defaults; and that new CEOs shed poorly perform- with the sources and uses of funds. This direct regulatory intervention through ing assets on arrival, showing their pre- suggests a natural delineation: Banks or consumer financial protection. decessors’ aversion to realizing losses.18 firms raise money, accounting for the The benefits of literacy train- Misbehavior appears to be contagious components of fundraising on the right ing have been hard to show empiri- in work by Christopher Parsons, Johan side of their balance sheets, and invest the cally. Bruce Carlin and David Robinson Sulaeman, and Sheridan Titman, show- proceeds, accounting for the components emphasize the complementary impor- ing that rates of financial misconduct of investment on the left side. The 2008 tance of decision support and literacy rise with the misconduct rates of nearby financial crisis has concentrated research in experimental data.13 Relatedly, Sumit peers.19 Overconfidence, extrapolation, efforts of the Corporate Finance program Agarwal, Souphala Chomsisengphet, loss aversion, peer effects, norms, and on banks and the less regulated, but func- Neale Mahoney, and Johannes Stroebel anchoring suggest managerial microfoun- tionally similar, shadow banking system. show positive effects of displaying the dations for macroeconomic fluctuations Banks are special because their defin- cumulative interest savings of early pay- and trends in CEO pay. ing source of funds is ultrasafe deposits ment of credit card balances.14 The four Manager personality and experi- and because their defining uses of funds researchers show that the Credit Card ence also loom large. For example, Paul are, for practical and regulatory reasons, Accountability, Responsibility, and Gompers, William Gornall, Steven much safer than the investments of indus- Disclosure (CARD) Act reduced bor- Kaplan, and Ilya Strebulaev find that trial firms. They specialize in maximally rowing costs by placing regulatory limits venture capitalists weigh a firm’s manage- diversified portfolios of loans, which are on credit card fees. In spite of concerns ment team quality more heavily than its expected to produce a stable cash flow that lower fees would be offset by higher product and technology.20 Perhaps this and are often collateralized by specific and interest expenses or reduced access to is because CEO personality, as measured transferable assets that can be quickly con- credit, the regulation appears to have had in structured surveys, predicts operat- verted into cash in the event of default. As no observable downside, consistent with ing performance, as shown by Ian Gow, an illustration of the power of collateral low fee salience and limited competition Kaplan, David Larcker, and Anastasia and the bank lending channel, Thomas in the market for credit card services. Zakolyukina.21 There are also apparent Chaney, David Sraer, and David Thesmar The data on corporate managers’ links between military service and cor- show a high propensity of firms to invest micro decisions is often less rich. In prin- porate finance,22 with a connection to following the price appreciation of their ciple, managers should have more train- conservative policies, lower investment, real estate holdings, a traditional form of ing, experience, and feedback to bring to lower fraud, and performance in down- collateral for lenders.26

4 NBER Reporter • No. 1, March 2017 On the right or funding side of the sector creation of safe assets that are close modate liquidity demands even when the balance sheet, Gary Gorton argues that substitutes for money.32 Zhiguo He and underlying securities are illiquid.42 But, financial history is marked by the contin- Asaf Manela 33 analyze limited informa- private incentives are once again limited. ual search for truly safe assets, which are tion and rumors about bank solvency, Douglas Diamond and Anil Kashyap prized for their ability to avoid adverse while Gorton and Guillermo Ordoñez 34 argue that because their depositors have selection, eliminate costly information and Viral Acharya, Douglas Gale, and imperfect information, banks, left to production, and hence provide a means Tanju Yorulmazer 35 argue that private their own devices, do not hold enough for the exchange of goods and services.27 parties will underinvest in information liquid assets to survive runs.43 Thus, any risk in banks’ assets is optimally production, leading to credit booms, cri- While the creation of ultrasafe lia- opaque, avoiding mark-to-market pric- ses, freezes, and fragility that comes from bilities is the key function on the liability ing: to work as money, short-term bank runs. Deposit insurance and regulation side of the banking system’s balance sheet, liabilities must trade at par. The essential help, but they lead non-core liabilities to screening and monitoring a diverse pool feature of banks in this view is their trans- be indicators of vulnerability, according of risky borrowers is the key function on forming risky assets into safer, more use- to Joon-Ho Hahm, Hyun Song Shin, and the asset side. Konstantin Milbradt and ful ones. Gorton, Stefan Lewellen, and Kwanho Shin.36 In light of excessive pri- Martin Oehmke point to an interdepen- Andrew Metrick find that the percent- vate incentives to create ultrasafe deposits dence between financing and investing age of all assets that is safe has remained and securities, Stein argues for monetary horizons, suggesting that banks might stable, suggesting limits on their overall policy as a tool to limit their negative hold short-duration loan portfolios, even production.28 The creation of safe assets externalities. In this sense, the bank lend- when their highest return investments are has shifted, though, toward the shadow ing channel is an alternative to tradi- long-term, as a result of financial frictions banking system, suggesting a functional tional models of monetary policy, which that grow with loan maturity.44 A criti- view of risk transformation and the sub- emphasize sticky prices.37 cal question is whether banks price loans stitution of money market mutual funds With a distinctive access to low- appropriately, given a borrower’s risk and for deposit-taking banks. Meanwhile, cost deposits and short-term funding, the bank’s ability to absorb losses with- Harry DeAngelo and Stulz emphasize banks and shadow banks view equity as out resorting to government interven- banks’ central role in liquidity production the more costly form of finance, push- tion and support. In traditional banks, as a driver of high leverage ratios; they ing bank leverage ratios to much higher Antonio Falato and David Scharfstein conclude that stringent capital require- levels than those of industrial firms. For show that pressure coming from pub- ments for regulated banks have fueled the example, Acharya, Philipp Schnabl, and lic equity markets to increase current growth of the shadow banking system.29 Gustavo Suarez show how banks used stock price through short-term earnings By this logic, the essential positive conduits to skirt capital requirements, causes banks to increase risk.45 In shadow feature of deposits and other ultrasafe moving assets off their balance sheets banks, Marcin Kacperczyk and Schnabl assets is that they require no monitor- without a complete transfer of risk.38 Ivo find that risk-taking by money market ing. This makes things simple for depos- Welch39 and Mathias Hoeyer, Wurgler, funds is higher when the fund sponsor itors. A behavioral version developed and I40 emphasize a complementary chan- does not provide an implicit guaran- by Gennaioli, Shleifer, and Vishny says nel of high-cost bank equity that comes tee.46 Agarwal and Ben-David find that that investors, for the most part, con- from the mispricing of safe, low-leverage, when bankers are encouraged to gener- sider assets that pay in most states of and bond-like firms in the equity market. ate revenue through loan prospecting the world to be ultrasafe, neglecting tail These private incentives again provide a versus screening, risk also rises.47 Even risks and obviating monitoring.30 This rationale for regulation, this time of bank with new communications technology, helps banks. Hanson, Shleifer, Jeremy capital. However, Agarwal, David Lucca, banking deregulation, and consolidation, Stein, and Vishny argue that banks are Seru, and Francesco Trebbi show how banking often remains local. Distance able to invest more patiently in fixed the capture of state regulators, whose rev- matters in Scharfstein and Sunderam, income assets because the stability of enues depend on the size of the banks where concentrated local banking mar- their deposit funding helps them endure they regulate, abetted reductions in risk- kets do not fully pass on reductions in transitory price volatility. 31 weighted capital ratios.41 yields on mortgage-backed securities At the same time, the essential nega- On the left or investing side of the to their customers.48 Itamar Drechsler, tive feature of deposits and other ultra- balance sheet, demand deposits and Alexi Savov, and Schnabl examine the safe assets is that they elicit no private concomitant fragility mean that banks macroeconomic implications of concen- monitoring. Securities deemed ultrasafe must hold some portion of their assets in tration in banking for monetary policy: are by their nature a low-cost source of ultraliquid securities. By analogy, Sergey Interest rate spreads increase as interest finance, and inviteex post risk-shifting. Chernenko and Aditya Sunderam show rates rise, reflecting bank market power Oliver Hart and Luigi Zingales argue how open-end equity mutual funds, like and shifting deposits into higher yielding that regulation is needed to limit private banks, use cash management to accom- instruments.49

NBER Reporter • No. 1, March 2017 5 Markets ket sentiment: the share of low-quality decline in economic activity with a lag, issuers;53 the ratio of bank loans to bonds suggesting that policy makers might use The banking system has always been in corporate capital structure;54 interme- these measures of asset prices alongside somewhat transactional, preserving high- diary leverage;55 growth in credit that is the traditional objectives of price stability cost equity capital by originating loans delinked from productivity;56 and insur- and employment in dictating monetary and underwriting securities of various ance companies reaching for yield, hold- policy.58 types, with the goal of transferring own- ing the highest yielding issuers within There has been less focus on equity ership to non- markets, which bank market par- Default Probability of High-Debt Issuance Firms Relative to Low-Debt Issuance Firms were not the ticipants through Default probability of high-debt firms relative to low-debt firms Two-year excess return on high-yield bonds (%)* epicenter of securitization, 1.5 -60 the 2008 cri- syndication, and sis. One area public offerings. of emphasis The ability to 1.0 -40 has been cor- sell assets insu- porate gov- lates the broader 0.5 -20 ernance and economy from investor activ- the health of the ism. In some banking system. 0.0 0 sense the suc- For example, cessful private Tobias Adrian, equity model Paolo Colla, -0.5 20 described and Shin show in Steven that bonds made -1.0 40 Davis, John 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 up much of the *Returns are plotted in reverse scale to highlight negative correlation Haltiwanger, shortfall in bank Source: R. Greenwood and S. Hanson, NBER Working Paper No. 17197 Ron Jarmin, lending during Josh Lerner, Figure 2a the 2008 finan- and Javier cial crisis.50 But bond Miranda59 and and equity markets can Insurance Company Holdings of Newly Issued Investment Grade Bonds Robert Harris, themselves be sources Tim Jenkinson, 60 of fluctuations, and the Insurance company holdings/all holdings by insurance companies, pension funds, and mutual funds and Kaplan, for 100% process of transferring Risk quartile: example, has been Safest assets from banks is frag- 95 imported into public ile. Asset fire sales were Riskiest equity markets, in a a source of contagion 90 reprise of the 1980s. in the crisis.51 Natural Lucian Bebchuk, 85 and informed buyers Alon Brav, and Wei 61 were also stressed and 80 Jiang and Brav, unable to absorb the Jiang, Song Ma, and sales of bank assets, cre- 75 Xuan Tian62 find ating a downward spiral 70 analogous long-run in prices and bank capi- benefits of activism tal when measured at fire 65 in public markets, sale prices. This is the 60 while Craig Doidge, source of bank vulner- Yield spread CDS spread Andrew Karolyi, and ability in Greenwood, Data for 2004–2007; Bars represent 95% confidence intervals Stulz63 show that a Augustin Landier, and Source: B. Becker and V. Ivashina, NBER Working Paper No. 18909 new wave of acqui- Thesmar.52 sitions has thinned Figure 2b Along with a shift the ranks of publicly in focus from industrial firms to banks, any credit rating category.57 Figures 2a listed firms. Even without activism, Philip researchers have turned their attention and 2b show two examples. David López- Bond, Alex Edmans, and Itay Goldstein from equity to credit markets. A variety Salido, Stein, and Egon Zakrajšek argue point to positive feedback effects from of factors appears to capture credit mar- that credit market sentiment predicts a equity markets: Movements in stock price

6 NBER Reporter • No. 1, March 2017 inform real decision making, and are in amplifiers include the impact of mortgage Severino75 point to the large contempora- part self-fulfilling.64 finance through the conforming limit 69 neous growth in bad loans made to higher and the impact of auto lending as a result income and traditionally credit-worthy The Macroeconomy of the collapse of securitization.70 households. Rather than suggesting loose The labor market suffered in tandem credit for lower income households as the The program has become both more with consumption. Corporate Finance critical mechanism, these papers point to focused on individuals, as described above, researchers have increasingly considered a widespread loan-demand narrative as and more macroeconomic. Papers rou- employment as an outcome variable, equally plausible. tinely consider the general equilibrium alongside corporate finance and invest- As household solvency deterio- conclusions of their microempirical esti- ment. For example, Jennifer Brown and rated, so too did the solvency of banks mates. For exam- that lent to them, with ples, see: Xavier Household Debt to GDP Expansion and Subsequent Growth, 1960–2012 consequences for the

Giroud and Joshua GDP growth, year t to t+3 bank-lending channel 65 Rauh for the 40 and their client corpora- effect of state-level Korea ’67 tions. Small firms were taxation; Agarwal, hit harder than larger

Gene Amromin, Singapore ’04 firms. Efraim Benmelech, Chomsisengphet, 20 Nittai Bergman, Anna Piskorski, Seru, and Milanez, and Vladimir 66 Yao for the effect Australia ’05 Mukharlyamov empha- of mandated loan size local contagion in modification; and 0 firm bankruptcies, using Giroud and Holger data on retail centers.76 Mueller 67 for the Japan ’06 International trade was effect of firm bal- Ireland ’07 hit harder than domestic ance sheets on Greece ’09 consumption. Implicitly -20 aggregate employ- -10 010203040 then, bank finance plays ment. Broadly Change in household debt to GDP ratio, year t-4 to t-1 a disproportionate role in Sample is 30 mostly advanced economies speaking, research Source: A. Mian, A. Sufi, and E. Verner, NBER Working Paper No. 21581 these locations. For exam- has emphasized ple, collateral is especially two related ampli- Figure 3 important for smaller fying mechanisms for the 2008 crisis: the David Matsa find that depressed hous- firms;77 trade credit is easily stressed effect of household balance sheets on con- ing markets lower household mobility in cross-border transactions.78 Shocks sumption, and the bank-lending channel. and job-search activity.71 Relatedly, Kyle can also propagate through the bank Household balance sheets were argu- Herkenhoff, Gordon Phillips, and Ethan branch network as shown in Erik Gilje, ably the ground zero of the crisis. Mian Cohen-Cole find an inefficient realloca- Elena Loutskina, and Philip Strahan.79 and Sufi have suggested that the effect tion of labor in tight credit markets.72 Patrick Bolton, Xavier Freixas, Leonardo of the housing boom and bust on house- Together, these papers suggest weak Gambacorta, and Paolo Emilio Mistrulli hold balance sheets was responsible for household balance sheets can be a driver argue that relationship banking played the sharp rise and fall in consumption of business cycles. Mian, Sufi, and Emil a mitigating role for larger firms.80 surrounding the financial crisis.68 Prior Verner show a broader link in the time Relationship banks may charge a pre- to the crisis, lower-income ZIP codes series and across countries between the mium in good times but they extended responded aggressively to increases in ratio of household debt to GDP and credit at favorable terms during the house prices and the decoupling of credit subsequent reductions in growth and downturn. Murillo Campello, Erasmo and income growth, converting price employment, as shown in Figure 3.73 Giambona, Graham, and Harvey81 point changes to spending through borrowing. Cumulatively, this highly influential to credit lines and Michael Roberts82 In these areas, the gap between income research, which documents a causal link points to renegotiation in allowing firms growth reported on mortgage applica- from credit cycles to household balance and banks to weather the crisis. tions and ZIP code income growth points sheets to consumption and employment, to the loosening of credit standards as has made corporate finance central to mac- Future Directions causal. The low-income areas that experi- roeconomics. Taking issue with this pure enced more loan growth fared worse dur- supply-side narrative, Christopher Foote, Recent history shows both the use- ing the crisis, especially in nontradeable Lara Loewenstein, and Paul Willen74 fulness and adaptability of the empiri- goods and services. Specific household and Manuel Adelino, Schoar, and Felipe cal and theoretical toolkits of corporate

NBER Reporter • No. 1, March 2017 7 finance. Undoubtedly, the bank-lending September 2010. 12 M. Egan, G. Matvos, and A. Seru, channel will continue to be an area of Return to Text “The Market for Financial Adviser focus because of the availability of rich 6 M. Baker and J. Wurgler, “Do Strict Misconduct,” NBER Working Paper No. data on households, the quasi-experimen- Capital Requirements Raise the Cost of 22050, February 2016. tal nature of government interventions Capital? Banking Regulation and the Low Return to Text in the financial system, and the salience Risk Anomaly,” NBER Working Paper No. 13 B. Carlin and D. Robinson, “What and size of the macroeconomic effects of 19018, May 2013; R. Fahlenbrach, R. Does Financial Literacy Training Teach the financial crisis. However, the impera- Prilmeier, and R. Stulz, “Why Does Fast Us?” NBER Working Paper No. 16271, tives may soon shift with events, and may Loan Growth Predict Poor Performance August 2010, and The Journal of well move back to core topics such as for Banks?” NBER Working Paper No. Economic Education, 43 (3), 2012, pp. the financing and governance of indus- 22089, March 2016; and M. Baron 235–47. trial firms; innovation, entrepreneur- and W. Xiong, “Credit Expansion and Return to Text ial finance, and productivity; and inter- Neglected Crash Risk,” NBER Working 14 S. Agarwal, S. Chomsisengphet, N. national trade, finance, and comparative Paper No. 22695, September 2016. Mahoney, and J. Stroebel, “Regulating financial systems. Return to Text Consumer Financial Products: Evidence There will also surely be new areas 7 P. Bordalo, N. Gennaioli, and A. from Credit Cards,” NBER Working of inquiry. Studies of the rising share Shleifer, “Diagnostic Expectations and Paper No. 19484, September 2013, and of finance in the global economy and Credit Cycles,” NBER Working Paper No. The Quarterly Journal of Economics, the disruptive forces of emerging finan- 22266, May 2016. 130 (1), 2015, pp. 111–64. cial technology firms, such as Thomas Return to Text Return to Text Philippon 83 and Jennie Bai, Philippon, 8 D. Kahneman and A. Tversky, 15 I. Ben-David, J. Graham, and C. and Savov 84 may be leading indicators of “Subjective Probability: A Judgment Harvey, “Managerial Miscalibration,” what lies ahead. of Representativeness,” Cognitive NBER Working Paper No. 16215, July Psychology, 3 (3), 1972, pp. 430–54; 2010, and The Quarterly Journal of D. Kahneman, Thinking: Fast and Economics, 128 (4), pp. 1547–84. 1 R. Vishny, “Program Report: Slow, New York, New York: Farrar, Return to Text Corporate Finance,” NBER Reporter, Straus, and Giroux, 2011; A. Tversky 16 R. Greenwood and S. Hanson, Winter, 1994–5, pp. 1–4, http://www. and D. Kahneman, “Judgment under “Waves in Ship Prices and Investment,” nber.org/reporter/reporter_archive/ Uncertainty: Heuristics and Biases,” NBER Working Paper No. 19246, July Winter%201994-95_1.pdf Science, 27 (185), 1974, 1124–31; 2013, and The Quarterly Journal of Return to Text and A. Tversky and D. Kahneman, Economics, 130 (1), 2015, pp. 55–109. 2 H. Ru and A. Schoar, “Do Credit Card “Extensional versus Intuitive Reasoning: Return to Text Companies Screen for Behavioral Biases?” the Conjunction Fallacy in Probability 17 K. Shue and R. Townsend, “Growth NBER Working Paper No. 22360, June Judgment,” Psychological Review, 90 through Rigidity: An Explanation for 2016. (4), 1983, pp. 293–315. the Rise in CEO Pay,” NBER Working Return to Text Return to Text Paper No. 21975, February 2016. 3 B. Keys, T. Piskorski, A. Seru, and V. 9 I. Ben-David, J. Birru, and V. Return to Text Yao, “Mortgage Rates, Household Balance Prokopenya, “Uninformative Feedback 18 Y. Pan, T. Wang, and M. Weisbach, Sheets, and the Real Economy,” NBER and Risk Taking: Evidence from Retail “CEO Investment Cycles,” NBER Working Paper No. 20561, October 2014. Forex Trading,” NBER Working Paper Working Paper No. 19330, August Return to Text No. 22146, April 2016. 2013. 4 A. Rampini and S. Viswanathan, Return to Text Return to Text “Household Risk Management,” NBER 10 R. Greenwood and A. Shleifer, 19 C. Parsons, J. Sulaeman, and S. Working Paper No. 22293, May 2016. “Expectations of Returns and Expected Titman, “The Geography of Financial Return to Text Returns,” NBER Working Paper No. Misconduct,” NBER Working Paper No. 5 N. Gennaioli, A. Shleifer, and R. 18686, January 2013, and The Review 20347, July 2014. Vishny, “Neglected Risks, Financial of Financial Studies, 27 (3), 2014, pp. Return to Text Innovation, and Financial Fragility,” 714–46. 20 P. Gompers, W. Gornall, S. Kaplan, NBER Working Paper No. 16068, Return to Text and I. Strebulaev, “How Do Venture June 2010, and Journal of Financial 11 S. Mullainathan, M. Noeth, and Capitalists Make Decisions?” NBER Economics, 104 (3), 2012, pp. 452–68; A. Schoar, “The Market for Financial Working Paper No. 22587, September and P. Bordalo, N. Gennaioli, and A. Advice: An Audit Study,” NBER 2016. Shleifer, “Salience Theory of Choice Under Working Paper No. 17929, March 2012. Return to Text Risk,” NBER Working Paper No. 16387, Return to Text 21 I. Gow, S. Kaplan, D. Larcker, and

8 NBER Reporter • No. 1, March 2017 A. Zakolyukina, “CEO Personality and 30 N. Gennaioli, A. Shleifer, and R. 39 I. Welch, “Levered Returns,” NBER Firm Policies,” NBER Working Paper No. Vishny, “A Model of Shadow Banking,” Working Paper No. 22150, April 2016. 22435, July 2016. NBER Working Paper No. 17115, June Return to Text Return to Text 2011, and The Journal of Finance, 68 40 M. Baker, M. Hoeyer, and J. Wurgler, 22 U. Malmendier, G. Tate, and J. (4), 2013, pp. 1331–63. “The Risk Anomaly Tradeoff of Leverage,” Yan, “Overconfidence and Early-life Return to Text NBER Working Paper No. 22116, March Experiences: The Impact of Managerial 31 S. Hanson, A. Shleifer, J. Stein, and 2016. Traits on Corporate Financial Policies,” R. Vishny, “Banks as Patient Fixed- Return to Text NBER Working Paper No. 15659, Income Investors,” NBER Working Paper 41 S. Agarwal, D. Lucca, A. Seru, and F. January 2010, and The Journal of No. 20288, July 2014, and Journal of Trebbi, “Inconsistent Regulators: Evidence Finance, 66 (5), pp. 1687–733. Financial Economics, 117 (3), 2015, pp. From Banking,” NBER Working Paper No. Return to Text 449–69. 17736, January 2012, and The Quarterly 23 E. Benmelech and C. Frydman, Return to Text Journal of Economics, 129 (2), 2012, pp. “Military CEOs,” NBER Working Paper 32 O. Hart and L. Zingales, “Inefficient 889–938. No. 19782, January 2014, and Journal of Provision of Liquidity,” NBER Working Return to Text Financial Economics, 117 (1), 2015, pp. Paper No. 17299, August 2011. 42 S. Chernenko and A. Sunderam, 43–59. Return to Text “Liquidity Transformation in Asset Return to Text 33 Z. He and A. Manela, “Information Management: Evidence from the Cash 24 A. Schoar and L. Zuo, “Shaped by Acquisition in Rumor Based Bank Runs,” Holdings of Mutual Funds,” NBER Booms and Busts: How the Economy NBER Working Paper No. 18513, Working Paper No. 22391, July 2016. Impacts CEO Careers and Management November 2012, and The Journal of Return to Text Styles,” NBER Working Paper No. 17590, Finance, 71 (3), 2016, pp. 1113–58. 43 D. Diamond and A. Kashyap, November 2011. Return to Text “Liquidity Requirements, Liquidity Return to Text 34 G. Gorton and G. Ordoñez, Choice, and Financial Stability,” NBER 25 C. Frydman and D. Jenter, “CEO “Collateral Crises,” NBER Working Working Paper No. 22053, March 2016. Compensation,” NBER Working Paper Paper No. 17771, January 2012, and Return to Text No. 16585, December 2010, and Annual American Economic Review, 104 (2), 44 K. Milbradt and M. Oehmke, Review of Financial Economics, 2 (1), pp. 343–78. “Maturity Rationing and Collective Short- 2010, pp. 75–102. Return to Text Termism,” NBER Working Paper No. Return to Text 35 V. Acharya, D. Gale, and T. 19946, February 2014, and Journal of 26 T. Chaney, D. Sraer, and D. Thesmar, Yorulmazer, “Rollover Risk and Market Financial Economics, 118 (3), 2015, pp. “The Collateral Channel: How Real Freezes,” NBER Working Paper No. 553–70. Estate Shocks Affect Corporate Investment,” 15674, January 2010, and The Journal Return to Text NBER Working Paper No. 16060, June of Finance, 66 (4), 2011, pp. 1177–209. 45 A. Falato and D. Scharfstein, “The 2010, and American Economic Review, Return to Text Stock Market and Bank Risk-Taking,” 102 (6), 2012, pp. 2381–409. 36 J. Hahm, H. S. Shin, and K. Shin, NBER Working Paper No. 22689, Return to Text “Non-Core Bank Liabilities and September 2016. 27 G. Gorton, “The Development of Financial Vulnerability,” NBER Working Return to Text Opacity in U.S. Banking,” NBER Working Paper No. 18428, September 2012, and 46 M. Kacperczyk and P. Schnabl, “Implicit Paper No. 19540, October 2013; G. Journal of Money, Credit and Banking, Guarantees and Risk Taking: Evidence Gorton, “The History and Economics of 45 (8), 2013, pp. 3–36. from Money Market Funds,” NBER Safe Assets,” NBER Working Paper No. Return to Text Working Paper No. 17321, August 2011. 22210, April 2016. 37 J. Stein, “Monetary Policy as Return to Text Return to Text Financial-Stability Regulation,” NBER 47 S. Agarwal and I. Ben-David, 28 G. Gorton, S. Lewellen, and A. Working Paper No. 16883, March “Loan Prospecting and the Loss of Soft Metrick, “The Safe-Asset Share,” NBER 2011, and The Quarterly Journal of Information,” NBER Working Paper No. Working Paper No. 17777, January 2012, Economics, 127 (1), 2012, pp. 57–95. 19945, February 2014. and American Economic Review, 102 Return to Text Return to Text (3), 2012, pp. 101–6. 38 V. Acharya, P. Schnabl, and G. Suarez, 48 D. Scharfstein and A. Sunderam, Return to Text “Securitization without Risk Transfer,” “Concentration in Mortgage Lending, 29 H. DeAngelo and R. Stulz, “Why High NBER Working Paper No. 15730, Refinancing Activity and Mortgage Rates,” Leverage is Optimal for Banks,” NBER February 2010, and Journal of Financial NBER Working Paper No. 19156, June Working Paper No. 19139, June 2013. Economics, 107 (3), 2010, pp. 515–36. 2013. Return to Text Return to Text Return to Text

NBER Reporter • No. 1, March 2017 9 49 I. Drechsler, A. Savov, and P. Schnabl, Return to Text 67 X. Giroud and H. Mueller, “Firm “The Deposits Channel of Monetary 58 D. López-Salido, J. Stein, and E. Leverage and Unemployment during the Policy,” NBER Working Paper No. Zakrajšek, “Credit-Market Sentiment Great Recession,” NBER Working Paper 22152, April 2016. and the Business Cycle,” NBER Working No. 21076, April 2015. Return to Text Paper No. 21879, January 2016. Return to Text 50 T. Adrian, P. Colla, and H. S. Shin, Return to Text 68 A. Mian and A. Sufi, “Household “Which Financial Frictions? Parsing 59 S. Davis, J. Haltiwanger, R. Jarmin, J. Leverage and the Recession of 2007 the Evidence from the Financial Crisis Lerner, and J. Miranda, “Private Equity to 2009,” NBER Working Paper No. of 2007–9,” NBER Working Paper and Employment,” NBER Working 15896, April 2010, and IMF Economic No. 18335, August 2012, and in D. Paper No. 17399, September 2011. Review, 58(1), 2010, pp. 74–117; A. Acemoglu, J. Parker, and M. Woodford, Return to Text Mian and A. Sufi, “What Explains eds., NBER Macroeconomics Annual 60 R. Harris, T. Jenkinson, and S. High Unemployment? The Aggregate 2012, Volume 27, Chicago, Illinois: Kaplan, “Private Equity Performance: Demand Channel,” NBER Working University of Chicago Press, 2013, pp. What Do We Know?” NBER Working Paper No. 17830, February 2012; A. 159–214. Paper No. 17874, February 2012, and Mian and A. Sufi, “House Price Gains Return to Text The Journal of Finance, 69 (5), 2014, and U.S. Household Spending from 2002 51 A. Shleifer and R. Vishny, “Fire Sales pp. 1851–82. to 2006,” NBER Working Paper No. in Finance and Macroeconomics,” NBER Return to Text 20152, May 2014; and A. Mian and A. Working Paper No. 16642, December 61 L. Bebchuk, A. Brav, and W. Jiang, Sufi, “Fraudulent Income Overstatement 2010, and Journal of Economic “The Long-Term Effects of Hedge Fund on Mortgage Applications during the Perspectives, 25 (1), 2011, pp. 29–48. Activism,” NBER Working Paper No. Credit Expansion of 2002 to 2005,” Return to Text 21227, June 2015. NBER Working Paper No. 20947, 52 R. Greenwood, A. Landier, and D. Return to Text February 2015. Thesmar, “Vulnerable Banks,” NBER 62 A. Brav, W. Jiang, S. Ma, and X. Return to Text Working Paper No. 18537, November Tian, “How Does Hedge Fund Activism 69 M. Adelino, A. Schoar, and F. 2012, and Journal of Financial Reshape Corporate Innovation?” NBER Severino, “Credit Supply and House Economics, 115(3), 2015, pp. 471–85 Working Paper No. 22273, May 2016. Prices: Evidence from Mortgage Market Return to Text Return to Text Segmentation,” NBER Working Paper 53 R. Greenwood and S. Hanson, “Issuer 63 C. Doidge, A. Karolyi, and R. Stulz, No. 17832, February 2012. Q uality and the Credit Cycle,” NBER “The U.S. Listing Gap,” NBER Working Return to Text Working Paper No. 17197, July 2011, Paper No. 21181, May 2015. 70 E. Benmelech, R. Meisenzahl, and and The Review of Financial Studies, Return to Text R. Ramcharan, “The Real Effects of 26 (6), 2013, pp. 1483–525. 64 P. Bond, A. Edmans, and I. Goldstein, Liquidity during the Financial Crisis: Return to Text “The Real Effects of Financial Markets,” Evidence from Automobiles,” NBER 54 B. Becker and V. Ivashina, “Cyclicality NBER Working Paper No. 17719, Working Paper No. 22148, April 2016. of Credit Supply: Firm Level Evidence,” December 2011, and Annual Review of Return to Text NBER Working Paper No. 17392, Financial Economics, 4 (1), 2012, pp. 71 J. Brown and D. Matsa, “Locked in by September 2011, and Journal of 339–60. Leverage: Job Search during the Housing Monetary Economics, 62, 2014, pp. Return to Text Crisis,” NBER Working Paper No. 76–93. 65 X. Giroud and J. Rauh, “State 22929, December 2016. Return to Text Taxation and the Reallocation of Return to Text 55 T. Adrian and H. Shin, “Procyclical Business Activity: Evidence from 72 K. Herkenhoff, G. Phillips, and E. Leverage and Value-at-Risk,” NBER Establishment-Level Data,” NBER Cohen-Cole, “How Credit Constraints Working Paper No. 18943, April 2013, Working Paper No. 21534, September Impact Job Finding Rates, Sorting, and and The Review of Financial Studies, 2015. Aggregate Output,” NBER Working 27 (2), 2014, pp. 373–403. Return to Text Paper No. 22274, May 2016. Return to Text 66 S. Agarwal, G. Amromin, S. Return to Text 56 G. Gorton and G. Ordoñez, “Good Chomsisengphet, T. Piskorski, A. Seru, 73 A. Mian, A. Sufi, and E. Verner, Booms, Bad Booms,” NBER Working and V. Yao, “Mortgage Refinancing, “Household Debt and Business Cycles Paper No. 22008, February 2016. Consumer Spending, and Competition: Worldwide,” NBER Working Paper No. Return to Text Evidence from the Home Affordable 21581, September 2015. 57 B. Becker and V. Ivashina, “Reaching Refinancing Program,” NBER Working Return to Text for Yield in the Bond Market,” NBER Paper No. 21512, August 2015. 74 C. Foote, L. Loewenstein, and P. Willen, Working Paper No. 18909, March 2013. Return to Text “Cross-Sectional Patterns of Mortgage Debt

10 NBER Reporter • No. 1, March 2017 during the Housing Boom: Evidence and 78 P. Antràs and C. Foley, “Poultry in Management and Corporate Investment Implications,” NBER Working Paper No. Motion: A Study of International Trade during a Financial Crisis,” NBER 22985, December 2016. Finance Practices,” NBER Working Working Paper No. 16309, Return to Text Paper No. 17091, May 2011, and August 2010, and The Review of 75 M. Adelino, A. Schoar, and F. Severino, Journal of Political Economy, 123 Financial Studies, 24 (6), pp. 1944–79. “Loan Originations and Defaults in (4), 2015, pp. 853–901; and C. Foley Return to Text the Mortgage Crisis: The Role of the and K. Manova, “International Trade, 82 M. Roberts, “The Role of Dynamic Middle Class,” NBER Working Paper No. Multinational Activity, and Corporate Renegotiation and Asymmetric 20848, January 2015, and The Review Finance,” NBER Working Paper No. Information in Financial Contracting,” of Financial Studies, 29 (7), 2016, pp. 20634, October 2014, and Annual NBER Working Paper No. 20484, 1635–70; and M. Adelino, A. Schoar, Review of Economics, 7 (1), 2015, pp. September 2014. and F. Severino, “Loan Originations and 119–46. Return to Text Defaults in the Mortgage Crisis: Further Return to Text 83 T. Philippon, “Has the U.S. Finance Evidence,” NBER Working Paper No. 79 E. Gilje, E. Loutskina, and P. Industry Become Less Efficient? On the 21320, July 2015. Strahan, “Exporting Liquidity: Branch Theory and Measurement of Financial Return to Text Banking and Financial Integration,” Intermediation,” NBER Working 76 E. Benmelech, N. Bergman, A. NBER Working Paper No. 19403, Paper No. 18077, May 2012, and Milanez, and V. Mukharlyamov, “The September 2013, and The Journal of American Economic Review, 105 (4), Agglomeration of Bankruptcy,” NBER Finance, 71 (3), 2016, pp. 1159–84. 2015, pp. 1408–38; and T. Philippon, Working Paper No. 20254, June 2014. Return to Text “The FinTech Opportunity,” NBER Return to Text 80 P. Bolton, X. Freixas, L. Working Paper No. 22476, 77 M. Adelino, A. Schoar, and F. Severino, Gambacorta, and P. Mistrulli, August 2016. “House Prices, Collateral, and Self- “Relationship and Transaction Lending Return to Text Employment,” NBER Working Paper in a Crisis,” NBER Working Paper No. 84 J. Bai, T. Philippon, and A. Savov, No. 18868, March 2013, and Journal of 19467, September 2013. “Have Financial Markets Become More Financial Economics, 117 (2), 2015, pp. Return to Text Informative?” NBER Working Paper 288–306. 81 M. Campello, E. Giambona, J. No. 19728, December 2013. Return to Text Graham, and C. Harvey, “Liquidity Return to Text

NBER Reporter • No. 1, March 2017 11 Research Summaries

Behavioral Barriers to Education

Philip Oreopoulos

Research in the economics of education nomics does not. The field often explores has devoted much attention to the role of consequences of myopia or lack of salience external factors, such as teacher quality, class for decisions related to savings, finance, and size, curriculum, peers, financial constraints, health. Education represents a relatively new and parental investments in determining stu- application of the field, one that seems partic- dents’ development. Students’ own role in ularly promising. Indeed, it is hard to imagine Philip Oreopoulos their development has received compara- a group more challenged by short- and long- is professor of econom- tively less attention. This is perhaps due to term trade-offs than children facing school- ics and public policy at the the assumption from the traditional human related decisions. University of Toronto. He capital model that students always do the In a series of research studies, my co- received his Ph.D. from the best they can when making decisions about authors and I have explored this topic using University of California, how much to study or how hard to work. In a range of methodologies. This research sum- Berkeley, and his M.A. from this investment framework, students care- mary briefly describes our work and points the University of British fully weigh immediate costs against long- to future possibilities. A more detailed intro- Columbia. term uncertain benefits to maximize lifetime duction to the topic of behavioral barriers to He is an NBER research well-being. education is provided in a review article I co- associate, a program director Clearly this process does not adequately wrote with Adam Lavecchia and Heidi Liu at the Canadian Institute for describe the behavior of a six-year-old, who last year.1 Advanced Research, and co- must be delicately persuaded to go to school, chair of the education sec- practice violin, or try addition. An elemen- Compulsory Schooling tor at the Abdul Latif Jameel tary-school student’s brain is simply not yet Poverty Action Lab. He has sufficiently developed to execute plans for the Compulsory schooling policies that held visiting appointments future. But over time and with experience, a place constraints on when students may start at Harvard University and remarkable neural circuitry expansion and or finish school are not easily justified from the Massachusetts Institute pruning process occurs that makes it possible a human capital investment model in the of Technology, and is a to hold information in mind before deciding absence of positive externalities. Instead they member of the board of edi- what to do with it. With age, children grad- are usually motivated by the belief that chil- tors of the Journal of Labor ually come to think about the future more. dren are too short-sighted. Economics. Impulses, feelings, and distractions can be Consider the attitude of former British Oreopoulos’ current held in check before making a choice. This Prime Minister David Cameron, speaking in work focuses on education process can take 25 years to mature, though 2003 on why he favored raising the school- policy, especially the appli- our tendency to focus on the present or what’s leaving age to 18: “Think about it: with your cation of behavioral eco- salient never fully disappears. children, would you dream of just leaving nomics to education and The emerging field of behavioral eco- them to their own devices, not getting a job, child development. He nomics attempts to integrate these tenden- not training, nothing? No — you’d nag and often examines this field by cies and others identified by research from push and guide and do anything to get them initiating and implement- psychology and sociology in order to bet- on their way … and so must we.” ing large-scale field experi- ter understand individual decision making Many studies have used legal constraints ments, with the goal of pro- and consider economic implications. While as instrumental variables to estimate returns ducing convincing evidence classical economics often assumes that indi- to schooling. Some, though not all, find for public policy decisions. viduals always make correct short- and long- substantial improvements to annual income, run trade-offs(ex ante), behavioral eco- health, and other measures of socioeconomic

12 NBER Reporter • No. 1, March 2017 success.2 I have argued that even a 7 per- housing projects. In all three locations, group, women who were offered both the cent expected increase in lifetime wealth participation rates quickly rose, to more scholarship and services performed better from an extra year of school would be than 85 percent, even though parents and in both their first and second years, even hard to turn down under the human capi- students were required to commit in writ- though the program occurred only in the tal investment model. Present bias, coming to the conditions and high expecta- first year. bined with a strong distaste for school, tions of the program. High school gradua- But we were not able to replicate this seems a more plausible explanation of fail- tion and post-secondary enrollment rates general result in the second experiment ure to undertake such investment.3 rose dramatically for Pathways students, when we tried to improve results by mak- Compulsory schooling’s effectiveness in some cases by more than 50 percent, ing the monetary incentives stronger, lin- is not only from forcing students to stay in comparisons with students from other ear (starting with grades of 70 percent and in school. Closer examination reveals that housing projects before and after intro- increasing), shorter-term (awarded at the these policies more often serve to drive duction of the program [Figure 1]. end of each semester), and more focused, expectations and adults’ efforts to encour- awarding them for each course (rather age youth to stay in class. Truant students Offering Financial Incentives than overall GPA). Treatment effects are given more attention. They or their to Offset Immediate Costs were small and mostly insignificant. Thus parents are often first contacted by teach- far, offering immediate incentives to off- ers, principals, or caseworkers in an effort In experiments I conducted with set immediate costs appears to deliver at to reengage the students and address rea- Joshua Angrist, Daniel Lang, and Tyler most modest increases in student perfor- sons behind their truancy. Williams, we offered large short-term mance, but considerable latitude exists monetary rewards for academic perfor- in designing such programs. It is possible Adding School Structure mance in an attempt to offset fami- that alternative designs, with different and Support lies’ immediate costs and make possible incentives, different target populations, larger lifetime gains.5 Similar to other or focusing on specific inputs (like read- Lavecchia, Robert Brown, and attempts to improve grades and reten- ing) instead of outputs (like grades) could I provide additional evidence that the tion, results were mixed and overall not prove worthwhile. approach of addressing students’ immediate Helping distaste for school by “Pathways to Education” Program and Academic Outcomes Complete College offering more structure Normalized high school graduation rate, percentage points Applications and support can be +30 4 effective. “Pathways to Students from Regent Park The transition Education” is a com- +25 from high school to prehensive youth sup- Program begins college involves many port program devel- +20 small steps: consider- oped to improve ing where and how to academic outcomes go, completing each +15 among those entering program application high school from very and paying each fee, poor socioeconomic +10 applying for financial backgrounds. The pro- aid, deciding what program includes proac- +5 gram and courses to tive mentoring of each Students from other public housing take, and figuring out 0 student, daily tutoring, 2000 2001 2002 2003 2004 2005 2006 2007 one’s new daily rou- group activities, career Normalized to 0 starting in 2000 tine. These costs are counseling, and college Source: P. Oreopoulos, R. S. Brown, and A. Lavecchia, NBER Working Paper No. 20430 often perceived as “too transition assistance, small to matter” in the combined with imme- Figure 1 traditional investment diate and long-term incentives to rein- very promising. model. From a behavioral perspective, force a minimum degree of mandatory In the first study, first-year college application processes can often get in the participation. The program began in 2001 students were offered $1,000 to $5,000 way of take-up and realization of benefits. for students entering Grade 9 and living for attaining solid, but not necessarily Actions that require taking time out of in Regent Park, the largest public hous- top, grades. Others were offered access to our routine, that are complex and with- ing project in Toronto. It expanded in additional student services. A third group out social support, and whose benefits are 2007 to include two additional Toronto was offered both. Relative to the control very long-term and uncertain are tempt-

NBER Reporter • No. 1, March 2017 13 ing to put off. vided a simple financial aid calculator to more continuous actions, such as studying. Eric Bettinger, Bridget Long, Lisa demonstrate how they could afford to Can we apply insights from this literature Sanbonmatsu, and I partnered with H&R attend. The second had students apply to encourage better habits or influence Block to provide assistance completing for real to colleges or universities, with social identity? To begin to explore these the Free Application for Federal Student the application fees covered from cutting issues, I created the Student Achievement Aid (FAFSA) to low-income parents vis- and pasting the application number to the Lab (SAL) at the University of Toronto. iting H&R Block who had children in LifeAfterHighSchool website. The third All students taking first-year economics their senior year in high school.6 Much workshop helped students open and get courses are asked to take an online warm- of the information called for in the appli- started on the Ontario Student Assistance up exercise for a small grade require- cation is collected in ment. After registering the process of com- Application Assistance and College Enrollment an account and tak- pleting the annual tax ing a short survey, they form. Guiding parents Postsecondary enrollment rates are randomized into through the remaining 58% groups; some are asked questions needed to to think about poten- complete the FAFSA Program schools tial obstacles likely to took only about 10 56 be encountered dur- minutes. The children ing the school year and of parents who were Control schools given advice in how to randomly offered this 54 cope, while others are service were 16 per- invited to receive fol- centage points more low-up, either in per- likely to apply to col- 52 son or by text. The lege and 8 percent- setup and large repre- age points more likely sentative sample offer to attend and stay a promising method 50 enrolled for at least 2009–10 2010–11 2011–12 2012–13 for collecting detailed two years. The inter- Assistance program administered in 2011–12 quantitative and quali- vention is among the Source: P. Oreopoulos and R. Ford, NBER Working Paper No. 22320 tative data, trying var- most cost-effective ious experiments, and Figure 2 ever tested for increas- iterating on those that ing college enrollment of children from Program application and sent follow- work best. low-income families. up emails and letters to parents with In one SAL experiment, Uros The FAFSA study’s intervention, instructions to complete the task. For stu- Petronijevic and I examine three specific however, only helped with one com- dents at low-transition schools that were interventions against a comparison group ponent of the transition to college. randomly provided assistance through that is assigned a simple personality test Applicants still had to determine which LifeAfterHighSchool, post-secondary instead.8 The treatment group receives: colleges and programs to apply to. They application rates increased from 64 to 1) A one-time, online exercise designed still had to pay program application fees 78 percent, while enrollment increased to affirm students’ goals and purpose for and register for courses, and only chil- the following school year by 5 percentage attending university; 2) the online inter- dren of parents visiting H&R Block were points [Figure 2]. The greatest impact was vention plus text and email messaging affected. To explore a more scalable pro- for students who were not taking any uni- throughout the full academic year (stu- gram which offered assistance for both versity-track courses in their last year of dents can communicate back); and 3) financial aid and program applications high school: their enrollments increased the online intervention plus one-on-one as part of high school seniors’ curricu- 9 percentage points. engagement with upper-year undergradu- lum, Reuben Ford and I created a pro- ate students who act as coaches and try to gram called LifeAfterHighSchool.7 The Leveraging Technology meet weekly. program provided all seniors at low-tran- to Advise and Motivate Students Overall, we find large positive effects sition high schools with in-class assis- from the coaching program, amounting tance over three 50-minute workshops. Simplification or salient reminders to approximately a 35 percent increase in The first workshop encouraged students are often effective approaches to tack- average course grades. In contrast, we find to consider local post-secondary pro- ling behavioral biases that discourage one- no effects on academic outcomes from grams that they could get into based time actions like completing an applica- either the online exercise or the text mes- on their high school grades and pro- tion. They are less effective for influencing saging campaign, even after investigat-

14 NBER Reporter • No. 1, March 2017 ing potentially heterogeneous treatment motivate them to want to learn. But con- 5 J. Angrist, D. Lang, and P. effects across several student characteris- text, population, timing, and details are Oreopoulos, “Incentives and Services tics, including gender, age, incoming high also all crucial. We are far from under- for College Achievement: Evidence school average, international-student sta- standing a student’s own role in her pro- from a Randomized Trial,” American tus, and whether students live on campus. duction of human capital; this research Economic Journal: Applied Economics, Our results suggest that the bene- highlights reasons for trying. 1(1), 2009, pp. 136–63; and J. Angrist, fits of coaching are not easily replicated P. Oreopoulos, and T. Williams, “When without a personal touch. They do point Opportunity Knocks, Who Answers? to possible directions for future inter- 1 A. Lavecchia, H. Liu, and P. New Evidence on College Achievement ventions. One of my current projects Oreopoulos, “Behavioral Economics of Awards,” NBER Working Paper No. tries to customize advice provided to stu- Education: Progress and Possibilities,” 16643, December 2010, and Journal of dents based on their own perceptions of NBER Working Paper No. 20609, Human Resources, 49 (3), 2014, pp. why “students like them” struggle. It also October 2014, and forthcoming in 572–610. explores the potential for providing more E. A. Hanushek, S. J. Machin and Return to Text personalized coaching through text, mak- L. Woessmann, eds., Handbook of 6 E. Bettinger, B. Long, P. Oreopoulos, ing it possible to reach out to a larger Economics of Education, Volume 5, and L. Sanbonmatsu, “The Role of number of students compared to having Amsterdam, The Netherlands: North Simplification and Information in to meet one-on-one. Holland Press. College Decisions: Results from the H&R Return to Text Block FAFSA Experiment,” NBER Summary 2 J. Angrist and A. Krueger, “Does Working Paper No. 15361, September Compulsory School Attendance Affect 2009, and published as “The Role of My father used to quote Aristotle to Schooling and Earnings?” NBER Working Application Assistance and Information me whenever I complained about home- Paper No. 3572, December 1990, and in College Decisions: Results from the work, reminding me that “The roots Quarterly Journal of Economics, 106 (4), H&R Block FAFSA Experiment,” of education are bitter, but the fruit is 1991, pp. 979–1014. Quarterly Journal of Economics, 127 sweet.” This long-run and uncertain trade- Return to Text (3), 2012, pp. 1205–42. off remains one of the biggest struggles 3 P. Oreopoulos, “Do Dropouts Drop Out Return to Text when growing up. It is difficult to imag- Too Soon? Wealth, Health, and Happiness 7 P. Oreopoulos and R. Ford, “Keeping ine, for example, how an extra evening’s from Compulsory Schooling,” Journal of College Options Open: A Field worth of homework is really worth it Public Economics, 91 (11-12), 2007, pp. Experiment to Help All High School against the much more tempting option 2213–29. Seniors Through the College Application of watching Netflix or going out. We all Return to Text Process,” NBER Working Paper No. struggle with tendencies to procrastinate 4 P. Oreopoulos, R. S. Brown, and A. 22320, June 2016. or focus on what is top of the mind. Lavecchia, “Pathways to Education: An Return to Text The good news is that these behav- Integrated Approach to Helping At-Risk 8 P. Oreopoulos and U. Petronijevic, ioral barriers point to ways to help. High School Students,” NBER Working “Student Coaching: How Far Can Opportunities exist to simplify applica- Paper No. 20430, August 2014, and forth- Technology Go?” NBER Working Paper tions, provide more structure, remind stu- coming in Journal of Political Economy. No. 22630, September 2016. dents of educational opportunities, and Return to Text Return to Text

NBER Reporter • No. 1, March 2017 15 Enterprise and Incentives for Innovation

B. Zorina Khan

All societies have an interest in find- the “great inventors.” 3 The majority of pro- undertook, in 1870, to continue to under- ing the appropriate incentives and institu- ductive inventors came from relatively undis- write the costs of artificial limbs for veterans tions to promote enterprise, knowledge, tinguished backgrounds, and even in Britain [Figure 1]. and innovation. My empirical research in individuals with modest education, rather One of the fundamental features of law and economic history sheds light on than scientific elites, created the important the American patent system was its role in these sources of long-term development advances.4 facilitating markets in technology and the in Europe and the United States during The American Civil War was an exog- mobilization of venture capital. Naomi early industrialization, 1750–1930. This enous shock that helps to identify the Lamoreaux and Sokoloff showed how was a period of enormous policy varia- responsiveness of inventors and inventions trade in patents promoted a specialization tion, which allows us to better identify at the most granular level.5 This conflict and division of labor among inventors, the nature and consequences of specific marked the advent of technology-inten- who were able to leverage their inventive measures. sive warfare, and key military participants ability to obtain funding.7 Endogenous as well as the U.S. president were paten- trade in markets was favorably influ- Patents and Inventive Activity tees. I traced the lifetime patenting careers enced by American patent rules, notably the centralized My first War and Inventive Activity examination book, The system, which Weaponry as a percent of total U.S. patents granted Prosthetic patents per capita Democratization 8% 35 filtered applica- of Invention, tions for novelty empirically 7 30 and provided a examined the signal of techni- 6 genesis and con- 25 cal merit.8 U.S. sequences of 5 knowledge mar- intellectual prop- 20 kets were much erty policy in the 4 more extensive 1 15 19th century. 3 relative to their European insti- international 10 tutions inhibited 2 competitors, access owing to 5 and the ability their assumption 1 to trade secure that elites engen- 0 0 inventive assets dered techno- 1840 1860 1880 1900 1920 1940 1960 1840 1860 1880 1900 1920 1940 1960 was especially logical and eco- Source: B. Z. Khan, NBER Working Paper No. 20944 significant for nomic progress. disadvantaged The U.S. delib- Figure 1 inventors who erately departed from precedent to intro- of a random sample of inventors, and esti- did not possess the means or connections duce the world’s first modern patent system, mated whether the creators of war-related to appropriate returns from manufactur- which, along with effective legal enforce- technologies were first-time inventors, had ing enterprises.9 ment, facilitated rapid technological prog- previously created military inventions, or ress.2 The evidence indicates how responsive switched from unrelated inventions. The Innovation Prizes all inventors — women, ordinary artisans, sci- results indicated that both the rate and entists, even economists — were to expected direction of inventiveness altered with Economists who model innova- returns and to enforceable property rights. war-time variation in expected benefits.6 tion incentives often reference histori- This was the age of patented invention; For instance, improvements in prosthetics cal “facts” like the prizes for longitude Kenneth Sokoloff and I found that the pro- increased during the war and declined at its and the Daguerreotype “patent buyout.” pensity to patent was especially high among conclusion, then rebounded after Congress However, examination of original archival

16 NBER Reporter • No. 1, March 2017 records reveals inaccuracies that undermine mists have a thorough understanding of central claims of their theories.10 Daguerre, their advantages and shortcomings as a for instance, never obtained a French pat- measure of inventive activity. International ent and, instead, lobbied for and gained industrial exhibitions add to our knowl- government payouts in a classic example edge but are rather more problematic as of rent-seeking. My research provides sys- indices of invention.12 World’s fairs were tematic empirical evidence regarding how not necessarily representative of any coun- innovation prizes work in practice, the try’s population of inventors, inventions, political economy of these administered patents, or industry. For instance, the incentives, and potential deadweight losses United States was at war during the 1862 from associated inefficiencies. Paris Universal Exhibition, so only 128 The most creative identification strat- Americans participated among the total egies are only as good as the underlying of over 26,000 exhibitors. At the Great Zorina Khan is professor of eco- data and, as economic historians stress, Exhibition of 1851 in London’s Crystal nomics at Bowdoin College, and effective economic inquiry requires metic- Palace, the rules allowed displays by manu- a research associate in the NBER’s ulous attention to institutional details and facturers and other noninventors. Exhibits Development of the American context. To avoid biases associated with often had nothing to do with inventions, Economy Program. She has a B.Sc. any one source, my analysis triangulates by and their date and place of creation were (First Class Honours) from the employing extensive datasets with detailed unknown.13 Decentralized juries, many University of Surrey in England, information on inventors, inventions, and with no technical expertise, bestowed med- and received her Ph.D. in econom- institutions from the United States and als for reasons ranging from workmanship ics from the University of California, Europe. to aesthetics, while relatively few awards Los Angeles, where she was a The renowned Royal Society of Arts recognized novel inventions. Fulbright Scholar. (RSA) in London provides a valuable Some of these drawbacks can be While the recipient of opportunity to investigate the efficiency of addressed by examining pooled cross-sec- the NBER’s biennial Griliches ex ante inducement — prizes as incentives tions from the same event and city over Fellowship for empirical schol- for invention.11 The society initially was time. My datasets include approximately arship, Khan completed The averse to patents and prohibited the award 30,000 innovation prizes from the reg- Democratization of Invention: of prizes for patented inventions, so the ularly occurring industrial exhibits of Patents and Copyrights in American two mechanisms were substitutes rather the American Institute of New York, the Economic Development, 1790–1920. than complements. My dataset encom- Massachusetts Mechanics Association, The Economic History Association passes several thousand monetary and hon- the Franklin Institute of Philadelphia, awarded this monograph the Alice orary prizes, patent records, and detailed the Mechanics Association of Ohio, the Hanson Jones Biennial Prize for an archival information about the application St. Louis Agricultural and Mechanics outstanding book in American eco- and decision-making process. Committees Association, the Mechanics Institute of nomic history. were typically unable to identify or induce San Francisco, and others. In addition to Khan was recently a W. Glenn worthwhile inventions. Inventors of valu- the information on inventions and innova- Campbell and Rita Ricardo- able discoveries secured patents and tions, the data incorporate extensive details Campbell National Fellow, and an bypassed the prize system; they submitted about exhibitors, judges, and the rationale Arch W. Shaw Fellow, at the Hoover minor contrivances to the RSA for con- for decisions. Institution. Other awards include sideration. Owing to such adverse selec- What can we learn from such data? the Leonardo da Vinci Fellowship, tion, prizes were negatively related to the Industrial exhibitions, whether national or Adam Smith Medal, Kenan course of future important technologies. international, tell us little about the pro- Fellowship, Porter Fellowship, and The RSA ultimately became disillusioned pensity to patent or the use of patent pro- Senior Fellowship at the Lemelson with the prize system. Officials acknowl- tection. A single exhibit of, say, a steam Center for Invention and Innovation. edged that the important British inven- engine, could comprise numerous patented Like Marguerite Yourcenar, a tions had been associated with patenting, components. Patentees must be identified favorite French author, Khan has and their efforts had been “futile” because from the names of the exhibitors when lived in Maine for more than a of the institution’s hostility to patents. As researchers are making a match, but many decade. She and fellow DAE mem- a result, the society switched from offering participants in the exhibition were third- bers have tracked down elusive data inducement prizes towards lobbying for party agents, manufacturers and sellers, in remote archives ranging from reforms to strengthen the patent system. not actually inventors. As a result, only a Paris, France, to settlements in New Patent rights represent novel inven- small percentage of entries can be matched South Wales, Australia, and even to tions that satisfy known rules, and econo- with patentees and their patents. Even if it Paris, Maine.

NBER Reporter • No. 1, March 2017 17 were possible to identify patentees with to focus on the potential for monop- patent and prize data offer an indispens- zero error, and a large fraction of exhib- oly, a longstanding concern of American able resource for gender studies. A sam- its were found to be unpatented, this does common law even before the Sherman ple of over 12,000 inventions and innova- not imply that inventors were actively Act.17 However, patent rules also man- tions by female patentees and participants avoiding patents and the patent system. date disclosure so others can replicate in prize-granting institutions in Britain, Instead, many exhibits were simply not the results or discover competitive substi- France, and the United States enables eligible for a patent, because they lacked tutes. The creators of the American pat- the systematic assessment of women’s novelty or their subject matter was inher- ent system specifically designed mecha- creativity within the market and house- ently unpatentable. nisms to enable the diffusion of technical hold.19 My dataset distinguishes between Industrial fairs do, however, offer information. To estimate the role of pat- improvements in consumer final goods, valuable insights into the operation of ents and prizes in generating knowledge changes in designs, and other forms of prize systems, into creativity that does not spillovers, I tested for spatial autocor- technological creativity. The results show qualify for patent protection, and into relation in patents and in prizes cover- that women, especially nonpatentees, the commercialization of innovations.14 ing unpatented technical innovations.18 were significantly more likely than men to Americans were skeptical about prizes, In keeping with the contract theory of produce these types of incremental con- highlighting their transactions costs and patents, patented inventions were asso- sumer-oriented improvements. A general the potential for cognitive dissonance or ciated with statistically significant spa- implication is that, by empirically missing corruption when juries and administra- tial autocorrelation, consistent with the such consumer innovations, economists tors, rather than markets, determined val- prevalence of knowledge spillovers. By continue to underestimate women’s con- ues and winners. Empirical tributions to tech- analyses of the datasets nological change consistently find that prize Telegraph Lawsuits Relative to Usage and social welfare. awards were largely idio- Federal State Legal records 0.30 1.50 syncratic, and unrelated to comprise another proxies for productivity like underused inventive human capital or 0.25 1.25 resource that can the value of the invention. shed light on the Decisions often reflected 0.20 1.00 link between mar- the identity of the partici- kets and incen- pants, both exhibitors and 0.15 0.75 tives for coop- judges, rather than the erative behavior nature of the discovery. In and innovation.20 Britain, the probability of 0.10 0.50 Courts and legal a prize being awarded to an institutions inventor was unaffected by 0.05 0.25 in the United variables such as the inven- States were not tor’s qualifications and 0.00 0.00 biased towards 1860–1869 1870–1879 1880–1889 1890–1899 1900–1909 1910–1919 1920–1929 1930–1939 1940–1949 experience; the most sig- Lawsuits per million telegraph messages sent the wealthy, but nificant determinant of an Source: B. Z. Khan, NBER Working Paper No. 10346 enhanced access award was whether the indi- by all citizens.21 vidual had an elite back- Figure 2 My book showed ground.15 Similarly, American prize win- contrast, prize-winning innovations were that inventive activity was bolstered by a ners typically belonged to more privileged not spatially dependent. Patenting fur- judiciary committed to enforcing prop- classes than the general population of ther boosted prize innovations in adja- erty rights for all inventors. Rules and patentees, as gauged by their wealth and cent counties, and such spatial effects standards were not static, but effectively occupational status.16 As inducements for were large and significant. In short, pat- altered in response to technological inno- new inventions, prizes frequently failed ents created spillovers for both patented vations.22 From the perspective of a world to result in creations that were scalable inventions and unpatented innovations; where mail was delivered by stagecoach, or valuable in the marketplace. Prizes whereas prizes were less effective in gen- the advent of the telegraph was far more undoubtedly offered valuable advertise- erating such externalities, perhaps owing transformative to communications than ment for sponsors and winners but this to a lack of specific mechanisms to diffuse the change from a landline to a cellphone. benefit declined as professional marketing information. A myopic focus on “explosions” in pat- practices developed. Even today, women are poorly rep- ent litigation fails to appreciate that liti- Welfare analysis of patents tends resented in the annals of technology, so gation about all areas of law — patents,

18 NBER Reporter • No. 1, March 2017 property, contracts and torts alike — was for inexperienced investors, arguably by Capital and Economic Development: inevitably associated with the advent of reducing the risk and transactions costs of Evidence from the British Industrial any important innovation.23 As Figure new ventures. Ongoing research examines Revolution, 1750–1930,” NBER Working 2, on total civil litigation related to the the links between related investing and Paper No. 20853, January 2015. telegraph, illustrates, productive institu- corporate governance, age, and portfolio Return to Text tional responses ultimately accommo- composition. Moreover, these data allow 5 B. Z. Khan, “War and the Returns dated and resolved the transactions costs us to investigate the Bagehot Hypothesis, to Entrepreneurial Innovation among and conflicts associated with disruptive which suggests that unlimited liability U.S. Patentees, 1790–1870,” Brussels innovation. rules have implications for the wealth Economic Review, 52 (3/4), 2009, pp. composition of shareholders. 239–74. Enterprise and Family Networks In sum, my research helps to explain Return to Text overarching growth patterns: the uni- 6 B. Z. Khan, “The Impact of War Another theme of my research, the versal prevalence of family networks in on Resource Allocation: ‘Creative organization of firms, highlights the role business, the early decline of innovation Destruction’ and the American Civil of family networks in the mobilization prizes, the success of American patent War,” NBER Working Paper No. of capital. Some scholars regard familial institutions that resulted in its global dif- 20944, February 2015, and Journal of connections as inefficient, with poten- fusion, and the rise of the United States Interdisciplinary History, 46 (3), 2015, tial both for corruption and for exploita- as a leading industrial nation. The results pp. 315–53. tion of unrelated shareholders. My results highlight the central role of market-ori- Return to Text support a more positive interpretation of ented incentives, in tandem with open- 7 N. Lamoreaux and K. L. Sokoloff, such personalized relationships in enter- access economic and legal institutions, “Intermediaries in the U.S. Market prise and innovation. in promoting technological progress and for Technology, 1870–1920,” NBER An empirical study of female entre- social welfare. Working Paper No. 9017, June 2002, preneurs in 19th-century France reveals and in S. L. Engerman, P. T. Hoffman, that their activities were enhanced by J.-L. Rosenthal, and K. L. Sokoloff, eds., participation in family firms.24 Women 1 B. Z. Khan, The Democratization Finance, Intermediaries, and Economic were constrained by discriminatory laws of Invention: Patents and Copyrights Development, New York, New York: that inhibited their ability to hold prop- in American Economic Development, Cambridge University Press, 2003, pp. erty, write contracts, and retain separate 1790–1920, New York, New York: 209–46. earnings.25 Family firms reduced such Cambridge University Press, 2005. Return to Text transaction costs and allowed women to Return to Text 8 B. Z. Khan, “Selling Ideas: An engage successfully in market exchange. 2 B. Z. Khan, “Looking Backward: International Perspective on Patenting The French experience suggests that fam- Founding Choices in Innovation and and Markets for Technology, 1790–1930,” ily-based enterprises can provide a means Intellectual Property Protection,” in Business History Review, 87 (1), 2013, for integrating relatively disadvantaged D. Irwin and R. Sylla, eds., Founding pp. 39–68. groups into the market economy as man- Choices: American Economic Policy in Return to Text agers and entrepreneurs. the 1790s, Chicago, Illinois: University of 9 B. Z. Khan, The Democratization Studies of family networks typi- Chicago Press, 2010, pp. 315–42. of Invention: Patents and Copyrights cally focus on insiders, such as direc- Return to Text in American Economic Development, tors and other corporate elites. By con- 3 B. Z. Khan and K. L. Sokoloff, 1790–1920, New York, New York: trast, I have collated unique panel data “Institutions and Technological Cambridge University Press, 2005. encompassing all of the shareholders Innovation during the Early Economic Return to Text in an economy-wide sample of antebel- Growth: Evidence from the Great 10 B. Z. Khan, “Inventing Prizes: A lum Maine corporations.26 The dataset Inventors of the United States, 1790– Historical Perspective on Innovation includes information on the age, occu- 1930,” NBER Working Paper No. Awards and Technology Policy,” NBER pation, and wealth of each investor as 10966, December 2004, and American Working Paper No. 21375, July 2015, well as the voting rights, restrictions on Economic Review, 94 (2) 2004, pp. and Business History Review, 89 (4), directors, and legal liability rules of each 395–401, and in T. Eicher and C. 2015, pp. 631–60. firm. I find that “related investing” char- Garcia-Penalosa, eds., Institutions Return to Text acterized the entire ownership structure, and Economic Growth, Cambridge, 11 B. Z. Khan, “Prestige and Profit: The and personal ties were especially prevalent Massachusetts: MIT Press, 2006, pp. Royal Society of Arts and Incentives for among women, less-wealthy sharehold- 123–58. Innovation, 1750–1850,” NBER Working ers, and small investors. Such networks Return to Text Paper No. 23042, January 2017. facilitated capital mobilization, especially 4 B. Z. Khan, “Knowledge, Human Return to Text

NBER Reporter • No. 1, March 2017 19 12 B. Z. Khan, “Inventing Prizes: A Working Paper No. 20731, December 22 B. Z. Khan, “Technological Innovations Historical Perspective on Innovation 2014. and Endogenous Changes in U.S. Legal Awards and Technology Policy,” NBER Return to Text Institutions, 1790–1920,” NBER Working Working Paper No. 21375, July 2015, 17 B. Z. Khan, “Antitrust and Innovation Paper No. 10346, March 2004, and and Business History Review, 89 (4), before the Sherman Act,” Antitrust Law “Innovations in Law and Technology, 2015, pp. 631–60. Journal, 77 (3), 2011, pp. 1001–29. 1790–1920,” in M. Grossberg and C. Return to Text Return to Text Tomlins, eds., Cambridge History of Law 13 The Royal Commission, “Official 18 B. Z. Khan, “Of Time and Space: in America, vol. 2, New York, Neew York, Catalogue of the Great Exhibition of the Technological Spillovers among Patents Cambridge University Press, 2008, pp. Works of Industry of All Nations,” Robert and Unpatented Innovations during 483–530, 796–801. Ellis, ed., London, United Kingdom: Early U.S. Industrialization,” NBER Return to Text Spicer Brothers, 1851, https://archive.org/ Working Paper No. 20732, December 23 B. Z. Khan, “Trolls and Other Patent stream/officialcatalog06unkngoog#page/ 2014. Inventions: Economic History and the Patent n10/mode/2up Return to Text Controversy in the Twenty-First Century,” Return to Text 19 B. Z. Khan, “Designing Women: George Mason Law Review, 21, 2014, pp. 14 B. Z. Khan, “Going for Gold: Technological Innovation and Creativity 825–63. Industrial Fairs and Innovation in the in Britain, France and the United States, Return to Text Nineteenth-Century United States,” 1750–1900,” NBER Working Paper No. 24 B. Z. Khan, “Invisible Women: Revue Économique, 64 (1), 2013, pp. 23086, January 2017. Entrepreneurship, Innovation, and 89–114. Return to Text Family Firms in France during Early Return to Text 20 B. Z. Khan, “ ‘Justice of the Marketplace’: Industrialization,” NBER Working Paper 15 B. Z. Khan, “Premium Inventions: Legal Disputes and Economic Activity No. 20854, January 2015, and The Journal Patents and Prizes as Incentive on America’s Northeastern Frontier, of Economic History, 76 (1), 2016, pp. Mechanisms in Britain and the United 1700–1860,” Journal of Interdisciplinary 163–95. States, 1750–1930” in D. L. Costa and History, 39 (1), 2008, pp. 1-35; B. Z. Return to Text N. Lamoreaux, eds., Understanding Khan, “Commerce and Cooperation: 25 B. Z. Khan, “Married Women’s Property Long-Run Economic Growth: Litigation and Settlement of Civil Disputes Laws and Female Commercial Activity: Geography, Institutions, and the on the Australian Frontier,” The Journal Evidence from United States Patent Records, Knowledge Economy, Chicago, Illinois: of Economic History, 60 (4), 2000, pp. 1790–1895,” The Journal of Economic University of Chicago Press, 2011, pp. 1088–119. History, 56 (2), 1996: 356–88. 205–34. Return to Text Return to Text Return to Text 21 B. Z. Khan, “ ‘To Have and Have Not’: 26 B. Z. Khan, “Related Investing: Corporate 16 B. Z. Khan, “Inventing in the Shadow Are Rich Litigious Plaintiffs Favored in Ownership and Capital Mobilization during of the Patent System: Evidence from Court?” NBER Working Paper No. 20945, Early Industrialization,” NBER Working 19th-Century Patents and Prizes for February 2015. Paper No. 23052, January 2017. Technological Innovations,” NBER Return to Text Return to Text

20 NBER Reporter • No. 1, March 2017 The Impact of Contracting Out on Medicare and Medicaid

Mark Duggan

More than 120 million Americans zations (HMOs) and others, with the currently receive their health insurance managed care organization typically through the Medicare or Medicaid receiving a fixed amount per member programs. Total government spending per month to coordinate and finance on the two programs in 2016 is pro- health care for the enrollee. Mark Duggan is the Trione jected to exceed $1.2 trillion.1 In the years since, a large body Director of the Stanford Institute Medicare is a federal program of evidence has demonstrated that for Economic Policy Research and that covers approximately 48 million Medicare managed care recipients the Wayne and Jodi Cooperman Americans aged 65 or older, as well as utilize significantly less health care Professor of Economics at Stanford nine million younger adults receiving than their counterparts in traditional University. His research focuses Social Security Disability Insurance FFS Medicare. However, it is unclear on the health care sector and the (SSDI) benefits. Medicaid is a means- whether this reflects an effect of man- effects of government expendi- tested program that, in 2016, provided aged care or instead a difference in the ture programs such as Medicare, coverage to more than 74 million low- characteristics of those choosing to Medicaid, and Social Security. income individuals. It is financed enroll in Medicare managed care plans, Duggan’s research has been jointly by the federal government which since 2003 have been referred published in the American and state governments. More than 10 to as Medicare Advantage (MA). This Economic Review, the Journal of million “dually eligible” individuals is especially true because all Medicare Political Economy, and the Q uar- receive health insurance coverage from recipients have the option to enroll in terly Journal of Economics, and has both programs. Both programs provide MA plans, and thus MA enrollees may been featured in The Economist, coverage for most health care services, differ in unobserved ways from those the New York Times, and the Wall with Medicare requiring enrollees to in FFS Medicare. Medicare Advantage Street Journal. He was the 2010 cover a greater share of their costs and has become more important over time. recipient of the ASHEcon Medal, Medicaid generally reimbursing health Today, nearly one in three (31 percent) awarded every two years to the care providers less generously. of the nation’s 57 million Medicare leading health economist in the During the 1960s, 1970s, and for recipients is enrolled in a MA plan, U.S. under age 40, and his research much of the 1980s, both programs compared with just one in eight (13 has been funded by the National tended to reimburse hospitals, physi- percent) in 2005 [Figure 1, next page.] Science Foundation, the National cians, and other health care providers Jonathan Gruber, Boris Vabson, Institutes of Health, the Alfred directly for the cost of each service. and I investigated the differences P. Sloan Foundation, the Robert One concern with this fee-for-service between MA enrollees and all other Wood Johnson Foundation, and (FFS) method of reimbursement was Medicare beneficiaries for the period the Social Security Administration. that it could give care providers a 1998 through 2003 in the state of New He has testified about his financial incentive to perform unnec- York . 2 We focused on this time period research to committees in both essary or low-value services. Similarly, and on a single state for two reasons: the U.S. Senate and U.S. House of providers had little incentive to coor- First, we were able to link individual- Representatives and served from dinate with one another to optimize level hospital discharge data from New 2009 to 2010 as senior econo- services. These concerns and rapid York with month-by-month Medicare mist for health care policy on growth in spending for both programs enrollment data, allowing us to mea- the White House Council of led Medicare in the early 1980s and sure health care utilization for the Economic Advisers. He teaches many state Medicaid programs soon same individual as he or she transi- “Econ 1” at Stanford and advises thereafter to test alternative payment tioned from FFS Medicare to MA or dozens of undergraduate and grad- models known as managed care. These vice versa. Second, at the end of 2000, uate students. included health maintenance organi- several counties experienced an abrupt

NBER Reporter • No. 1, March 2017 21 plans more if they enrolled individuals Medicare Advantage Enrollees (% of Medicare Beneficiaries) with certain medical conditions. For

35% example, an insurer would receive a certain increment to the plan payment if a

30 Medicare recipient had diabetes. This shift to risk-adjustment was designed

25 to increase insurers’ incentives to com- pete on price and quality rather than

20 on the ability to “cream-skim” low-cost enrollees. 15 Jason Brown, Ilyana Kuziemko, William Woolston, and I investi- 10 gated the effects of this shift to risk adjustment on MA enrollment and on 3 5 Medicare expenditures. We developed a simple model which showed that, 0 even with risk adjustment, plans have 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 a strong financial incentive to select Source: G. Jacobson, G. Casillas, A. Damico, T. Neuman, and M. Gold, Kaiser Family Foundation, Medicare Advantage 2016 Spotlight: Enrollment Market Update, 2016 certain types of Medicare recipients. A Medicare recipient with a relatively Figure 1 mild case of diabetes would be more reduction in their MA enrollment as enrollees moved into FFS Medicare. profitable than an otherwise identi- certain health insurers exited the MA This result is explained by MA plans cal recipient with a more serious case. market. These insurer exits caused tending to have narrower provider Consistent with our model’s predic- MA enrollment to decline to nearly networks than traditional Medicare. tion, we found that MA plans enrolled zero in affected counties. Despite the increase in utilization, we Medicare recipients with more adverse Using longitudinal data, we found little evidence of a change in the health conditions after the shift to explored how health care utiliza- quality of care or in health outcomes. risk adjustment, with this reflected in tion, the quality of health care, and Taken together, the results suggest that a higher average risk score. However, health outcomes changed in response MA plans are effective in reducing the conditional on this risk score, Medicare to changes in enrollment status. This utilization of low-value care while hav- recipients enrolling in MA plans had analysis had an important advantage ing little impact on observable mea- lower costs than the average. Because over most previous “switcher” analyses, sures of health. of this, overpayments to MA plans did which compared utilization changes One challenge for Medicare since not fall after the shift to risk adjust- for individuals who voluntarily moved the program’s introduction of man- ment. The hoped-for Medicare savings from FFS to MA or vice versa, as these aged care in the early 1980s has been had not materialized by the final year of changes might have been caused by to determine appropriate payments the study period, 2006. Furthermore, a change in an individual’s demand to insurers. Through the early 2000s, we found no evidence of significant for care. Our findings demonstrated managed care plans typically were paid improvements in the average quality of very large increases in inpatient hospi- 5 percent less per patient than the aver- care following this policy change. tal care for Medicare recipients forced age for someone with the same age, These studies did not address how out of MA plans. Hospital utilization gender, and county of residence. The the quality of care in MA plans changes increased by an average of 60 percent rationale for reimbursing less than tra- with the generosity of plan reimburse- when individuals switched into tradi- ditional FFS Medicare was that insurers ment. Amanda Starc, Vabson, and I tional FFS Medicare. Interestingly, this could control costs sufficiently to still explored this issue by leveraging a pol- finding was almost identical to the anal- earn a profit. However, insurers ben- icy-induced increase in MA reimburse- ogous estimate of 65 percent from anal- efited from positive selection because ment in metropolitan areas with a pop- yses of the RAND Health Insurance low-utilization Medicare recipients ulation of 250,000 or more relative Experiment in the 1970s, which ran- opted into the plans. Partly because of to areas below this threshold.4 More domly assigned patients to managed evidence that Medicare was spending specifically, the policy reform that care plans. The increases in utilization more for MA enrollees than if they had we studied introduced a floor on the were especially pronounced for elective remained in FFS Medicare, beginning benchmark for plan reimbursement in visits. Our results also showed that the in 2004 the federal government moved areas with relatively low per-capita FFS average distance to the hospital fell as to a risk-adjustment system that paid expenditures. Areas with populations

22 NBER Reporter • No. 1, March 2017 of 250,000 or more had their bench- D, which relied on private insurers to ing Medicaid recipients from FFS into mark set 10.5 percent higher than areas provide and finance prescription drug managed care plans has been to control with smaller populations. We focused treatments, on pharmaceutical prices. costs. But, perhaps surprisingly, there is on metropolitan areas with popula- Our results revealed that contracting little empirical evidence suggesting that tions between 100,000 and 600,000 with private plans substantially low- Medicaid managed care (MMC) does and compared the quality of MA cover- ered pharmaceutical prices for drugs lower costs. To investigate this issue, age for those above the 250,000 thresh- sold differentially to Medicare recipi- Tamara Hayford and I used Centers for old with those below. ents. The likely mechanism for this Medicare & Medicaid Services (CMS) Consistent with past research, was the greater negotiating power that data on each state’s Medicaid spending we found MA enrollment to be very the plans had relative to individual by service category and year to explore responsive to the generosity of plan Medicare recipients, many of whom the effect of MMC on state Medicaid reimbursement, with the 10.5 percent were previously uninsured for prescrip- expenditures.8 We also assembled data increase in reim- on state and local bursement caus- MMC mandates to Medicaid Managed Care Enrollees (% of Medicaid Beneficiaries) ing a 13 percent- serve as a plausibly age point increase in 80% exogenous source of MA enrollment. This MMC enrollment. enrollment increase 70 Our results demon- was partially driven strated that the man- by the entry of new 60 dates significantly insurers to the mar- increased MMC 50 ket, with an average enrollment, with an of two additional 40 increase of four MMC insurers entering in recipients for every response to the addi- 30 10 Medicaid recipi- tional reimburse- ents “exposed” to an ment. Despite the 20 MMC mandate. This increase in MA enroll- 10 effect was not one- ment, our results sug- for-one because some 0 gested little improve- 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Medicaid recipients ment in the quality of Source: M. Duggan and T. Hayford, NBER Working Paper No. 17236 were already volun- care as measured by and updated using Medicaid Managed Care Enrollment Reports tarily enrolled at the patient out-of-pocket time of the mandates, costs, coverage for Figure 2 while other Medicaid additional services, or satisfaction. We tion drug expenses. recipients were exempt. estimated that less than 20 percent of While most of my research on pri- Using the MMC mandates as an the additional reimbursement passed vate insurer contracting has focused on instrument for MMC enrollment, we through to consumers in the form of the Medicare program, in recent and found little evidence to suggest that more generous coverage; pass-through ongoing work I am also estimating the MMC contracting reduced Medicaid was highest in areas with the most effects for Medicaid. More than 70 per- spending. However, the effect of the competition among MA plans. This cent of Medicaid recipients are currently mandates appears to vary across states as was broadly consistent with my previ- enrolled in managed care plans, up dra- a function of the generosity of provider ous research with Leemore Dafny and matically from just 10 percent in the reimbursement. According to data from Subbu Ramanarayanan, which found early 1990 [Figure 2]. In contrast to a survey of health care providers con- that a reduction in competition leads to Medicare, where all recipients have the ducted two years before the start of our higher costs for consumers.5 option to enroll in managed care plans, study period, in some states Medicaid While my recent studies point to many states introduced mandates during reimbursed physicians, hospitals, and some of the challenges in contracting the 1990s and 2000s that required some other health care providers much less with private insurers in the Medicare or all of their Medicaid recipients to generously than did private insurers. program, my previous research with enroll in managed care plans. These man- Thus, even if a private insurer could sig- Fiona Scott Morton on Medicare Part dates were frequently rolled out county- nificantly lower utilization, it is plausi- D suggested the possibility of very by-county, as in California during the ble that spending would increase due to large benefits to such contracting.6 We 1990s.7 the higher prices that they pay provid- explored the effect of Medicare Part A primary motivation for shift- ers. However, some states actually had

NBER Reporter • No. 1, March 2017 23 Medicaid reimbursement that was com- Working Paper No. 21650, October Review, 102 (2), April 2012, pp. parable to that paid by private insur- 2015, and forthcoming, American 1161–85. ers. In those states, a reduction in utili- Economic Journal: Economic Policy. Return to Text zation could translate into a reduction Return to Text 6 M. Duggan and F. Scott Morton, in Medicaid spending. Consistent with 3 J. Brown, M. Duggan, I. Kuziemko, “The Effect of Medicare Part D on this, our results suggest that Medicaid and W. Woolston, “How does Risk Pharmaceutical Prices and Utilization,” spending did fall in states that began Selection Respond to Risk Adjustment? NBER Working Paper No. 13917, our study period with relatively high Evidence from the Medicare Advantage April 2008, and American Economic rates of provider reimbursement. Taken Program,” NBER Working Paper No. Review, 100 (1), 2010, pp. 590–607. together, our results demonstrate that 16977, April 2011, and American Return to Text the spending effects of MMC contract- Economic Review, 104 (10), pp. 7 M. Duggan, “Does Contracting Out ing vary across states as a function of 3335–64. Increase the Efficiency of Government their FFS program’s parameters, with Return to Text Programs? Evidence from Medicaid some states well-positioned to reap bud- 4 M. Duggan, A. Starc, and B. HMOs” NBER Working Paper No. get savings and others likely to see an Vabson “Who Benefits when the 9091, August 2002, and Journal of increase in Medicaid spending. Government Pays More? Pass-Through Public Economics, 88 (12), 2004, pp. in the Medicare Advantage Program,” 2549–72. 1 Centers for Medicare and NBER Working Paper No. 19989, Return to Text Medicaid Services (CMS) Office March 2014, and Journal of Public 8 M. Duggan and T. Hayford, “Has of the Actuary, “Table 3. National Economics, 141, 2016, pp. 50–67. the Shift to Managed Care Reduced Health Expenditures; Historical and Return to Text Medicaid Expenditures? Evidence Projections, 1960–2025,” 2016. 5 L. Dafny, M. Duggan, and S. from State and Local-Level Mandates,” Return to Text Ramanarayanan, “Paying a Premium NBER Working Paper No. 17236, July 2 M. Duggan, J. Gruber, and B. on Your Premium? Consolidation in the 2011, and Journal of Policy Analysis Vabson, “The Efficiency Consequences U.S. Health Insurance Industry,” NBER and Management, 32 (3), 2013, pp. of Health Care Privatization: Evidence Working Paper No. 15434, October 505–35. from Medicare Advantage Exits,” NBER 2009, and American Economic Return to Text

24 NBER Reporter • No. 1, March 2017 Macroeconomic Policy in a Liquidity Trap

Gauti B. Eggertsson

The main focus of my research for a bit of attention over the years, perhaps nearly two decades has been macroeco- due to the fact that during the Great nomic policy during periods when the Recession the Federal Reserve used the central bank has cut the short-term nom- analysis, and closely related work by inal interest rate to zero, periods that are other authors, as part of the rationale for often referred to as exhibiting a liquidity its “forward guidance” policy once the trap. In this summary, I describe my key ZLB became a concern.2 Several other Gauti B. Eggertsson is a mac- conclusions. central banks — including the Bank of roeconomist and a professor of The work can be divided quite neatly Canada, the European Central Bank, economics at Brown University. into four parts, roughly following the the Bank of Japan, and the Bank of He received his Ph.D. in econom- time line in which it was written. I high- England — utilized this research for sim- ics from Princeton University in light each phase of my research agenda ilar policy purposes. 2004, after having completed his and three generations of models which Another important result was an B.S. in economics at the University evolved along the way. While I focus “irrelevance” proposition, the idea that of Iceland. primarily on my own research, I must increasing the money supply at a zero He has worked at research acknowledge at the outset that many interest rate has no effect on output or departments of the International others have contributed to this research prices if it does not change expectations Monetary Fund and the Federal agenda. about future interest rates. Woodford Reserve Bank of New York. He has and I further showed that it was irrel- also been a visiting faculty mem- First-Generation Models evant how this was done, that is, which ber at Princeton, Yale University, assets the central bank bought in order and Columbia University, where My interest in the liquidity trap was to increase the money supply. This was he taught international finance triggered by events in Japan in the late a quite controversial proposition when and macroeconomics at graduate 1990s. At that time, Japan suffered from reported, but one that has stood the test and undergraduate levels. subpar growth and deflation, and the of time, with several central banks more Eggertsson has published in short-term interest rate had collapsed to than doubling the monetary base during a variety of professional journals, zero. If it could happen in Japan, it could the most recent crisis, using various pur- including the American Economic happen here as well, and it seemed to me chasing schemes, with little or no appar- Review and the Q uarterly Journal a first-order priority for those concerned ent effect on prices.3 This was consistent of Economics. The main focus of his with macroeconomic policy to under- with the empirical prediction of that work is the analysis of monetary stand those events. paper. It was a direct violation, however, and fiscal policy over the business My first published work on this topic of the quantity theory of money, which cycle, both from a modern and a was written with my adviser, Michael was a reigning paradigm in the ’90s. historical perspective. Woodford.1 Central to it was the idea A second major theme of my that once a central bank is constrained by early work was how policies aimed at the zero lower bound (ZLB), it can still manipulating expectations, such as for- on Paul Krugman’s proposal that have an impact on the economy by giving ward guidance, could be made credi- the Bank of Japan needed to “com- markets guidance about the evolution ble. Specifically, I wanted to know what mit to being irresponsible.”4 It was a of future interest rates, rates that would could be done by the government to back theme I would return to repeatedly prevail once the ZLB is no longer bind- up an announcement of future inter- in work on the Great Depression in ing. For example, it could set explicit vention by the appropriate use of fis- order to interpret various govern- thresholds, saying that the interest rate cal policy, exchange rate policy, or vari- ment policy actions in the 1930s, will stay at zero until the price level or ous forms of quantitative easing. This an agenda I took up after leaving unemployment rate reaches a particu- was the main focus of the paper, “The graduate school at the urging of one lar level, an idea we formalized in the Deflation Bias and Committing to Being of my advisers, Ben Bernanke, and paper. These results have received quite Irresponsible,” the title of which played many others.

NBER Reporter • No. 1, March 2017 25 The Great Depression was invited to give the paper as a part of linked to my earlier theoretical dissertation and the Liquidity Trap the Bank of Japan’s Annual Conference work, while the second aimed at building a in 2006. This meeting was attended by a second generation of New Keynesian mod- My work on the Great Depression large part of the governing board at the els to understand what happened, going yielded three major conclusions. First, bank, and in a youthful fit of over-con- deeper into the origin of the 2008 crisis it gave a somewhat novel interpreta- fidence, I felt that perhaps warning that and the Great Depression. tion of the U.S. recovery that started in they were about to repeat the mistake of Within the first line, I examined how 1933, when Franklin Delano Roosevelt 1937 would make a difference. The talk, of fiscal policy tools could be used instead took office. It heavily emphasized the role course, had no apparent effect at the time. of, or in addition to, monetary policy in of expectations about future policy and The bank raised the short-term nominal responding to the crisis. Perhaps the most the price level, something that was largely rate a few weeks later — precisely what important result was that the “multiplier missing from the existing literature, which I warned could lead to a recession. The of government spending” — the increase focused more on static movements in the phrase “The Mistake of 1937” caught on, in output as a consequence of an increase money supply or government spending as and is used routinely by policy makers and in government spending — was theoreti- explanatory variables.5 One of the main pundits talking about this period. This was cally much greater at the ZLB than under goals of my work on the regime change in probably driven by the fact that Krugman normal circumstances.8 I proved that it 1933 was to model it in the context of an devoted a New York Times column to the had to be above unity in a standard New infinitely repeated game; then, one could paper and used the title for his column Keynesian model. This implied that exist- interpret many of the actions of the gov- when warning the Fed about raising rates ing empirical estimates of government ernment as having directly affected expec- prematurely. spending multipliers were not useful. tations, something I spent considerable Those estimations depended upon data time arguing did indeed happen. A sec- The 2008 Crisis: Second- generated under regular circumstances ond and somewhat more provocative con- Generation ZLB Models when the short-term nominal interest rate clusion was that some of the most con- was positive. This had strong policy impli- troversial elements of the New Deal, such The work described above was done cations, as the Obama administration was as the National Industrial Recovery Act, prior to the economic crisis of 2008, which designing the largest fiscal stimulus pro- were expansionary, rather than contrac- led me to abandon further work on eco- gram seen since the end of World War II. tionary, as the conventional wisdom held nomic history. The 2008 crisis looked a While this result was anticipated in some at the time, but the act included tem- lot like the type of economic crises that of my earlier work, I now showed it explic- porary but highly controversial policies I already had analyzed in previous work itly with a series of analytical propositions. like allowing firms to cartelize to prop up and I decided to pursue two main lines of Since then a considerable literature has prices, in violation of reigning antitrust research in response. The first was tightly emerged on this question and I have con- laws.6 This was due to the pos- tinued to work on it.9 itive effect these policies had I wrote two other papers on inflation expectations, as The Federal Reserve’s Bond-Buying during and a er the Crisis studying the policy response higher inflation expectations to the Great Recession, built Ratio of Federal Reserve’s holdings of Treasuries to pre-crisis average GDP are expansionary at the ZLB 20% to some extent on the the- since they reduce the real rate oretical framework I had of interest, thereby stimulating QE1 begins QE2 begins QE3 begins developed prior to the crisis. demand. These policies were, The first provides theoretical in other words, part of FDR’s 15 foundations for some aspect commitment to “reflate” the of the Federal Reserve’s pol- economy. Third, this research icy during the crisis, namely provided a novel interpreta- 10 the quantitative easing (QE) tion of the 1937 recession, program in which the Fed which I termed “The Mistake bought long-term govern- 10 of 1937.” I argued that the 5 ment bonds [Figure 1]. mistake was due to the admin- One motivation for that istration’s abandonment of the paper was that Bernanke has commitment to inflate the famously quipped “QE works 0 price level back to pre-Depres- 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 in practice but not in theory.” 7 sion levels. Source: S. Bhattarai, G. Eggertsson, and B. Gafarov, NBER Working Paper No. 21336 In other words, there was and “The Mistake of 1937” is remains a perception that QE one of my favorite papers. I Figure 1 had an important economic

26 NBER Reporter • No. 1, March 2017 effect, yet proper theoretical explanations via reduction in short-term real interest an important element of the crisis is have been elusive, in part due to the “irrel- rates that induced savers to spend. The the reduction in liquidity that occurred evance result” I proposed with Woodford key point was that the required reduc- because several asset classes became in 2003. This paper suggests a particular tion in the real interest rate resulting harder to sell. It argues that the emer- way in which QE affected expectations from a “Minsky moment” might easily gency assistance of the Federal Reserve about future interest rate policy. bring the economy to the ZLB, which via various liquidity facilities may have The second paper in this vein, writ- would then lead to the type of mac- prevented the second coming of the ten with Andrea Ferrero and Andrea roeconomic challenges that had been Great Depression. Raffo, was motivated by the deep such a strong focus of my earlier work. recession in the southern periphery This debt deleveraging theory of Post Crisis: Third-Generation of Europe following the 2008 crisis.11 the crisis had readily testable implica- Models of Secular Stagnation The periphery countries were unable tions, including the idea that regions in to fight the slump by devaluing their the U.S. in which consumers had taken My most recent work has grappled own currency on account of the euro, on larger amounts of debt should have with the fact that existing models have and they could not engage in an aggres- suffered more during the crisis than a difficult time explaining the long sive fiscal expansion due to high levels other areas. A considerable literature duration of the Great Recession and of public debt. As a result, many policy has emerged that supports predictions the fact that the U.S. nominal inter- makers turned to “structural reforms” of this kind using micro-data, the best- est rate is still close to zero almost a as a panacea. The paper showed that known of which are a series of papers decade after the shocks that led to while structural reforms, defined as by Atif Mian and Amir Sufi summa- the recession occurred. The second- policies that increase the potential out- rized in their book, House of Debt.14 generation models predicted a tem- put of the economy, are expansionary I continued this line of research in a porary debt deleveraging cycle which in the long run, they are contractionary recent paper with Pierpaolo Benigno should have led to a recession that was in the short run due to their deflation- and Federica Romei.15 We take the more short-lived. Similarly, the first- ary effects if the central bank is con- debt deleveraging idea and incorporate generation models plainly assumed strained by the ZLB. The key insight, it into what has become known as the that the shocks giving rise to the crisis as in the case of the article on the New standard New Keynesian model, a con- were temporary. Moreover, those mod- Deal, was built on what I had earlier sensus model formed prior to the cri- els “blow up” in the presence of very termed as the “paradox of toil,” accord- sis. We show how the standard model long-lasting shocks: They do not per- ing to which the usual rules of macro- can be nested in a more general setting, mit well-defined, bounded solutions in economics can be stood on their head which includes the forces associated such cases. I have referred to these con- at the ZLB. 12 with debt deleveraging and banking cri- ditions as “deflationary black holes” in The second line of research I pur- sis, and argue that this new framework some of my work. sued in response to the crisis sought should become the post-crisis bench- With interest rates still close to zero deeper theoretical foundations for the mark model in the New Keynesian around the world, and inflation low but source of ZLB episodes. The first gen- literature. We also illustrate several not approaching any explosive negative eration of models I had written assumed important policy implications of the numbers, many started suggesting that we that the shocks that triggered the crisis proposed new benchmark model and need to consider models in which a low were a reduced form of “preference how the policy conclusion changes rel- interest rate can persist for an arbitrarily shock.” Krugman and I modeled the ative to the earlier benchmark model. long time. The proposition that we could origin of the crisis in a more fundamen- This second line of research also be in for a very long slump — without tal way based on the idea of a “Minsky includes a joint paper with Marco any natural pushback to normalcy — is moment.”13 This refers to the work of Del Negro, Ferrero, and Nobuhiro the secular stagnation hypothesis. It was Hyman Minsky, and suggests that the Kiyotaki.16 While much of the focus posited by Alvin Hansen in 1938 in his 2008 crisis came about due to debtors of the paper is on the effect of vari- presidential address to the American realizing in the “Minsky moment” that ous Fed policies during the crisis, at Economic Association, shortly after they had overextended themselves by its heart is once again an attempt to “the Mistake of 1937,” when the future taking on too much debt, after which model in more detail the origin of the of the American economy looked grim there was a rapid contraction of spend- economic crisis of 2008. This turns indeed.17 This hypothesis was recently ing (“deleveraging”) by borrowers. To out to be necessary to rationalize vari- resurrected by Lawrence Summers in a make up for this drop in spending, ous types of policy interventions the speech at the International Monetary some other economic agents had to Federal Reserve implemented in the Fund.18 step in and start spending more. The early part of the crisis involving emer- Neil Mehrotra and I formalize the way this happened in our theory was gency loans. The paper proposes that secular stagnation hypothesis in a theo-

NBER Reporter • No. 1, March 2017 27 Global Trends in Interest Rates org/publications/speeches/ plosser/2013/02-12-13_siepr; Short-term interest ratesLong-term interest rates Janet Yellen’s 2009 speech “U.S. 16% 16% Monetary Policy Objectives in 14 14 the Short and Long Run,” http:// www.frbsf.org/our-district/ 12 12 United Kingdom United Kingdom press/presidents-speeches/ 10 10 yellen-speeches/2009/january/ yellen-us-monetary-policy- Germany 8 8 objectives/; or Ben Bernanke United States United States for an early reference in “Some 6 6 Thoughts on Monetary Policy in

4 4 Japan,” 2003, http://www.fed- Japan Germany eralreserve.gov/BOARDDOCS/ 2 2 Japan SPEECHES/2003/20030531/ default.htm 0 0 1988 1992 1996 2000 2004 2008 2012 2016 1988 1992 1996 2000 2004 2008 2012 2016 Return to Text 3 Source: OECD and Bank of Japan data G. Eggertsson and K. Proulx, “Bernanke’s No-Arbitrage Figure 2 Argument Revisited: Can Open retical model which I consider to be a key with Summers on secular stagnation, Market Operations in Real Assets contribution to “third generation” mod- some of which is coauthored by Sanjay Eliminate the Liquidity Trap?” NBER eling of the ZLB.19 Our model provides Singh.21 One of the key insights of this Working Paper No. 22243, May 2016. a much stronger rationale for aggressive work is that while under regular cir- Return to Text fiscal policy relative to monetary policy cumstances a current account deficit 4 G. Eggertsson, “The Deflation Bias in the optimal policy mix. At the heart transmits lower interest rates from the and Committing to Being Irresponsible,” of this work is the idea that something surplus country to the deficit country, Journal of Money, Credit, and Banking, more than financial collapse may have which is expansionary, when the ZLB 38 (2), 2006, pp. 283–321. been behind the crisis of 2008. The drop is binding, the trade deficit will instead Return to Text in real interest rates we have seen in transmit a recession. This provides a the- 5 G. Eggertsson, “Great Expectations recent years appears to be the result of a oretical foundation for the prospect of and the End of the Depression,” American broader worldwide trend that dates back trade and currency war in low-interest Economic Review, 90 (4), 2008, pp. well before the recent financial turbu- environments. Overall, this highlights 1476–516. lence [Figure 2].20Accordingly, in this an increased value of cross-country pol- Return to Text model, we focus not only on financial icy coordination in these circumstances. 6 G. Eggertsson, “Was the New Deal shocks — which still remain very impor- Contractionary?” American Economic tant — but also on slower moving trends Review, 102 (1), 2012, pp. 524–55. such as increasing inequality, popula- 1 G. Eggertsson and M. Woodford, Return to Text tion dynamics, and a fall in the relative “Optimal Monetary Policy in a 7 G. Eggertsson and B. Pugsley, “The price of investment over time as well as Liquidity Trap,” NBER Working Paper Mistake of 1937: A General Equilibrium the observed slowdown in productiv- No. 9968, September 2003, and pub- Analysis,” Bank of Japan’s Monetary and ity. All these forces can put downward lished as “The Zero Bound On Interest Economic Studies, 24 (S-1), 2006, pp. pressures on the real interest rate and, Rates And Optimal Monetary Policy,” 151–90. unlike financial shocks, they are unlikely Brookings Papers on Economic Return to Text to return to where they were quickly, Activity, 1, 2003, pp. 139-235; and 8 G. Eggertsson, “What Fiscal Policy if at all. Moreover, this new genera- G. Eggertsson and M. Woodford “Policy is Effective at Zero Interest Rates?” in tion of models has some fundamentally Options in a Liquidity Trap,” American D. Acemoglu and M. Woodford, eds., new implications for policy relative to Economic Review, 94 (2), 2004, pp. NBER Macroeconomics Annual 2010, the first two generations. In particular, 76–9. Volume 25, Chicago, Illinois: University monetary policy becomes much more Return to Text of Chicago Press, 2011, pp. 59–112. challenging as a solution to insufficient 2 For examples, see speeches by the Return to Text demand. President of the Philadelphia Fed, 9 M. Denes, G. Eggertsson, and Following up on the first paper with Charles Plosser, “Forward Guidance,” S. Gilbukh, “Deficits, Public Debt Mehrotra, he and I started joint work 2013, https://www.philadelphiafed. Dynamics and Tax and Spending

28 NBER Reporter • No. 1, March 2017 Multipliers,” The Economic Journal, the Great Recession, and How We Can Lower Bound,” Business Economics, 123 (566), 2013, pp. 133–63. Prevent It from Happening Again, 49 (2), 2014, pp. 65–73. Return to Text Chicago, Illinois: University of Chicago Return to Text 10 S. Bhattarai, G. Eggertsson, and Press, 2015. 19 G. Eggertsson, and N. Mehrotra, “A B. Gafarov, “Time Consistency and Return to Text Model of Secular Stagnation,” NBER the Duration of Government Debt: 15 P. Benigno, G. Eggertsson, and F. Working Paper No. 20574, October A Signalling Theory of Q uantitative Romei, “Dynamic Debt Deleveraging 2014. Easing,” NBER Working Paper No. and Optimal Monetary Policy,” NBER Return to Text 21336, July 2015. Working Paper No. 20556, October 20 G. Eggertsson, N. Mehrotra, and Return to Text 2014. J. Robbins, “A Model of Secular 11 G. Eggertsson, A. Ferrero, and Return to Text Stagnation: Theory and Q uantitative A. Raffo, “Can Structural Reforms 16 M. Del Negro, G. Eggertsson, A. Evaluation,” NBER Working Paper No. Help Europe?” Journal of Monetary Ferrero, and N. Kiyotaki, “The Great 23093, January 2017. Economics, 61 (C), 2014, pp. 2–22. Escape? A Q uantitative Evaluation of Return to Text Return to Text the Fed’s Liquidity Facilities,” NBER 21 G. Eggertsson, N. Mehrotra, and L. 12 G. Eggertsson, “The Paradox of Toil,” Working Paper No. 22259, May Summers, “Secular Stagnation in the Federal Reserve Bank of New York Staff 2016, and forthcoming in American Open Economy,” NBER Working Paper Report No. 433, February 2010. Economic Review. No. 22172, April 2016, and American Return to Text Return to Text Economic Review, 106 (5), pp. 503– 13 G. Eggertsson and P. Krugman, 17 A. Hansen, “Economic Progress 7; and G. Eggertsson, N. Mehrotra, S. “Debt, Deleveraging, and the Liquidity and Declining Population Growth,” Singh, and L. Summers, “A Contagious Trap: A Fisher-Minsky-Koo Approach,” American Economic Review, 29(1), Malady? Open Economy Dimensions of The Quarterly Journal of Economics, 1939, pp. 1–15. Secular Stagnation,” NBER Working 127 (3), 2012, pp. 1469–513. Return to Text Paper No. 22299, June 2016, and Return to Text 18 For futher discussion see L. Summers, forthcoming in the IMF Economic 14 A. Mian and A. Sufi, House of “U.S. Economic Prospects: Secular Review. Debt: How They (and You) Caused Stagnation, Hysteresis, and the Zero Return to Text

NBER Reporter • No. 1, March 2017 29 NBER News

Awards 2016

John Abowd received the in health economics for the paper, Marco Di Maggio received the Julius Shiskin Memorial Award for “Do Firms Underinvest in Long-Term NASDAQ Prize at the Financial Economic Statistics. The award, pre- Research? Evidence from Cancer Management Association conference sented by the Washington Statistical Clinical Trials.” for his paper “The Value of Trading Society, the National Association for Leonardo Bursztyn received Relations in Turbulent Times,” coau- Business Economics, and the American an Alfred P. Sloan Research Fellowship thored with Amir Kermani and Statistical Association, recognizes origin Economics. Zhaogang Song. inal and important contributions to the John Y. Campbell delivered the Martin Gaynor received the development of economic statistics. Richard T. Ely Lecture at the American Best Paper Award from the American Kenneth Ahern won second place Economic Association meetings in Economic Journal: Economic Policy for in the Jensen Prize competition for the January 2016. “Death by Market Power: Reform, Best Paper in the Journal of Financial John Cawley became the U.S. Competition, and Patient Outcomes Economics. He was honored for his Department of State’s Fulbright in the National Health Service,” with paper “Lost in Translation? The Effect Specialist in Economics to Ireland. Rodrigo Moreno-Serra and Carol of Cultural Values on Mergers Around Stephen G. Cecchetti was awarded Propper, and was elected to the the World,” with Daniele Daminelli an honorary doctorate from the fac- Academy of Medicine of the National and Cesare Fracassi. ulty of business and economics at the Academies of Sciences, Engineering, Susan Athey was elected a University of Basel. and Medicine. Corresponding Fellow of the British Janet Currie received an honor- Matthew Gentzkow received the Academy and received the Jean-Jacques ary doctorate from l’Université Jean 2016 Calvó-Armengol International Laffont Prize. Moulin Lyon III and the Carolyn Prize in Economics. Orazio Attanasio received the Shaw Bell Award for furthering the Claudia Goldin received the 2016 Carlos Diaz-Alejandro Prize from role of women in economics from the IZA Prize in Labor Economics for her the Latin American and Caribbean Committee on the Status of Women in career-long work on the economic his- Economic Association (LACEA) and the Economics Profession. tory of women in education and the the Klaus J. Jacobs Research Prize. Angus Deaton was named Knight labor market. Javier Bianchi received the Bachelor in the Queen’s Birthday Robert J. Gordon’s book The Rise Excellence Award in Global Economic Honours List, Doctor of Humane and Fall of American Growth won the Affairs from the Kiel Institute for the Letters from Brown University, PROSE Award of the Association of World Economy. Honorary Fellow and Royal Medal American Publishers for the best book Olivier Blanchard received an Recipient from the Royal Society of of the year in U.S. history, and was honorary doctorate from London Edinburgh, Honorary Fellow of the included in the Wall Street Journal ’s Business School, was named an Officier University of Bristol, and recipient of list of the ten best nonfiction books de la Légion d’Honneur in France, and the Franklin Founder Award. of 2016. was elected President of the American Peter DeMarzo became President- Gautam Gowrisankaran received Economic Association. Elect of the American Finance the 2016 Best Paper Award for the Francine D. Blau received the Association, and received the Charles Workshop on Health IT and Economics 2017 Judge William B. Groat Alumni River Associates Award for Best (WHITE) for “Does Hospital EMR Award, presented each year by the Paper on Corporate Finance for “The Adoption Lead to Upcoding or More Industrial and Labor Relations School Leverage Ratchet Effect,” with Anat Accurate Coding?” coauthored with at Cornell University to a graduate Admati, Martin Hellwig, and Paul Keith Joiner and Jianjing Lin. He, Aviv in recognition of outstanding profes- Pfleiderer, and the Best Paper Prize at Nevo, and Robert Town were awarded sional accomplishments and commit- the Utah Winter Finance Conference the 2016 Antitrust Writing Award for ment to the school. for “Relative Pay for Non-Relative the best academic paper on mergers Eric Budish, Heidi Williams, Performance: Keeping Up with the for their paper “Mergers When Prices and Benjamin N. Roin received the Joneses with Optimal Contracts,” with are Negotiated: Evidence from the 24th Arrow Award for the best paper Ron Kaniel. Hospital Industry.”

30 NBER Reporter • No. 1, March 2017 John Graham, Michael R. an Alfred P. Sloan Research Fellowship Morgan Stanley American Finance Roberts, and Mark Leary were in Economics. Association Award for Excellence awarded the Jensen Prize for the best Samuel Kortum was elected a in Finance, recognizing “outstand- corporate finance paper published in Fellow of the American Academy of ing thought leadership in the field of the Journal of Financial Economics for Arts and Sciences. financial economics.” “A Century of Capital Structure: The Amanda E. Kowalski, Martin B. Ariel Pakes gave the inaugural Leveraging of Corporate America.” Hackmann, and Jonathan T. Kolstad Griliches Lecture of the Econometric Graham also received the AAA received the National Institute for Society on “Moment Inequalities and Notable Contribution to Accounting Health Care Management (NIHCM) Their Use in Industrial Organization.” Literature Award for his Journal of Research Award for their paper on Alessandro Rebucci received Accounting and Economics paper “Adverse Selection and an Individual the E-House Best Paper Award at the “Earnings Quality: Evidence from the Mandate: When Theory Meets Global Chinese Real Estate Congress Field,” with Ilia Dichev, Campbell R. Practice.” for “Does Easing Monetary Policy Harvey, and Shiva Rajgopal. Ronald Lee received the 2016 Increase Financial Stability?” jointly Shane Greenstein’s book, How Laureate Award from the International with Ambrogio Cesa-Bianchi. the Internet Became Commercial: Union for Scientific Study of Dani Rodrik was awarded an hon- Innovation, Privatization, and the Birth Population for outstanding contribu- orary doctorate by the University of of a New Network, won the Schumpeter tions to demography. Southern Denmark. Prize for recent scholarly contributions Christian Leuz was awarded the Judith Scott-Clayton received that are related to Schumpeter’s work. 2016 Distinguished Contribution to the 2016 American Educational Gene M. Grossman was awarded the Accounting Literature Award for Research Association Division L an honorary doctorate by the his paper “Mandatory IFRS Reporting (Education Policy and Politics) Early University of Minho in Braga, Portugal Around the World: Early Evidence Career Award, as well as the National and delivered The World Economy on the Economic Consequences,” with Association of Student Financial Aid Annual Lecture at the University of Holger Daske, Luzi Hail, and Rodrigo Administrators (NASFAA) Robert Nottingham. Verdi. He also received the 2016 P. Huff Golden Quill Award for her Daniel S. Hamermesh was named Best Paper Award from the Financial research on student financial aid. Network Director of the IZA and Accounting and Reporting Section of Kent Smetters and Felix Editor-in-Chief of the IZA World of the American Accounting Association Reichling received the 2016 TIAA Labor. for “Adopting a Label: Heterogeneity Paul A. Samuelson Award for their Oliver Hart and Bengt Holmstrom in the Economic Consequences around paper “Optimal Annuitization with shared the Sveriges Riksbank Prize IAS/IFRS Adoptions,” with the same Stochastic Mortality and Correlated in Economic Sciences in Memory of three co-authors, and the 2016 Best Medical Costs.” Alfred Nobel. Holmstrom was also Dissertation Supervision Award from Robert N. Stavins was awarded named the 2016 Distinguished Fellow the same organization. the Edmund G. “Pat” Brown Award at CESifo in Munich. Brigitte Madrian received the for advancing environmental policy in Yael V. Hochberg was awarded 2016 Brigham Young University California. the Ewing Marion Kauffman Prize Distinguished Alumni Achievement Erdal Tekin was appointed Medal for Distinguished Research in Award. Honorary Professor at Deakin Entrepreneurship. Thomas McGuire received University, Australia. Sebnem Kalemli-Ozcan was the article of the year award at the Daniel Trefler received the Killam selected as the Council on Foreign International Journal of the Economics Prize in the Social Sciences and the Relations’ first International Affairs of Business for his paper on “Do Reverse Bank of Canada Fellowship Award for Fellow in International Economics. Payment Settlements Constitute an academic excellence. Steven N. Kaplan received the Anticompetitive Pay-for-Delay?” coau- Stijn Van Nieuwerburgh was Harry M. Markowitz Award for the thored with Keith Drake and Martha awarded the Germán Bernácer Prize best paper published in the Journal Starr. for the best European economist under of Investment Management for his Alan C. Monheit received the New 40 working in macroeconomics or paper with Robert Harris and Tim Jersey Health Foundation’s Excellence finance. Jenkinson on “How Do Private Equity in Research Award. John Van Reenen was named an Investments Perform Compared to Enrico Moretti was elected a OBE (Officer of the Order of the Public Equity?” Fellow of the Econometric Society. British Empire) “for services to eco- Loukas Karabarbounis received Stewart C. Myers received the nomics and public policy making.”

NBER Reporter • No. 1, March 2017 31 Conferences

18th Annual Neemrana Conference

The NBER, India’s National Council for Applied Economic Research (NCAER), and the Indian Council for Research on International Economic Relations (ICRIER) sponsored a meeting in Neemrana, India, on December 16–18, 2016, that included NBER researchers and economists from Indian universities, research institutions, and government departments. NBER participants were David Atkin, Abhijit Banerjee, Esther Duflo, and James Poterba, all of MIT; Emily Breza, Shawn Cole, and Gita Gopinath, of Harvard University; Meredith Fowlie and Pierre-Olivier Gourinchas, from the University of California, Berkeley; Douglas Irwin of Dartmouth College; Peter Klenow from Stanford University; Anne O. Krueger of Johns Hopkins University; Rajnish Mehra of Arizona State University; Karthik Muralidharan of the University of California, San Diego; and Romain Wacziarg of the University of California, Los Angeles. A wide range of topics was discussed, including the prospects for India and the global economy after Brexit and the U.S. presidential election; new perspectives on skill development, education, economic growth and productivity; currency reform in India and its consequences; business investment, financial markets, and trade in India and the U.S.; and the economics of pollution abatement and climate change.

Economics of Digitization

“Economics of Digitization,” an NBER conference supported by the Alfred P. Sloan Foundation, took place at Stanford on March 3. Research Associates Shane Greenstein and Josh Lerner of Harvard University and Scott Stern of MIT organized the meeting. These researchers’ papers were presented and discussed:

• Barbara Biasi, Stanford University, and Petra Moser, New York University and NBER, “Effects of Copyrights on Science: Evidence from the WWII Book Republication Program”

• Joan Calzada, University of Barcelona, and Ricard Gil, Johns Hopkins University, “What Do News Aggregators Do? Evidence from Google News in Spain and Germany”

• Thomas Blake, eBay Research Labs; Sarah Moshary, University of Pennsylvania; Kane Sweeney, Uber; and Steven Tadelis, University of California, Berkeley, and NBER, “Price Salience and Product Choice”

• Erik Brynjolfsson, MIT and NBER; Felix Eggers, University of Groningen (Netherlands); and Avinash Gannamaneni, MIT, “Using Massive Online Choice Experiments to Measure Changes in Well-Being”

• Ben Shiller, Brandeis University; Joel Waldfogel, University of Minnesota and NBER; and Johnny Ryan, PageFair Limited, “Will Ad Blocking Break the Internet?” (NBER Working Paper No. 23058)

• Shawn Cole, Harvard University and NBER, and A. Nilesh Fernando, University of Notre Dame, “ ‘Mobile’izing Agricultural Advice: Technology Adoption, Diffusion, and Sustainability”

• Susan F. Lu, Purdue University, and Huaxia Rui and Abraham Seidmann, University of Rochester, “Does Technology Substitute for Nurses? Staffing Decisions in Nursing Homes”

Summaries of these papers are at: http://www.nber.org/confer/2017/EoDs17/summary.html

32 NBER Reporter • No. 1, March 2017 Economics of National Security

“Economics of National Security,” an NBER conference organized by NBER President-emeritus Martin Feldstein of Harvard University and Research Associate Eli Berman of the University of California, San Diego, took place in Cambridge on March 5–6. These researchers’ papers were presented and discussed:

• Giorgio Chiovelli and Elias Papaioannou, London Business School, and Stelios Michalopoulos, Brown University and NBER, “Land Mines and Spatial Development”

• Esteban Klor, Hebrew University of Jerusalem; Sebastian M. Saiegh, University of California, San Diego; and Shanker Satyanath, New York University, “The Logic of Cronyism in State Violence: Evidence from Labor Repression During Argentina’s Last Dictatorship”

• Suleiman Abu Bader, Ben-Gurion University of the Negev (Israel), and Elena I. Ianchovichina, World Bank, “Polarization, Foreign Military Interventions, and Civil Conflicts”

• Kerwin Kofi Charles, University of Chicago and NBER; Konstantin Kunze, University of California, Davis; Hani Mansour and Daniel I. Rees, University of Colorado Denver; and Bryson Rintala, U.S. Air Force Academy, “Taste- Based Discrimination and the Labor Market Outcomes of Arab and Muslim Men in the United States”

• Benjamin Crost, University of Illinois at Urbana-Champaign, and Joseph Felter, Stanford University, “Export Crops and Civil Conflict”

• Samuel A. Bazzi and Matthew Gudgeon, Boston University; Robert Blair, Brown University; Christopher Blattman and Oeindrila Dube, University of Chicago and NBER; and Richard Peck, Northwestern University, “What Can Prediction Teach Us About Violence? Machine Learning Applications in Indonesia and Colombia”

• Madeline Zimmerman, Harvard University, “The Effect of U.S. Drone Strikes on Terrorism in Pakistan and Yemen”

• Luke N. Condra, University of Pittsburgh; James D. Long, University of Washington; Andrew C. Shaver, Princeton University; and Austin L. Wright, University of Chicago, “The Logic of Insurgent Electoral Violence”

Summaries of these papers are at: http://www.nber.org/confer/2017/ENSs17/summary.html

NBER Reporter • No. 1, March 2017 33 Program and Working Group Meetings

Industrial Organization

The NBER’s Program on Industrial Organization met at Stanford on January 27–28. Research Associate Matthew Gentzkow of Stanford University and Faculty Research Fellow Robin S. Lee of Harvard University organized the meeting. These researchers’ papers were presented and discussed:

• Ali Hortaçsu, University of Chicago and NBER; Fernando Luco and Dongni Zhu, Texas A&M University; and Steven L. Puller, Texas A&M University and NBER, “Does Strategic Ability Affect Efficiency? Evidence from Electricity Markets”

• Avi Goldfarb, University of Toronto and NBER, and Mo Xiao, University of Arizona, “Transitory Shocks, Limited Attention, and a Firm’s Decision to Exit”

• David Atkin, MIT and NBER, and Dave Donaldson, Stanford University and NBER, “Who’s Getting Globalized? The Size and Implications of Intra-National Trade Costs” (NBER Working Paper No. 21439)

• Bruce Blonigen, University of Oregon and NBER, and Justin R. Pierce, Federal Reserve Board, “Evidence for the Effects of Mergers on Market Power and Efficiency” (NBER Working Paper No. 22750)

• Takuo Sugaya, Stanford University, and Alexander Wolitzky, MIT, “Maintaining Privacy in Cartels”

• Adam Kapor, Columbia University; Christopher Neilson, Princeton University and NBER; and Seth Zimmerman, University of Chicago and NBER, “Heterogeneous Beliefs and School Choice Mechanisms”

• Pietro Tebaldi, University of Chicago, “Estimating Equilibrium in Health Insurance Exchanges: Price Competition and Subsidy Design under the ACA”

Summaries of these papers are at: http://www.nber.org/confer/2017/IOs17/summary.html

Economic Fluctuations and Growth

The NBER’s Program on Economic Fluctuations and Growth met in New York City on February 24. Research Associates Laura Veldkamp of New York University and Jon Steinsson of Columbia University organized the meeting. These researchers’ papers were presented and discussed:

• Matthias Kehrig, Duke University, and Nicolas Vincent, HEC Montréal, “Do Firms Mitigate or Magnify Capital Misallocation? Evidence from Plant-Level Data”

• Daniel Garcia-Macia, International Monetary Fund; Chang-Tai Hsieh, University of Chicago and NBER; and Peter Klenow, Stanford University and NBER, “How Destructive is Innovation?” (NBER Working Paper No. 22953)

34 NBER Reporter • No. 1, March 2017 • George-Marios Angeletos, MIT and NBER, and Chen Lian, MIT, “Forward Guidance without Common Knowledge” (NBER Working Paper No. 22785)

• Barney Hartman-Glaser, University of California, Los Angeles; Hanno Lustig, Stanford University and NBER; and Mindy Zhang, University of Texas at Austin, “Capital Share Dynamics When Firms Insure Managers” (NBER Working Paper No. 22651)

• Sang Yoon Lee, Toulouse School of Economics, and Yongseok Shin, Washington University in St. Louis and NBER, “Horizontal and Vertical Polarization: Task-Specific Technological Change in a Multi-Sector Economy”

• Michael Gelman, University of Michigan; Yuriy Gorodnichenko and Steven Tadelis, University of California, Berkeley, and NBER; Shachar Kariv and Dmitri Koustas, University of California, Berkeley; Matthew Shapiro, University of Michigan and NBER; and Dan Silverman, Arizona State University and NBER, “The Response of Consumer Spending to Changes in Gasoline Prices” (NBER Working Paper No. 22969)

Summaries of these papers are at: http://www.nber.org/confer/2017/EFGw17/summary.html

Labor Studies

The NBER’s Program on Labor Studies met in San Francisco on February 24. Program Director David Card of the University of California, Berkeley, organized the meeting. These researchers’ papers were presented and discussed:

• Raj Chetty, Stanford University and NBER; David Grusky and Maximilian Hell, Stanford University; Nathaniel Hendren, Harvard University and NBER; Robert Manduca, Harvard University; and Jimmy Narang, University of California, Berkeley, “The Fading American Dream: Trends in Absolute Income Mobility Since 1940” (NBER Working Paper No. 22910)

• Seth D. Zimmerman, University of Chicago and NBER, “Making the One Percent: The Role of Elite Universities and Elite Peers” (NBER Working Paper No. 22900)

• Lars Lefgren, David Sims, and Olga B. Stoddard, Brigham Young University, “The Other 1%: Class Leavening, Contamination and Voting for Redistribution”

• David Neumark, University of California, Irvine, and NBER; Ian Burn, University of California, Irvine; and Patrick Button, Tulane University, “Is It Harder for Older Workers to Find Jobs? New and Improved Evidence from a Field Experiment” (NBER Working Paper No. 21669)

• George Bulman, University of California, Santa Cruz; Robert W. Fairlie, University of California, Santa Cruz, and NBER; Sarena Goodman, Federal Reserve Board; and Adam Isen, Department of the Treasury, “Parental Resources and College Attendance: Evidence from Lottery Wins” (NBER Working Paper No. 22679)

• Rachel B. Baker, University of California, Irvine; Eric Bettinger, Stanford University and NBER; Brian Jacob, University of Michigan and NBER; and Ioana Marinescu, University of Chicago and NBER, “The Effect of Labor Market Information on Community College Students’ Major Choice”

Summaries of these papers are at: http://www.nber.org/confer/2017/LSs17/summary.html

NBER Reporter • No. 1, March 2017 35 Law and Economics

The NBER’s Program on Law and Economics met in Cambridge on March 3. Program Director Christine Jolls of Yale University organized the meeting. These researchers’ papers were presented and discussed:

• David Arnold, Princeton University; Will S. Dobbie, Princeton University and NBER; and Crystal Yang, Harvard University, “Racial Bias in Bail Decisions”

• Mitchell Polinsky, Stanford University and NBER, and Paul N. Riskind, Stanford University, “Deterrence and the Optimal Use of Prison, Parole, and Probation”

• Saurabh Bhargava and George Loewenstein, Carnegie Mellon University, and Justin R. Sydnor, University of Wisconsin-Madison and NBER, “Evaluating Health Insurance Decisions: Health Plan Choices from a Menu with Dominated Options”

• Tal Gross, Columbia University and NBER; Matthew J. Notowidigdo, Northwestern University and NBER; and Jialan Wang, University of Illinois at Urbana-Champaign, “The Marginal Propensity to Consume over the Business Cycle” (NBER Working Paper No. 22518)

• Andrew Daughety and Jennifer Reinganum, Vanderbilt University, “Information Suppression by Teams and Violations of the Brady Rule”

• Albert Choi, University of Virginia, and Eric Talley, Columbia University, “Appraising the ‘Merger Price’ Appraisal Rule”

• Edward L. Glaeser and Andrei Shleifer, Harvard University and NBER, and Giacomo A.M. Ponzetto, Pompeu Fabra University (Barcelona), “Securing Property Rights” (NBER Working Paper No. 22701)

• Justin Marion, University of California, Santa Cruz, “Affirmative Action Exemptions and Capacity Constrained Firms”

Summaries of these papers are at: http://www.nber.org/confer/2017/LEs17/summary.html

Monetary Economics

The NBER’s Program on Monetary Economics met in Chicago on March 3. Research Associate Yuriy Gorodnichenko of the University of California, Berkeley, and Faculty Research Fellow Kinda Cheryl Hachem of the University of Chicago organized the meeting. These researchers’ papers were presented and discussed:

• Ernesto Pasten, Central Bank of Chile; Raphael Schoenle, Brandeis University; and Michael Weber, University of Chicago and NBER, “Nominal Rigidities and the Granular Origins of Aggregate Fluctuations”

• Andres Drenik, Columbia University, and Diego Perez, New York University, “Price Setting under Uncertainty about Inflation”

• Camila Casas, Banco de la República (Colombia); Federico Díez, Federal Reserve Bank of Boston; Gita Gopinath, Harvard University and NBER; and Pierre-Olivier Gourinchas, University of California, Berkeley, and NBER, “Dominant Currency Paradigm” (NBER Working Paper No. 22943)

36 NBER Reporter • No. 1, March 2017 • Juan Antolín-Díaz, Fulcrum Asset Management, and Juan Rubio Ramírez, Emory University, “Narrative Sign Restrictions for SVARs”

• Jeffrey W. Huther, Jane Ihrig, and Elizabeth Klee, Federal Reserve Board, “The Federal Reserve’s Portfolio and its Effect on Interest Rates”

Summaries of these papers are at: http://www.nber.org/confer/2017/MEs17/summary.html

Environment and Energy Economics

The NBER’s Program onEnvironment and Energy Economics met in Cambridge on March 3–4. Research Associates Christopher R. Knittel of MIT and Paulina Oliva of the University of California, Irvine, organized the meeting. These researchers’ papers were presented and discussed:

• Sharat Ganapati, Yale University; Joseph S. Shapiro, Yale University and NBER; and Reed Walker, University of California, Berkeley, and NBER, “The Incidence of Carbon Taxes in U.S. Manufacturing: Lessons from Energy Cost Pass-Through” (NBER Working Paper No. 22281)

• Joshua A. Lewis, Université de Montréal, and Edson R. Severnini, Carnegie Mellon University, “Short- and Long-Run Impacts of Rural Electrification: Evidence from the Historical Rollout of the U.S. Power Grid”

• T. Robert Fetter and Andrew L. Steck, Duke University; Christopher Timmins, Duke University and NBER; and Douglas Wrenn, Pennsylvania State University, “Learning by Viewing? Social Learning, Regulatory Disclosure, and Firm Productivity in Shale Gas”

• Frank A. Wolak, Stanford University and NBER, “Assessing the Impact of the Diffusion of Shale Oil and Gas Technology on the Global Coal Market”

• Nicholas Ryan, Yale University and NBER, “Is There an Energy-Efficiency Gap? Experimental Evidence from Indian Manufacturing Plants”

• James E. Archsmith and David Rapson, University of California, Davis; Kenneth Gillingham, Yale University and NBER; and Christopher R. Knittel, “Household Diversification: The Vehicle Portfolio Effect”

• Maximilian Auffhammer, University of California, Berkeley, and NBER, “Climate Adaptive Response Estimation: Short and Long Run Impacts of Climate Change on Residential Electricity and Natural Gas Consumption Using Big Data”

• Solomon M. Hsiang, University of California, Berkeley, and NBER, “Estimating Economic Damage from Climate Change in the United States”

• Achyuta Adhvaryu, University of Michigan and NBER; Prashant Bharadwaj, University of California, San Diego, and NBER; James E. Fenske, University of Warwick (England); Anant Nyshadham, Boston College; and Richard Stanley, UNICEF, “Dust and Death: Evidence from the West African Harmattan”

• Kelsey Jack, Tufts University and NBER; Seema Jayachandran, Northwestern University and NBER; and Sarojini V. Rao, University of Chicago, “Environmental Externalities and Intrahousehold Inefficiencies”

NBER Reporter • No. 1, March 2017 37 • Gustavo Bobonis and Leonardo Tovar, University of Toronto, and Mark Stabile, INSEAD (Fontainebleau), “Bombs and Babies: U.S. Navy Bombing Activity and Infant Health in Vieques, Puerto Rico” (NBER Working Paper No. 22909)

Summaries of these papers are at: http://www.nber.org/confer/2017/EEEs17/summary.html

NBER Books

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Innovation Policy and the Economy, Volume 17

Edited by Shane Greenstein, Josh Lerner, and Scott Stern The University of Chicago Press, 2017 $60 (cloth)

The 17th volume of Innovation of patient data becoming virtually cost- Innovation and the Policy Economy Innovation Policy and the Economy, Volume 17 Policy and the Economy provides an acces- less to store,Edited share, by Shane Greenstein, and Josh Lerner, individualize, and Scott Stern The seventeenth annual volume of the National Bureau of Economic Research’s Innovation Policy sible forum for bringing the work of lead- showing how (NBER)data Innovation management Policy and the Economy brings the work andof leading academic pri - researchers to an audience of policymakers and those interested in the interac- ing academic researchers to an audience vacy issues havetion between become public policy and innovation. important In the first chapter, Joel Waldfogelcon - discusses how reduced costs of production have resulted in a “Golden Age of and the Economy Television,” arguing that this development has gone underappreciated. The of policy makers and those interested in siderations insecond, health by Marc Rysman policy.and Scott Schuh, discusses The the prospects fourth for innovation in payment systems, including mobile payments, faster payment systems, Volume 17 and digital currencies. In the third paper, Amalia Miller and Catherine Tucker the interaction between public policy chapter, by Michaelanalyze the consequences Luca, of patient data examines becoming virtually costless tohow store, share, and individualize, showing how data management and privacy issues National Bureau of Economic Research and innovation. In the first chapter, Joel online marketplaceshave become central to healthhave policy. The fourth,proliferated by Michael Luca, examines how online marketplaces have proliferated over the past decade, with a focus on 17 vol. Edited by Shane Greenstein, Josh Lerner, and Scott Stern Waldfogel discusses how reduced costs over the past decade,the trust and reputation evolving mechanisms used in designing far online beyond marketplaces. In the fifth essay, Timothy Bresnahan and Pai-Ling Yin characterize information and communication technologies in the workplace, which have transformed of production have resulted in a “Golden pioneers suchproduction as andeBay shifted relative and labor demand Amazon. toward smart managers andIn professionals, and workers who are skilled at contributing to and interacting Age of Television,” arguing that this the fifth chapter,with other members Timothy of organizations. Bresnahan Greenstein, Lerner, and Stern, editors Table of Contents Shane Greenstein is the Martin Marshall Professor of Business Administra- development has gone underappreciated. and Pai-Ling tionYin and co-chair characterize of the HBS Digital Initiative at Harvard informa Business School, - • The Random Long Tail and the Golden Age of Television and co-director of the NBER Project on the Economics of Digitization. Josh Lerner is Chair of the Entrepreneurial Management Unit and the Jacob H. • New Innovations in Payments The second chapter, by Marc Rysman tion and communicationSchiff Professor of Investment Banking technologies at Harvard Business School, and ina research associate and co-director of the Productivity, Innovation, and Entre- • Frontiers of Health Policy: Digital Data and Personalized Medicine and Scott Schuh, discusses the pros- the workplace,preneurship which Program at the NBER.have Scott Stern transformed is the David Sarnoff Professor of Management and Chair of the Technological Innovation, Entrepreneurship, • Designing Online Marketplaces: Trust and Reputation Mechanisms pects for innovation in payment systems, production andand Strategic Managementshifted Group at therelative MIT Sloan School of Management,labor • Adoption of New Information and Communications Technologies and a research associate and director of the Innovation Policy Working Group in the Workplace Today including mobile payments, faster pay- demand towardat the NBER.smart managers and pro- ment systems, and digital currencies. In fessionals, andNBER workersInnovation Policy and the whoEconomy Series are skilled The University of Chicago Press the third chapter, Catherine Tucker and at contributingwww.press.uchicago.edu to and interacting with

Amalia Miller analyze the consequences other members of organizations. the university of chicago press

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38 NBER Reporter • No. 1, March 2017 Insights in the Economics of Aging

Edited by David A. Wise The University of Chicago Press, 2017 $110.00 (cloth)

In many developed countries, the tions, and a rapidly evolving landscape fraction of the population over age 65 of policy incentives and supports. is projected to rise in coming decades, The contributors to Insights in the in some cases sharply. This has gener- Economics of Aging uncover how finan- ated growing interest in research on the cial, physical, and emotional well-being health and economic circumstances of are integrally related. The authors con- individuals as they age. Many individ- sider the interactions between finan- uals are retiring from paid work, and cial circumstances in later life, such they are living longer than ever. Their as household savings and home own- well-being is shaped by past decisions, ership, physical circumstances such as such as their saving behavior, as well as health and disability, and emotional by current and future economic con- well-being, including happiness and ditions, health status, medical innova- mental health.

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