Quick viewing(Text Mode)

Econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible

A of

Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for

National Bureau of Economic Research (NBER) (Ed.)

Periodical Part NBER Reporter Online, Volume 2010

NBER Reporter Online

Provided in Cooperation with: National Bureau of Economic Research (NBER), Cambridge, Mass.

Suggested Citation: National Bureau of Economic Research (NBER) (Ed.) (2010) : NBER Reporter Online, Volume 2010, NBER Reporter Online, National Bureau of Economic Research (NBER), Cambridge, MA

This Version is available at: http://hdl.handle.net/10419/61993

Standard-Nutzungsbedingungen: Terms of use:

Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes.

Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu NBER Reporter NATIONAL BUREAU OF ECONOMIC RESEARCH

Reporter OnLine at: www.nber.org/reporter 2010 Number 1

Program Report

IN THIS ISSUE Program Report Economic Fluctuations and Growth Economic Fluctuations and Growth 1 Research Summaries Robert E. Hall* The Credit Rating Crisis 8 Measuring Returns to Healthcare 10 New Dynamic Public Finance 13 The Economic Fluctuations and Growth (EF&G) Program goes back to the beginning of ’s presidency of the NBER, although origi- NBER Profiles 15 nally it was simply called the Economic Fluctuations Program. It has been my Conferences 17 honor to serve as its director from its founding, 32 years ago. To the public, the NBER News 20 Program’s most conspicuous activity has been to maintain the NBER’s chro- Program and Working Group Meetings 24 nology of the U.S. , generally accepted as the standard for identi- Bureau Books 31 fying the beginning and ending of each . As I write, many eyes are on the program’s Business Cycle Dating Committee, which I also chair, as evidence grows that the recession that began in December 2007 may have come to an end recently or is about to come to an end. The following graph shows the two main indicators the committee considers in deciding on the dates of turning points in economic activity, real GDP and payroll employment: 1.01 1.00 0.99 0.98 0.97 0.96 0.95 0.94 Real GDP 0.93 Nonfarm employment 0.92 0.91 0.90

-08 b-06 g-06 b-07 g-07 b-08r g-08 b-09 g-09 Dec-05Fe Apr-06Jun-06Au Oct-06Dec-06Fe Apr-07Jun-07Au Oct-07Dec-07Fe Ap Jun-08Au Oct-08Dec-08Fe Apr-09Jun-09Au Oct-09Dec-09 * Hall directs the NBER’s Program on Economic Fluctuations and Growth and is Chairman of the NBER’s Business Cycle Dating Committee. He is 2010 President of the American Economic Association, and is the Robert and Carole McNeil Professor of Economics and Hoover Senior Fellow at Stanford University. In this article, the numbers in parentheses refer to NBER Working Papers. For other papers, titles are included, and the latest versions can be found by googling the title. NBER Reporter • 2010 Number 1 Both measures are stated as indexes that reached 1.00 in December 2007, the month NBER Reporter determined to be the peak of the business cycle by the committee on November 28, 2008. That month was the exact peak of employment, but real GDP reached a slightly higher in the second quarter of 2008. Both measures plunged in late 2008 as the took hold. The National Bureau of Economic Research is a private, nonprofit research orga- Real GDP began to grow in the summer of nization founded in 1920 and devoted to objective quantitative analysis of the 2009 but employment continued to decline. American economy. Its officers and board of directors are: The percentage drop in employment in the cur- President and Chief Executive Officer — James M. Poterba rent recession was the largest since the govern- Controller — Kelly Horak ment began the collection of the data in 1939, BOARD OF DIRECTORS although not nearly as large as the decline in Chairman — John S. Clarkeson the in 1929 to 1933, accord- Vice Chairman — Kathleen B. Cooper ing to annual data from earlier sources. The huge Treasurer — Robert Mednick difference between the recent behavior of out- DIRECTORS AT LARGE put and employment reflects the unprecedented Peter Aldrich Jessica P. Einhorn Alicia H. Munnell growth of productivity in 2009. In determining Elizabeth E. Bailey Mohamed El-Erian Rudolph A. Oswald the date for the trough in economic activity, the Richard Berner Jacob A. Frenkel Robert T. Parry John Herron Biggs Judith M. Gueron James M. Poterba committee will be deciding how to weigh output John S. Clarkeson Robert S. Hamada John S. Reed and employment in its definition of economic Don R. Conlan Karen N. Horn Marina v. N. Whitman activity. Kathleen B. Cooper John Lipsky Martin B. Zimmerman Charles H. Dallara Laurence H. Meyer EF&G is the largest of the Bureau’s research George C. Eads Michael H. Moskow programs, with 149 Research Associates and 45 Faculty Research Fellows (as of February DIRECTORS BY UNIVERSITY APPOINTMENT 2010). At recent Program Meetings, the , California, Berkeley Joel Mokyr, Northwestern papers have included two on the effects of the Jagdish W. Bhagwati, Columbia Andrew Postlewaite, Pennsylvania small probability of large disasters: Francois Glen G. Cain, Wisconsin Uwe E. Reinhardt, Princeton Ray C. Fair, Yale Nathan Rosenberg, Stanford Gourio, “Disasters Risk and Business Cycles” Franklin Fisher, MIT Craig Swan, Minnesota (15399); and , Emi Nakamura, Mark Grinblatt, California, Los Angeles David B. Yoffie, Harvard Jon Steinsson, “Crises and Recoveries in an Saul H. Hymans, Michigan Arnold Zellner, Chicago Marjorie B. McElroy, Duke Empirical Model of Consumption Disasters.” Housing economics has played a major role in DIRECTORS BY APPOINTMENT OF OTHER ORGANIZATIONS the meetings, too, with: Veronica Guerrieri, Jean Paul Chavas, Agricultural and Association Martin Gruber, American Finance Association Daniel Hartley, and Erik Hurst, “Endogenous Timothy W. Guinnane, Association Gentrification and Housing Price Dynamics”; Arthur B. Kennickell, American Statistical Association Jack Favilukis, Sydney Ludvigson, and Stijn Van Thea Lee, American Federation of Labor and Congress of Industrial Organizations Nieuwerburgh, “The Macroeconomic Effects of William W. Lewis, Committee for Economic Development Housing Wealth, Housing Finance, and Limited Robert Mednick, American Institute of Certified Public Accountants Risk-Sharing in General Equilibrium”; and Angelo Melino, Canadian Economics Association Harvey Rosenblum, National Association for James Kahn, “What Drives Housing Prices?” John J. Siegfried, American Economic Association Volatility in financial markets has an important The NBER depends on funding from individuals, corporations, and private foun- new role in , as seen in YiLi dations to maintain its independence and its flexibility in choosing its research Chien, Harold Cole, and Hanno Lustig, “Is the activities. Inquiries concerning contributions may be addressed to James M. Volatility of the Market Price of Risk due to Poterba, President & CEO, NBER 1050 Massachusetts Avenue, Cambridge, MA 02138-5398. All contributions to the NBER are tax deductible. Intermittent Portfolio Re-Balancing?” (15382) and Ricardo Lagos, Guillaume Rocheteau, and The Reporter is issued for informational purposes and has not been reviewed by Pierre-Olivier Weill, “Crises and Liquidity in the Board of Directors of the NBER. It is not copyrighted and can be freely repro- duced with appropriate attribution of source. Please provide the NBER’s Public Over-the-Counter Markets” (15414). The novel Information Department with copies of anything reproduced. role of in today’s economy was the Requests for subscriptions, changes of address, and cancellations should be sent subject of Christopher Erceg and Jesper Linde, to Reporter, National Bureau of Economic Research, Inc., 1050 Massachusetts “Is There a Fiscal Free Lunch in a Liquidity Avenue, Cambridge, MA 02138-5398. Please include the current mailing label. Trap?”

2 NBER Reporter • 2010 Number 1 Most of the EF&G Program’s activi- provide good approximations to optimal Two additional papers by Zhiguo ties take place in its nine research groups. policy in such environments. In “Where He and Wei Xiong (15482) and by Each group has two or three leaders, who Should Liquidity be Injected during a Viral Acharya, Douglas Gale, and Tanju determine the membership of the group Financial Crisis?” Ricardo Reis formal- Yorulmazer (15674) consider the effect and its methods of operation, timing izes the notion of a liquidity shortage of financing longer-term by of its meetings, and content of its pro- and then studies the tactical aspects of rolling over short-term assets, as in many grams. Most groups meet at the NBER when such a shortage financial institutions. The papers con- Summer Institute in July and many also arises. sider the risks associated with this matu- meet during the academic year. Lawrence Christiano, Martin rity transformation and the roles played Eichenbaum, and Sergio Rebelo (15394) by volatility, liquidity, and maturity, as Impulse and Propagation analyze the circumstances under which well the potential role of financial regu- Mechanisms Group – Lawrence fiscal policy has a large and socially ben- lation in mitigating these risks. Christiano and Martin eficial effect. Standard macro models The group discussed two related imply that the effect of fiscal policy on empirical papers. The first, “Banking Eichenbaum, Leaders output is positive but relatively small. Crises and Crisis Dating,” by John Recently, this group has focused on However, these effects can be very large if Boyd, Gianni De Nicolò, and Elena an important area of research stimulated the zero-bound constraint on the nomi- Loukoianova, carefully considers the by the financial crisis of 2008: under- nal rate is binding. A key deter- roots of measured banking crises and standing the role of financial market minant of the size of the is the finds that the crises arise from underlying frictions. Gadi Barlevy in “A Leverage- state of the world in which new govern- systemic bank shocks. Since the shocks Based Model of Speculative Bubbles,” ment spending comes on line. If it comes pre-date the crises, using the shocks to George-Marios Angeletos and Jennifer on line in future periods when the nom- date the origins of the crisis changes one’s La’O (14982), Zheng Liu, Pengfei Wang, inal is zero, then there is a view of the dynamics and causes of finan- and Tao Zha in “Asset Priced Channels large effect on current output. If it comes cial crises. A second paper, by Manuel and Macroeconomic Fluctuations,” and on line in future periods where the nomi- Adelino, Kristopher Gerardi, and Paul Luca Dedola and Giovanni Lombardo in nal interest rate is positive, then the cur- Willen (15159), looks at data during “Financial Friction, Financial Integration rent effect on government spending is the financial crisis, starting in 2007, and and the International Propagation of smaller. This finding supports the view shows that because of re-default risk and Shocks” all study models in which infor- that, for fiscal policy to be effective, gov- self-cures (mortgages becoming current mational frictions give rise to important ernment spending must come online in a again), renegotiating delinquent mort- capital market frictions. The first two timely manner. gages is not very attractive to investors. papers are theoretical in nature, exploring Hence, payment-reducing loan modifi- new ideas and frameworks. The others Capital Markets and the cations have been uncommon in both are more quantitative in nature, explor- Economy – Janice Eberly and securitized and non-securitized pools of ing the significance of different financial Deborah Lucas, Leaders mortgages. market frictions in dynamic stochastic Finally, this group considered sev- general equilibrium (DSGE) models. The capital markets group studies eral theoretical treatments of the recent Motivated by recent events as well, interactions between the real and finan- financial crisis. In “Securitization, other researchers in this group are explor- cial economy. The recent financial crisis Transparency, and Liquidity,” Marco ing the efficacy of different policies in has sparked new and interesting research Pagano and Paolo Volpin argue that economies where a zero bound on the on the sources of the crisis, how such a there are cases where the release of coarse nominal interest rate is binding, and in crisis might be prevented or foreseen, the information is preferred by bond issuers economies in which the spread on inter- potential impact on the macroeconomy, enhancing primary market liquidity, at est rates to borrowers and lenders expe- and policy responses. the cost of secondary market liquidity. riences large changes. In “Conventional The group has discussed several In “Bursting Bubbles: Consequences and and Unconventional Monetary Policy,” papers related to market dynamics that Cures,” Narayana Kocherlakota, now the Vasco Cúrdia and Michael Woodford are similar to bank runs, but occur out- President of the Federal Reserve Bank extend the basic New Keynesian model side the banking sector. Julio Rotemberg of Minneapolis, discussed a framework of the monetary transmission mecha- (14222) presented a novel model of how in which asset market bubbles can arise, nism to allow for a spread between the payments clearing among interconnected because the asset can be used as collateral interest rate available to savers and bor- agents are settled, and how the amount for borrowing. He shows that the con- rowers. This spread can vary for either of liquidity needed to clear the payments sequences of bursting the bubble can be exogenous or endogenous reasons. depends on the payments system among dramatic and persistent in the real and Woodford discusses policy rules that the agents. financial economy.

NBER Reporter • 2010 Number 1 3 The Labor Market in the perspective of society — high unem- the papers that are presented fit in both Macroeconomics – Richard ployment is socially inefficient. categories. Rogerson, Robert Shimer, and Another long-standing issue in the In the first category, Jens H. E. analysis of aggregate labor market out- Christensen, Francis X. Diebold, and Randall Wright, Leaders comes concerns the elasticity of aggregate Glenn D. Rudebusch (13611) study the The labor market is central to many labor supply, and in particular, the appar- term structure of nominal government issues in macroeconomics, including ent inconsistency between low labor-sup- debt, showing that a combination of a business cycles, , inequal- ply elasticities that are estimated from standard parametric specification and ity, and growth. This group considers micro data and the much larger values an arbitrage-free specification leads to models of the labor market, data analysis, implicit in many aggregate models. The improvement in predictive performance. and the use of models to carry out sub- elasticity of aggregate labor supply has In the second category, Serena Ng, stantive policy analysis. important implications both for the prop- Emanuel Moench, and Simon Potter, in Modern models of the labor mar- agation of shocks in business cycle models “Dynamic Hierarchical Factor Models,” ket stress the underlying dynamics in job and for assessing the implications of fiscal develop and apply a procedure that and worker flows. High-quality data on policy instruments, such as tax and trans- allows a hierarchy across cross-section these flows is central to developing bet- fer programs. Work by Richard Rogerson units prior to estimation; this is natural, ter models of these processes and assess- and Johanna Wallenius (13017) argues for example, in applications with global, ing their consequences for a variety of that there is no inconsistency. They pres- country, and regional factors. In real- substantive and policy issues. Therefore, ent a model of life- cycle labor supply in time forecasting of real activity, Elena this group has always emphasized the which standard procedures used to infer Andreou, Andros Kourtellos, and Eric analysis of new datasets that can shed elasticities using micro data would find a Ghysels, in “Should Macroeconomic additional light on the empirical prop- small elasticity even though the aggregate Forecasters Look at High-Frequency erties of these flows. A recent exam- elasticity is large. Central to this finding Financial Data?” show that quarterly ple of this is the work of Steven Davis, is the fact that individuals adjust their forecasts improve if monthly data are Jason Faberman, and John Haltiwanger, lifetime labor supply along two margins: used. “The Establishment-Level Behavior of how much to work while employed, and Vacancies and Hiring.” Recent models what fraction of their lives to spend in Methods and Application for of labor market flows stress the role of employment. An important implication Dynamic Equilibrium Models vacancy creation in understanding labor of the analysis is that tax and transfer pol- – Jesus Fernandez-Villaverde market outcomes, and this is the first icies generate large responses in aggregate paper to provide systematic evidence on hours worked. and Frank Schorfheide, Leaders the relationship between vacancy posting The dynamic equilibrium group con- and hiring. The paper uses data from the Forecasting and Empirical ducts research on a range of subjects recent JOLTS dataset and the facts that Methods in Macroeconomics related to the construction, computation, it presents will play a key role in guiding and Finance – Mark W. Watson estimation, and evaluation of dynamic the development and calibration of mod- models and their applications in empiri- els of labor market dynamics. and Kenneth D. West, Leaders cal research. These types of models have Understanding the nature and causes The forecasting and methods group become one of the main workhorses of of labor market fluctuations associated focuses on the development and assess- modern macroeconomics and related with business cycles remains a key issue ment of econometric methods for use in fields such as finance. Sophisticated in economics, and research on this issue empirical macroeconomics and finance, empirical analysis based on dynamic has always featured prominently in the placing special emphasis on problems of equilibrium models has produced novel group’s meetings. A recent example is my prediction. It meets jointly with a group substantive findings. An increasing num- paper, “Reconciling Cyclical Movements on forecasting under the Committee ber of policy making institutions, includ- in the Marginal Value of Time and the on and Mathematical ing the Federal Reserve Board and many Marginal Product of Labor,” which shows Economics umbrella, with support from central banks including the European that a standard the National Science Foundation. , are actively formulating appended to capture labor market fric- Group meetings tend to involve two and estimating DSGE models for pol- tions, in the spirit of work pioneered by types of papers: one type with models or icy analysis and forecasting. Many of Diamond, Mortensen, and Pissarides, can forecasts of one or more variables, using the group’s activities are aimed at creat- reconcile observed labor market fluctua- novel or technically advanced methods; a ing bridges of communication and coop- tions in a framework where all bilateral second type in which the authors develop eration between pure macroeconomics gains from trade are realized. It does not and evaluate a new methodology for esti- researchers, time-series econometricians, follow that fluctuations are optimal from mation, inference, or prediction. Many of and central bank staff.

 NBER Reporter • 2010 Number 1 One active area of research is the retic model of Finland’s depression based voter. Now, she was an older, middle- incorporation of time variation into on the very large trade relationship with aged urban resident who favored the the parameterization of DSGE models. the USSR that collapsed following the imposition of a social security system. Time-varying parameters can be used, end of the Soviet Union. They show how for instance, to capture changes in mon- this shock temporarily reduced output, Aggregate Implications of etary policy over the post-war period. as the production inputs from this sec- Microeconomic Consumption Roger Farmer, Daniel Waggoner, and tor were not easily reallocated to other Behavior – , Tao Zha (12965) develop and apply sectors, and then show how this shock tools to solve mod- was propagated for many years by labor Christopher Carroll, and José els with regime-switching coefficients. market rigidities that prevented wages Víctor Ríos Rull, Leaders Vasco Curdia and Ricardo Reis (15774) from declining and that kept unemploy- Research in this group ranges from examine to what extent the conclusions ment high. empirical studies using microeconomic derived from estimated DSGE models, Another paper that integrates mod- data to theoretical analyses of dynamic for instance with respect to the sources of ern approaches to modeling with a long- stochastic general equilibrium models business cycles, are sensitive to assump- standing question of historical interest is with uninsurable idiosyncratic risk. At tions about the driving forces of macro by Matthias Doepke, Moshe Hazan, and the 2009 Summer Institute, the group fluctuations. Yushiy Maoz (13707). They develop a dedicated an entire day to a workshop Martin Uribe and Stephanie Schmitt- theory of the post-war baby boom based on the Consumer Expenditure Survey, Grohe (14215) study the role of news on the increased demand for female organized in collaboration with the (or anticipated) shocks for business cycle labor during the war, using a model Conference on Research on Income and fluctuations. Because direct information with endogenous fertility and labor force Wealth (CRIW). The event attracted about the agents’ information sets is not participation. The theory implies that a large number of academics and users available, this information needs to be women who worked in the war accumu- of the CEX, as well as a delegation extracted in an efficient manner from the lated important work experience which from the Bureau of Labor , and auto-covariance properties of observable led to higher wages and also a persistent included discussions of “Evolution and macroeconomic variables. increase in labor force participation after Change in the Consumer Expenditure the war, resulting in that cohort delaying Surveys: Adapting Methodologies Macroeconomics across Time births. In contrast, the theory predicts to Meet Changing Needs,” by Karen and Space – Jeremy Greenwood that younger women will tend to have Goldenberg and Jay Ryan, and “Strengths and Lee Ohanian, Leaders children earlier. The quantitative analy- and Weaknesses of the CE from a BLS sis generates a substantial baby boom, Perspective,” by Thesia Garner and This group uses modern dynamic followed by a baby bust, simply reflect- William Passero. The panel discussion theory to investigate long-standing ques- ing the one-time wartime increase in the afterwards included NBER President tions of substantive historical interest. demand for female labor. The theory’s Jim Poterba with Barry Bosworth, Chris Research presented at these meetings predictions are consistent with differ- Carroll, Stephen Landfeld, and Jonathan includes analyses of great depressions, ences in the timing of births across coun- Parker. The workshop also included three industrial revolutions, the diffusion of tries that differed with respect to the rel- methodological papers on consumption new technologies, secular shifts in hours ative increases in their wartime demand measures: “Survey Instruments and the worked and leisure, long-run trends in for female labor in the 1940s. Reports of Consumption Expenditures: marriage, women’s labor supply, and fer- Betsy Caucutt, Thomas Cooley, and Evidence from the Consumer tility, the connection between the forma- Nezih Guner (12854) undertake an anal- Expenditure Surveys,” by Erich Battistin tion and dissolution of institutions and ysis of the rise of social security during and Mario Padula; “Methodological the economy, the rise in urbanization; the beginning of the twentieth century. Innovations in Collecting Spending international trade and capital flows, and They argue that the rise of such programs Data: The HRS Consumption and the growth and location of business. in the West is linked to the decline of Activities Mail Survey,” by Mike Hurd Yuriy Gorodnichenko, Enrique the agrarian economy and the rise of the and Susann Rohwedder; and “Five Mendoza, and Linda Tesar (14874) chal- industrial one. In decades past, the rural Decades of Consumption and Income lenge the standard view that Finland’s population did not favor social security. Poverty” (14827), by Bruce Meyer and depression of the 1990s was caused by The median voter was a middle-aged James Sullivan. The current shortcom- a banking crisis. Instead, they show that person who earned a lot of his income ings of the CEX were discussed exten- the depression began before the crisis, from land. With industrialization, the sively, with an eye to possible changes and its inception coincided with the value of rural land declined. The popu- and innovations that would improve the breakup of the former Soviet Union. lation shifted from the countryside to quality of the consumption measures Their paper develops a quantitative theo- the city. This led to a shift in the median currently available. The active participa-

NBER Reporter • 2010 Number 1 5 tion of the BLS delegation was particu- factors in accounting for the remark- in Africa”); , Davide larly welcome. able transformation of the world income Ticchi, and Andrea Vindigni (12748); Several papers presented to the group distribution over the last two centuries, and Daron Acemoglu, James Robinson, provided evidence on income processes: as well as in the sharp rise in inequality and Rafael Santos (15578). With a for example, “Changes in the Distribution within countries during recent decades. shorter-run perspective, the main ques- of Income Volatility,” by Shane Jensen The groups’ work is organized along tions explored by the group centered and Stephen Shore; “RIP to HIP: The three main avenues of research. around: 1) the optimal forms and levels Data Reject Heterogeneous Labor The first line focuses on deep-rooted of redistribution and social insurance, Income Profiles,” by Dmytro Hryshko; determinants of the growth process and for example, and Ivan “Semiparametric Characterizations of comparative economic development Werning (11408), Giovanni Violante Income Dynamics,” by James Feigenbaum throughout the course of history, and and Nicola Pavoni (“Optimal Welfare-to- and Geng Li; and “Wages over the up to the modern era. These include: Work Programs”), and Jess Benhabib and Business Cycle: Spot Markets?” by 1) geographical factors, such as differ- Alberto Bisin (14730); 2) the political- Marcus Hagedorn and Iourii Manovskii. ences in land endowments and access economy mechanisms and belief dynam- Another set looked at the topical issues routes, which were shown to generate ics that can explain why actually observed of housing, mortgage markets, and bank- permanent differences in both income policies are often so different, for exam- ruptcy, including “Mortgage Innovation and ethnolinguistic heterogeneity, by ple, Rodney Ramcharan (“Inequality and the Foreclosure Boom,” by Dean Stelios Michalopoulos (“The Origins of and Redistribution: Evidence from Corbae and Erwan Quintin; “Housing Ethnolinguistic Diversity”) and Louis US Counties and States, 1890-1930”), and Debt over the Life Cycle and over Putterman and David Weil (14448); 2) Dietrich Vollrath (“Inequality, Property the Business Cycle,” by Matteo Iacoviello long-run consequences of major histori- Taxes, and Public Debt: The United and Marina Pavan; “Bankruptcy and cal events, such as slavery, by Nils-Petter States, 1880–1930”), Roland Benabou Debt Portfolios,” by Thomas Hintermaier Lagerlof (“Slavery and Other Property (13907), Erzo Luttmer and Monica and Winfried Koeniger; “Access to Rights”) and Nathan Nunn (13367), Singhal (14268), Emmanuel Farhi and Credit after Bankruptcy: Does it Pay and colonization and the industrial rev- Ivan Werning (“The To Be a Deadbeat?” by Ethan Cohen- olution, by Carol Shiue and Wolfgang of Nonlinear Capital Taxation,”), and Cole, Burcu Duygan-Bump, and Judit Keller (10778); 3) initial stocks of sci- Benjamin Olken and Monica Singhal Montoriol-Garriga; and “ entific knowledge, by Diego Comin, (15221). Borrowing after Personal Bankruptcy,” William Easterly, and Erick Gong The group’s third main line of research by Song Han and Geng Li . Others con- (12657), and factors affecting the subse- aims to: 1) identify the main market and sidered different types of and quent pace of innovation, such as the lev- non-market channels through which the other life-cycle decisions such as college els of diversity and cooperation within a distributions of income, human capi- enrollment, entrepreneurship, and dis- society, by Quamrul Ashraf and Oded tal, and financial assets affect aggregate ability risk, including “Insuring College Galor (“Human Genetic Diversity and economic performance; and 2) bring to Failure Risk,” by Satyajit Chatterjee Comparative Economic Development”), light the key determinants of the rise in and Felicia Ionescu; “Health Insurance or the attitudes of different political and inequality experienced by most coun- and Entrepreneurship,” by Vincenzo religious groups towards the diffusion of tries over the last quarter-century. On Quadrini; and “Disability Risk, Disability knowledge, by Roland Bénabou, Davide the markets side, the papers have docu- Insurance and Life Cycle Behavior,” by Ticchi, and Andrea Vindigni (“The mented the impacts on wages levels and Hamish Low and Luigi Pistaferri. Political Economy of Science, Religion, income risk of: sectorial shifts in labor and Growth”). demand, for example, Francisco Buera Income Distribution and The second theme is the role of and Joseph Kaboski (14822); inter- Macroeconomics – Daron political institutions and social conflict national migration, for example, Jess Acemoglu, Roland Benabou, in determining cross-country differences Benhabib and Boyan Jovanovic (12871); in income per capita. From a long-term and globalization, for example, Xavier and Oded Galor, Leaders perspective, a key issue is: what makes Gabaix and (12365), This group explores a wide range institutions so persistent, even when they and Thomas Philippon and Ariell Reshef of issues related to the sources and con- have very detrimental economic effects, (14644). Considerable attention also sequences of inequality at the national as in the case of entrenched elites, dic- was devoted to credit market imperfec- and international levels. Much of its tatorships, or weak, failed states? This is tions as impediments to educational or discussions have centered on the inter- addressed in studies by Daron Acemoglu entrepreneurial investments, and to how play of markets, technological change, and James Robinson (12108); Nicola the human-capital promoting or retard- trade, and redistributive policies with Gennaioli and Ilia Rainer (“The Modern ing nature of institutions and policies geographical, institutional, and cultural Impact of Pre-Colonial Centralization (child labor regulation, and the availabil-

 NBER Reporter • 2010 Number 1 ity and quality of public education) is - fuel cells and electric cars. They find that shaped by the distribution of ownership Charles I. Jones and Peter achieving optimal growth without an of production factors and the of J. Klenow, Leaders environmental catastrophe often involves landed aristocracies or industrial elites. not only input taxes (such as a carbon Examples include Raghuram Rajan and The growth group focuses on differ- tax) but also efforts to direct technical Rodney Ramchandran (14347), and ences in income across countries, firm- change through research subsidies or Oded Galor, Omer Moav, and Dietrich level productivity growth, and techni- profit taxes. When inputs are sufficiently Vollrath (“Inequality in Landownership, cal progress over time, as illustrated by substitutable, such subsidies or taxes can the Emergence of Human-Capital the following papers: Simon Johnson, be temporary. Promoting Institutions, and the Great William Larson, Chris Papageorgiou, and Mark Aguiar and Manuel Amador Divergence”). On the non-market side, Arvind Subramanian (15455) study how (15194) document that high-growth a number of papers have documented revisions to the Penn World Tables—one countries tend to accumulate official and analyzed the role of family deci- of the most widely-used datasets in the foreign assets, but not private net foreign sions (fertility, intra-household bar- literature—affect our understanding of assets. Their explanation: the govern- gaining) and the powerful influence of economic growth. They document that ment in power has a bias toward current social networks, such as in “Traditional in the move to the most recent version, consumption (which it can direct while Institutions Meet the Modern World: the revision to the annual growth rate it is temporarily in power), and cannot Caste, Gender, and Schooling Choice of a country had a standard deviation commit the future government to a low in a Globalizing Economy,” by Kaivan of 5.4 percent, much greater than the tax rate on capital. Reforms that reduce Munshi and Mark Rosenzweig. In partic- average growth rate itself of 1.5 percent. these political economy and contracting ular, changing patterns of gender inequal- Remarkably, the revision to the average frictions result in less government debt, ity or parental preferences for educated 30-year growth rate had a standard devi- and therefore less temptation to tax cap- offspring reflect a combination of mar- ation of only 1.1 percent. ital— but only gradually over time. So ket and technological forces with slow- Daron Acemoglu, Philippe Aghion, growth proceeds as the tax on capital moving cultural attributes and gradual Leonardo Bursztyn, and David Hemous slowly falls and official net foreign assets adaptation of preferences to economic (15451) examine theoretically how tech- rise. Their theory implies that uncondi- incentives. An example of this work is nological change and environmental tional foreign aid does not boost growth Raquel Fernández, Alessandra Fogli, and problems can interact. In particular, they even temporarily, and that unconditional Claudia Olivetti (“Mothers and Sons: study situations in which researchers can debt relief lifts growth only temporarily. Preference Formation and Female Labor choose to work on improving “dirty” Force Dynamics”), and Matthias Doepke technologies like the internal combus- and Fabrizio Zillibotti (12917). tion engine, or “clean” technologies like

NBER Reporter • 2010 Number 1 7 Research Summaries

The Credit Rating Crisis

Efraim Benmelech*

The credit crisis of 2008–9 was in classes of securities, known as tranches, bonds, making them an attractive invest- many ways a credit rating crisis. Structured with prioritized claims against the collat- ment for rating-constrained investors. finance products, such as mortgage-backed eral pool. In a tranched deal, some inves- securities, accounted for over $11 trillion tors hold more senior claims than oth- The Collapse of Credit dollars worth of outstanding U.S. debt. ers. In the event of default, the losses are Ratings during the Crisis The lion’s share of these securities were absorbed by the lowest priority class of highly rated -- for example, more than half investors before the higher priority inves- Jennifer Dlugosz and I examine of the structured finance securities rated tors are affected. Naturally, the process of the rating performance of all structured by Moody’s carried a AAA rating, the pooling and tranching creates some secu- finance securities issued in the period highest possible credit rating that is typi- rities that are riskier than the average asset 1990–2008.1 We show that the deterio- cally reserved for securities deemed to be in the collateral pool and some that are ration in the creditworthiness of struc- nearly riskless. In 2007 and 2008, the cred- safer. tured finance products began in 2007. itworthiness of structured finance secu- The structured finance market is a There were more than 8,000 downgrades rities deteriorated dramatically: 36,346 “rated” market — the vast majority of in 2007 — an eightfold increase over the Moody’s rated tranches — tranches are a securities issued are rated by at least one previous year. In the first three quarters class of security with a prioritized claim rating agency. Given the complexity of of 2008, there were 36,880 downgrades, against the collateral pool — were down- the underlying collateral and the asym- overshadowing the cumulative number of graded, and nearly one third of the down- metric information between issuers of downgrades since 1990. Downgrades were graded tranches bore the AAA rating. In these securities and investors, credit rat- not only more common in 2007 and 2008 November 2007 alone, there were 2,000 ings serve as a focal point for the quality but also more severe. The average down- downgrades and many were severe: 500 of the securities. grade was 4.7 notches in 2007 and 5.8 tranches were downgraded more than 10 The interaction between credit rat- notches in 2008, compared to 2.5 notches notches. The ensuing confusion about the ings and financial regulation was an in both 2005 and 2006. Meanwhile, true value of these complicated securi- important driver of growth in securi- upgrades were less frequent and smaller in ties, and the extent of exposure by finan- tization markets. The extensive use of magnitude on average. cial institutions, incited a credit crunch credit ratings in the regulation of finan- Many of the downgrades in 2007 and with effects beyond subprime mortgage- cial institutions created a natural clien- 2008 were tied to collateralized debt obli- related investments. tele for highly rated — and in particular gations (CDOs) backed by assets that AAA-rated — securities. Minimum capi- are themselves structured (ABS CDOs). The Role of Credit Ratings in tal requirements at banks, insurance com- While initially ABS CDOs were diver- the Process of Securitization panies, and broker-dealers, depend on sified and collateralized by assets from the credit ratings of the assets on their a variety of sectors, they became more Securitization is a broad term that balance sheets. Pension funds also face concentrated over time. Since 2003 the encompasses several kinds of structures rating-based investment restrictions. The primary asset classes backing them were by which loans, mortgages, or other debt process of securitization enabled these subprime and non-conforming residential instruments are packaged into securities. investors to participate in asset classes mortgage-backed securities. Many of these The essence of securitization is pooling from which they would normally be pro- ABS CDOs were downgraded during the and tranching. After pooling a set of hibited. For example, an investor required crisis, leading to large selloffs of these secu- assets, the issuer creates several different to hold investment-grade securities could rities and losses at financial institutions. not directly invest in B-rated corporate Dlugosz and I show that in early 2009, * Benmelech is a Faculty Research Fellow loans but could invest in a AAA-rated financial institutions around the world in the NBER’s Programs on Corporate CLO security backed by a pool of B-rated wrote down more than half a trillion dol- Finance and Development of the American corporate loans. Structured finance secu- lars, out of which more than 200 billion Economy and is an associate professor of economics at . His pro- rities typically yield a higher interest rate dollars resulted from exposure to ABS file appears later in this issue. than similarly rated corporate or sovereign CDOs that were severely downgraded.

 NBER Reporter • 2010 Number 1 FigureFigure 11 that the tranche will be downgraded within NumberNu ofmb Downgradeser of Downgrades vs. v s.Upgrades Upgrades ofof St Structuredructured Finance Finance Products Products a year after issuance is higher for tranches rated by only one rating agency. Moreover, tranches rated by only one agency are not 40.000 only more likely to be downgraded but also 35.000 experience more severe drops in creditwor- thiness when compared to tranches that 30.000 are rated by more than one agency. Our 25.000 results also provide suggestive evidence that the rating model used by S&P may 20.000 have been inflated and that rating shop- 15.000 ping may have played a role in the collapse of the structured finance market. Industry 10.000 experts questioned the S&P rating model 5.000 and some of its underlying assumptions. For example, on December 19, 2005, S&P 8 put 35 tranches from 18 different deals on negative watch following an update of its 1/1/831/1/841/1/851/1/861/1/871/1/881/1/891/1/901/1/911/1/921/1/931/1/941/1/951/1/961/1/971/1/981/1/991/1/001/1/011/1/021/1/031/1/041/1/051/1/061/1/07 1/1/200 rating criteria. Out of the 18 deals, 14 car- DNGn UPGn ried ratings only from S&P — suggesting that the issuers involved in these deals may Why Did the Ratings Collapse? However there is little empirical evidence have “shopped” for their rating. testing the rating shopping hypothesis. B. Rating Alchemy and the Failure of the What led to the collapse of structured Dlugosz and I test whether “rating Black Box finance credit ratings? Were the initial shopping” led to inflated ratings of ABS credit ratings assigned to securitized bonds CDOs. We examine whether the number In “The Alchemy of CDO Credit too high? Or was it the unforeseen eco- of agencies that rate a security can predict Rating,” Dlugosz and I study the underly- nomic downturn and nationwide decline the probability of subsequent downgrades. ing collateral of CDOs secured by corpo- in the housing market that led to the dete- Structured finance tranches are rated by rate loans.3 We find a striking difference rioration in credit quality of these securi- Moody’s and S&P, and to a lesser degree by between the credit rating structure of the ties? Put differently, did the credit rating Fitch, hence the number of raters can range CDO and the credit quality of the collat- agencies make honest mistakes in estimat- from 0 to 3. We find that the probability eral pool. ing default risk, or did they assign inflated Figure 2: CDO vs. Underlying Collateral Credit Ratings credit ratings to risky securities? Figure 2 CDOCD OCredit credi tRating rating vs.vs .Underlying Collateral r aCollateralting (3,91 2Credit tranc hRatinges) A. Rating Shopping 250000000 (3,912 Tranches) Rating shopping occurs when an issuer chooses the rating agency that will assign CDO Rating the highest rating or that has the most lax criteria for obtaining a desired rating. Most 200000000 Collateral Rating rating agencies operate under an issuer-pays revenue model where issuers solicit and pay for their own bond ratings. If reputational 150000000 concerns are not strong enough to disci- pline rating agencies, the issuer-pays model can result in inflated ratings. Rating shop- ping concerns are particularly pronounced 100000000 for structured finance bonds — as opposed to corporate or municipal bonds— because of the lack of public information on these 50000000 securities. Recent research has developed models in which rating agencies trade- off the value from inflating its client’s rat- 0 ing against an expected reputation cost.2 AAA AA+ AAAA- A+ AA-BBB+ BBB BBB- BB+ BBBB- B+ BB- CCC+ NR

NBER Reporter • 2010 Number 1 9

1 While the average credit quality of the the issuers had access to the rating model that most issuers were using the model loans being securitized is around B, more of the credit rating agencies. According to to target the highest possible credit rat- than 70 percent of the dollar amount of this explanation, the rating agencies pro- ing at the lowest cost. If there were mis- CDOs was initially rated as AAA. For vided issuers with their model, and issuers takes embedded in these credit rating this mismatch to be appropriate, it would structured their CDOs accordingly. black boxes — those were probably com- need to be the case that a pool of assets Anecdotal evidence suggests that pounded over the trillions of dollars that with an average credit quality of B be able the rating agencies models indeed were were deliberately structured by CDO issu- to withstand enough losses such that 70 known to CDO issuers and were pro- ers using this model. percent of its liabilities will still remain vided to them directly by the rating agen- default-risk free. cies. For example, the CDO Evaluator 1 E. Benmelech and J. Dlugosz, “The We also document a large degree Manual — an optimization tool used by Credit Rating Crisis,” NBER Working of uniformity in CDO structures. The S&P — enabled issuers to achieve the Paper No. 15045, June 2009, and NBER CDOs that we study have very similar highest possible rating at the lowest pos- Macro Annual, 2009, forthcoming. liability structures and very similar collat- sible cost. The model, for example, would 2 P. Bolton, X. Freixas, and J. Shapiro, eral pools. There is little variation in the indicate to issuers when they had “excess “The Credit Ratings Game,” NBER quality of the underlying collateral across collateral” and would advise issuers on: Working Paper No. 14712, February different issuers; while we study around “the percentage of assets notional needs 2009; E. Damiano, H. Li, and W. 4,000 tranches they all seem to conform to be eliminated (added) in order for the Suen, “Credible Ratings,” Theoretical to the same CDO model. What caused transaction to provide just enough sup- Economics, 3 (September 2008), pp. the uniformity in CDO structures? port at a given rating level.” 325–65; F. Sangiorgi, J. Sokobin, and C. One potential answer is that CDO Thus, the rating agencies may have Spatt, “Credit Ratings Shopping, Selection issuers just follow market convention: served not just as monitors and evalua- and the Equilibrium Structure of Ratings,” if some CDO structures have been per- tors of existing structures, but rather as NBER Working Paper No. 14712, ceived as desirable, then other issuers will architects and creators of new securities. November 2008. follow the same convention. However, Providing such models to issuers poten- 3 E. Benmelech and J. Dlugosz, “The while this would explain the uniformity tially led to the creation of CDOs with Alchemy of CDO Credit Ratings,” NBER in deal structures (that is, the amount the minimum possible collateral needed Working Paper No. 14878, April 2009, allocated to each category), what explains to obtain an AAA credit rating. The uni- and Journal of , the uniformity of the underlying collat- formity across CDOs and the low credit 56(5) (July 2009), pp. 617–34. eral? An alternative explanation is that ratings of the underlying collateral suggest

Measuring Returns to Healthcare

Joseph Doyle*

Healthcare spending in the are not associated with better measures particular level of care. With heteroge- United States comprises 16 percent of of health-outcome.1 However, evidence neous returns, greater care is likely pro- GDP — nearly 80 percent more than in from time series and panel data suggest vided to those with the highest returns. the median OECD country and 45 per- that higher healthcare spending has gen- This would tend to bias results toward cent above that of the second-highest erated benefits that, when converted to finding beneficial effects of treatment. At spending nation, France. Across countries, dollar magnitudes in various ways, appear the same time, patients with the highest and across markets within the United to exceed their costs.2 Of course, the type returns may be those in relatively poor States, the vast disparities in spending of variation in treatment intensity differs health. Indeed, hospitalized patients who across these two types of comparisons, but receive more care are much more likely to * Doyle is a Faculty Research Fellow in the NBER’s Program on Aging and the Alfred the question remains: are the returns to die in the hospital, even after controlling Henry and Jean Morrison Hayes Career healthcare large or small? for a host of observable characteristics: Development Associate Professor of Applied Estimating such returns can be con- more care is provided to patients in worse Economics at MIT’s Sloan School. His pro- founded because medical providers health. With the raw correlation between file appears later in this issue. attempt to provide each patient with a treatment and health seemingly negative,

10 NBER Reporter • 2010 Number 1 estimating returns is an uphill battle. ity rate than newborns with birth weights tional night of supervision, we conclude In a series of research studies, my co- just above this cutoff, even though mor- that in this instance the insurance man- authors and I have explored natural exper- tality risk tends to decrease with birth- dates result in moral hazard: greater use iments that can shed some light on the weight. This constitutes a relatively large of hospital resources with little benefit returns to healthcare. Most of these papers reduction when compared to a mortality in terms of major health problems. This consider conditions where selection bias rate of 5.5 percent just above 1500 grams. is consistent with efforts by insurers to associated with admission into the hos- We conclude that the additional medi- reduce stays to one night in care. pital is less of an issue: childbirth — the cal attention afforded to very low birth- most common reason for hospitalization weight newborns is highly cost effective Evidence from Health in the United States — and emergency at lives. Emergencies admissions. This research summary briefly The same project shows that hospi- describes this work and points to future tals with the most state-of-the-art neo- As noted earlier, there is a large work in the area. natal intensive care units (NICUs) are amount of regional variation in health- less likely to use the threshold, whereas care spending within the United States. Evidence from At-Risk changes in treatment and mortality are The Dartmouth Atlas of Healthcare shows Newborns found at those hospitals with lower-level that some markets spend 60 percent more or no NICUs. than others, yet survival from a heart One project, joint with Douglas attack is remarkably similar across these Almond, Amanda Kowalski, and Heidi Evidence from “Uncomplicated” areas. Is it possible that individuals in Williams, uses the idea that diagnostic Births high-spending areas are in worse health in thresholds can offer the potential to esti- ways that are difficult to control for in the mate returns to healthcare.3 If physicians In another study with Douglas comparisons? provide greater levels of care to patients Almond, we test whether a longer stay in While it is not possible to randomly falling just above a diagnostic criterion, the hospital after a birth affects the health assign patients to different healthcare then researchers can compare treatment of newborns and mothers.4 We use insur- systems, I have compared the outcomes and health outcomes for patients just ance rules that provide coverage for one of patients who are exposed to different above and below the threshold. The nature or two days in the hospital after birth, and healthcare systems not designed for them: of the variation allows us to measure mar- these days are counted as “the number of patients who are far from home when a ginal returns, which are crucial for the midnights in care.” That is, a newborn health emergency strikes.5 Patients who interpretation of whether additional care delivered at 12:05 a.m will have one more experience these health shocks may find saves lives. night of reimbursable care than an infant themselves in an area that spends a great Our work focuses on at-risk new- born a few minutes earlier. In a dataset deal on patients or in one that tends to borns on either side of the “very low of California births from 1991–2002— spend less. For example, West Palm Beach birthweight” threshold of 1500 grams including nearly 100,000 births within and Fort Lauderdale are neighboring cit- (3lbs. 5oz.) The underlying health of new- 20 minutes of midnight—we find that ies on Florida’s east coast with similar borns who weigh 1499 grams is similar to the discontinuous change in insurance lodging prices, yet Fort Lauderdale tends those weighing 1500 grams, yet the rules coverage leads to significantly longer stays to spend 30 percent more on heart attack of thumb used by physicians and hos- for those born just after midnight than patients. The idea is that these types of cit- pital protocols call for additional atten- for those born before midnight. We find ies are close demand substitutes in terms tion for newborns below the threshold. no differences in major health problems, of destinations, and they attract “close By comparing newborns on either side of summarized by hospital readmissions and substitutes” in terms of patients. the threshold, we are able to avoid some mortality, for either the infants or the Contrary to the literature that focuses of the confounding factors that usually mothers. Together with a 1997 law that on local patients, analyzing visitors to affect measurements of the returns to mandated coverage for a minimum of two Florida who have a serious heart-related health care. days, these results suggest that increases in emergency in a high-spending market We show that newborns with birth- the length of stay from 1-2 days or from results in a 20 percent lower mortality rate weights just below 1500 grams have dis- 2-3 days impose substantial costs without than for patients in low-spending areas. continuously higher hospital costs than apparent health benefits. These estimates are robust across differ- slightly heavier newborns, on the order In comparison to the findings on at- ent types of patients, including patient- of $10,000 each. When we study data risk newborns described above, this study income levels, and within groups of sim- from the census of U.S. births over twenty shows the results that apply to “uncom- ilar destinations. In addition, the results years, we find that newborns with birth plicated” deliveries. These newborns are suggest that intensive-care unit services weights just below 1500 grams have a sin- representative of the typical birth. While drive cost differences, and they appear to gle percentage-point lower infant mortal- new parents may benefit from the addi- be cost effective.

NBER Reporter • 2010 Number 1 11 The results apply to emergency care, teams.8 Further, the teams are affiliated Summary and specifically to a set of patients healthy with one of two academic institutions: enough to travel. To the extent that the one institution is among the top medical Measuring returns to healthcare can results may apply more broadly, it appears schools in the United States, while the be confounded by the nature of the deliv- that high-spending areas may not be as other institution is ranked lower in the ery: more care is provided to patients wasteful as the previous cross-section quality distribution. Because of the ran- in worse health. My research has inves- results suggest. domization, patients treated by the two tigated instances when additional care teams have identical observable charac- is less likely to be related to underlying The Consequences of teristics. Further, both teams have access patient health and found large returns for Being Uninsured to a single set of facilities and ancillary at-risk newborns and patients receiving staff, because care is located in the same emergency care, but small returns for lon- An earlier study also considers hospital. ger postpartum hospital stays among typ- health shocks by comparing patients We show that across common con- ical births. Future work should continue with and without health insurance fol- ditions, the more-prestigious teams pro- to consider additional types of patients lowing a severe automobile accident.6 vide care that is 10–25 percent less costly and treatments, begin to consider chronic This is a sudden health emergency when than the less-prestigious ones. Health conditions, and investigate the interac- the individuals have no choice but to outcomes are not related to the phy- tion between physician quality and the visit the hospital. The analysis uses a sician-team assignment, and the esti- cost of care. dataset originally intended for highway- mates are precise: they (statistically) rule safety research linking hospital discharge out better health outcomes associated 1 See, for example, E. Fisher, D. records with police reports. I find that with assignment to the more-prestigious Wennberg, T. Stukel, D. Gottlieb, F. the uninsured receive 20 percent less team. Further investigating the source Lucas, and E. Pinder, “Implications of care and have a significantly higher mor- of the treatment differences, the results Regional Variations in Medicare spend- tality rate. are consistent with the ability of phy- ing, Part 2: health outcomes and satisfac- Another innovation in this project sicians in the lower-ranked institution tion with care,” in Annals of Internal is the comparison group available in the to substitute diagnostic tests and spe- Medicine, 138(4) (2003), pp. 288–98; rich data source: individuals who have cialist consultations for the faster judg- and A.M. Garber and J. S. Skinner, health insurance but do not have auto- ments of physicians from the top-ranked “Is American Healthcare Uniquely mobile insurance according to the police institution. Inefficient?” Journal of Economic report. These patients are quite similar The comparison is among only two Perspectives, 22(4) (2008), pp. 27–50. to those who do not have health insur- institutions, but the results suggest a 2 D. Cutler, A. Rosen, and S. Vijan, ance, and the results are similar when the number of implications. First, local-area “The Value of Medical Spending in the analysis is restricted to these two groups. variation in care can be substantial, even United States, 1960–2000,” New England This is one of the few studies to exam- after controlling for patient characteris- Journal of Medicine, 355 (2006), pp. ine the potential effects of health insur- tics. Second, inequality in access to high- 920–27; and K.M. Murphy and R. Topel, ance directly on health outcomes.7 The quality physicians may lead to differences “The Economic Value of Medical Research” results again suggest that greater treat- in the use of specialists and testing, but in Measuring the Gains from Medical ment intensity yields health benefits for not to health disparities. Third, a relax- Research: An Economic Approach, trauma care. ation of accreditation standards may not K.M. Murphy and R. Topel, eds. Chicago: adversely affect the quality of care, but it Press, 2003. Returns to Physician Quality may raise operating costs. Fourth, while 3 D. Almond, J. Doyle, A. Kowalski, previous studies have found that high- and H. Williams, “Estimating Marginal Some physicians provide much more cost areas are associated with lower-qual- Returns to Medical Care: Evidence from care to patients than others, which is ity care, a greater reliance on specialists, Care for At-Risk Newborns,” NBER a major source of variation within and and little difference in health outcomes, Working Paper No. 14522, December across cities. Patients are referred or and interpreted this as evidence of waste- 2008, and Quarterly Journal of choose their physicians, however, and it ful spending, these results suggest the Economics, forthcoming. is not clear how much of the variance possibility of an alternative interpreta- 4 D. Almond and J. Doyle, “After in care can be explained by differences tion. Areas with lower-quality provid- Midnight: A Regression Discontinuity among the patients themselves. ers may require greater treatment inten- Design in Length of Postpartum Hospital A project with Todd Wagner and sity and the use of specialists in order to Stays,” NBER Working Paper No. 13877, Steven Ewer studies a setting where over achieve outcomes on par with areas with March 2008. 30,000 patients in a large, urban hospi- higher-quality providers. This appears to 5 J. Doyle, “Returns to Local-Area tal were randomly assigned to physician be a fruitful area for future research. Health Care Spending: Using Health

12 NBER Reporter • 2010 Number 1 Shocks to Patients Far from Home,” NBER 2005, and Review of Economics and 8 J. Doyle, S. Ewer, and T. Wagner, Working Paper No. 13301, August 2007. Statistics, 87(2) (2005) pp. 256–70. “Returns to Physician Human Capital: 6 J. Doyle, “Health Insurance, 7 Institute of Medicine, Hidden Costs, Analyzing Patients Randomized to Treatment, and Outcomes: Using Auto Value Lost: Uninsurance in America, Physician Teams,” NBER Working Paper Accidents as Health Shocks,” NBER Washington D.C: National Academies No. 14174, July 2008. Working Paper No. 11099, February Press, 2003, p. 141.

New Dynamic Public Finance

Mikhail Golosov and Aleh Tsyvinski*

Many problems in public finance and research in New Dynamic Public Finance worker believes about his future decisions macroeconomics, such as the taxation of is directed at understanding how one can regarding whether to claim disability will capital or the provision of Social Security design social insurance or redistribution affect his labor supply and saving choices and disability insurance, are dynamic in systems that achieve distributional objec- while young. If he believes that he is very nature. The individuals who pay taxes or tives while ensuring necessary incentives unlikely to apply for and receive disability claim benefits are long-lived. The tax and to provide effort or work throughout benefits in the future, for example, then benefit policies in place in one period can individuals’ lives. he is likely to save more in his younger affect their behavior in other periods. For When designing policy in dynamic years. Similarly, an individual’s past saving example, increasing retirement benefits settings, it is important to take account choices may affect his willingness to fake may affect individuals’ behavior and sav- of the random shocks that confront indi- disability and to claim disability benefits ings in earlier years. viduals over time. These may be shocks at an older age. The New Dynamic Public Finance to earnings capacity, or health status, or We highlight two sets of findings that literature extends the traditional literature financial market returns. In each case, have emerged from our own research, and on optimal income tax and optimal pro- individual taxpayers or program benefi- that of other scholars, in the area of New gram design, much of which focused on ciaries are likely to have more information Dynamic Public Finance. First, the tax settings in which individuals made deci- on their circumstances than the govern- treatment of saving is a key policy instru- sions in a single period, to focus on such ment does. The government cannot easily ment for affecting dynamic incentives, dynamic settings.1 While the same effi- observe health status or hourly wage rates, and policymakers may need to consider ciency-equity tradeoffs that apply in sin- and it cannot condition its tax or social its impact on a variety of labor market gle-period settings also arise in dynamic insurance rules on them. The policy chal- incentives. Second, the availability of pri- settings, there are additional tradeoffs lenge is to preserve incentives for individ- vate insurance against various risks may between providing insurance and pre- ual work and saving while still raising the have an important effect on the way that serving incentives. When individuals live necessary funds for redistribution or gov- government tax and transfer programs for many periods, they may experience ernment revenue. influence household behavior. both favorable and unfavorable “shocks” Consider a simple example of a as they age: unexpected increases in their dynamic social insurance problem: an Tax Policy toward Saving Can wages, or the early onset of a disability, for able young worker may become disabled Affect Dynamic Incentives example. Public policy can provide insur- later in life. It may be possible to claim ance against adverse shocks, but it may do to be disabled even if one is able to work. In our work with Narayana so at some cost in incentives. Much of the For example, one can pretend to be suf- Kocherlakota, we develop an important fering from back pain which is very dif- insight about policy design in dynamic * Golosov and Tsyvinski are Research ficult to verify. The fundamental chal- settings. When agents receive random Associates in the NBER’s Program on Public lenge in designing a disability insurance shocks to their earnings capacity, one fea- Economics and Professors of Economics at system is to provide adequate transfers to ture of government policies that achieves a Yale University. Their profiles appear later truly disabled workers while discourag- Pareto-efficient allocation— one in which in this issue. ing fake disability applications. What a no one could be made better off with-

NBER Reporter • 2010 Number 1 13 out making someone else worse off — is a take into account agents’ saving deci- ance and the market insurance are perfect tax that discourages .2 This result sions. Building on work by Christophe substitutes. holds quite generally, as long as there is Chamley and Ken Judd 4, we know that Our research suggests that relatively some uncertainty about future individual efficient long-run policies set the tax rate specific features of the private insurance shocks. Our work on disability insurance on capital income to zero. A key differ- market, such as whether an insurer can suggests that a key feature of policies that ence between our analysis and theirs is restrict an insurance buyer to purchasing preserve incentives while achieving redis- that we allow for individuals to experi- insurance against a particular risk from tributive goals is an asset-test in which dis- ence various “shocks” over time, which only one insurer, or whether an insurer ability (or more, generally, retirement) means that insurance considerations can can monitor all of the other insurance benefits are paid only to individuals who affect the nature of the efficient policy. contracts that an individual purchases, have assets below a specified limit3. That play a key role in determining whether is, asset testing is an implicit tax on savings Interaction between Private government provision of insurance can that discourages fake applications for dis- and Public insurance lead to a more efficient allocation of risk ability insurance. More generally, in both and can improve the tradeoff between tax and social insurance settings, policies New Dynamic Public Finance places insurance and the provision of incentives. may be conditioned on the amount of central emphasis on the insurance ele- For this purpose, “insurance contracts” savings that an individual accumulates, ment of public programs, so it is no sur- should be interpreted quite broadly. For and they may be history-dependent in prise that the structure of private insur- example, an individual who saves today the sense that eligibility for benefits may ance markets is a key consideration in to prepare for adversity tomorrow can be depend on the applicants’ past actions public program design. Our work exam- thought of as purchasing insurance. and experiences. ines how the impact of various govern- The key takeaway from our work is In the disability example above, we ment transfer and insurance programs that considering what private insurance can provide an intuition for the potential depends on the other insurance options markets can and cannot do is essential to role of a tax on savings. Consider a system available to .5 In many cir- evaluating the welfare effects of increas- of disability transfers that gives a disabled cumstances, private markets can provide ing government provision of insurance. In worker $1000 per month once he or she insurance against shocks that individuals many cases, the only effect of government is classified as disabled. An able worker experience. Private insurers offer health, is crowding out of private insurance. In contemplates whether to continue work- disability, and property-casualty insur- other cases, the government may be able ing, or to claim disability next month. ance. They also offer annuities to insure to correct inefficiencies in the provision Assume for simplicity that the disabil- against longevity risk. The presence of of private insurance. It is important to ity verification process works poorly, so private competitive insurance markets remember, however, that the set of private that if he reports that he is disabled, he may significantly change the economic insurance markets is not fixed over time. will surely receive the $1000 monthly dis- effects of government policies, and the When government policy changes, the set ability payment going forward. If he does trade-off between redistribution and the of insurance contracts offered by private not fake disability, however, and claims provision of incentives. Suppose there firms may also change. Policy designers disability only if he is truly disabled, his is no government insurance against dis- should be careful about assuming that the income switches from being a certain ability shocks. One can expect then that nature of insurance arrangements offered $1000 per month on disability to a “lot- the private insurance markets will arise by the private sector might generate a tery”: $1000 per month if he is disabled, to provide insurance. That does not mean misleading account of how new govern- and a higher amount if he is able and con- that the private insurance markets will be ment social insurance programs affect the tinues to work. Someone who intends to able to provide perfect insurance — the private insurance marketplace. fake disability will prepare for that even- problem of determining who is truly dis- tuality by saving more in earlier periods, abled is still present. But it is possible, for The Way Forward because he knows that at some point he example if the key market failure is the will claim disability and his income will inability to observe true disability status, A key challenge for researchers in drop to $1000/month. A disability insur- for the private market to be able to pro- New Dynamic Public Finance is develop- ance scheme that introduces a tax on sav- vide the same degree of insurance as the ing concrete, data-based practical impli- ings, for example by paying benefits only government. If the government were to cations of theoretical models. Progress on to those with low levels of assets, will help create a public disability program in this this front is just beginning. In our work to discourage fake applicants. setting, its only effect would be to com- with Troshkin (2009), we show how tech- One of the central insights of the pletely “crowd-out” private insurance. If niques that are familiar to public finance New Dynamic Public Finance research a government provides more insurance, from the analysis of static program is that when designing a taxa- the competitive markets will provide cor- taxation models can be extended to the tion or social insurance system, one must respondingly less: the government insur- dynamic settings. Adding dynamics to the

14 NBER Reporter • 2010 Number 1 standard introduces both 1 For a survey see M. Golosov, A. in a Simple Perfect Foresight Model,” analytical challenges and greater richness Tsyvinski, and I. Werning, “New Dynamic Journal of Public Economics, Vol. 28, for the possible set of policies that might Public Finance: A User’s Guide,” in No. 1, 1985, and C. Chamley, “Optimal be implemented. It is possible, for exam- NBER Macroeconomics Annual, D. Taxation of Capital Income in General ple, to consider history-dependent poli- Acemoglu, K. Rogoff, and M. Woodford Equilibrium with Infinite Lives,” cies, (taxes or transfers that depend on eds., Cambridge, MA: MIT Press, 2006; Econometrica, Vol. 54, No. 3, 1986. past work and savings decisions), and and N. Kocherlakota, The New Dynamic 5 M. Golosov and A. Tsyvinski, dynamic incentives such as asset-testing Public Finance, “Optimal Taxation with Endogenous improve incentives and redistribution. Press, forthcoming 2010. Insurance Markets,” Quarterly Journal of Many unresolved questions lie ahead, 2 The general proof is provided in Economics, Vol. 122, No. 2, 2007. and answering them will require both M. Golosov, N. Kocherlakota, and A. 6 E. Saez, “The Desirability of a general algorithm that will allow us Tsyvinski, “Optimal Indirect and Capital Commodity Taxation Under Non-Linear to solve quantitatively a broader set of Taxation,” Review of Economic Studies, Income Taxation and Heterogeneous models and empirical work that provides Vol. 70, No. 3, 2003. Tastes,” NBER Working Paper No. 8029, realistic distributions for earnings and 3 M. Golosov and A. Tsyvinski, December 2000, and Journal of Public health shocks to individuals. It is also “Designing Optimal Disability Insurance: Economics, Vol. 83, No. 2, 2002; and P. important to bridge the gap between the A Case for Asset Testing,” NBER Working Diamond, “Optimal Income Taxation: research in this literature and the ear- Paper No. 10792, September 2004, and An Example with a U-Shaped Pattern of lier research which addressed many sim- Journal of Political Economy, Vol. 114, Optimal Marginal Tax Rates,” American ilar questions but did not incorporate No. 2, 2006. Economic Review, Vol. 88, No. 1, 1998. dynamic elements.6 4 K.L. Judd, “Redistributive Taxation

NBER Profile: Efraim Benmelech

Efraim Benmelech is a Faculty Research of financial distress. He also studies the eco- Fellow in the NBER’s Programs on Corporate nomics of terrorism. Currently, Benmelech Finance and Development of the American is analyzing the relation between financial Economy. He is also an associate professor of distress and labor relations, focusing in par- economics at Harvard University. ticular on “pension dumping,” the process of Benmelech received a B.A in economics terminating defined benefit pension plans in and an M.B.A. from the Hebrew University the face of financial distress, and on the con- at Jerusalem, and a Ph.D. in financial econom- sequences of underfunded defined-benefits ics from the University of Chicago’s Graduate pension plans for wage renegotiations. School of Business. He joined Harvard’s fac- Benmelech lives in Newton with his wife, ulty when he graduated from the University Shikma, and their four children: Machol, of Chicago in 2005. Shoham, Attar, and Millo. Benmelech’s research is mainly in the field of corporate finance, focusing on bank- ruptcy, financial contracts, and the real effects

NBER Reporter • 2010 Number 1 15 NBER Profile: Joseph Doyle

Joseph Doyle is a Faculty Research labor economics. His research focuses on Fellow in the NBER’s Aging, Children, measuring the returns to healthcare, assess- and Environmental and Energy Economics ing the role of physicians’ human capital Programs. He is also the Alfred Henry and on their treatment decisions and patients’ Jean Morrison Hayes Career Development health outcomes, and evaluating the eco- Associate Professor of Applied Economics nomics of child welfare programs, in par- at MIT’s Sloan School of Management. He ticular the effects of foster care on long- completed his B.S. at Cornell University term outcomes for children. in 1996 and his Ph.D. in economics at Doyle lives in Boston with his wife, the University of Chicago in 2002. Before Michelle, and their two sons, Jack and attending graduate school, he worked as an Michael. They enjoy digging: in the sand assistant at the Federal Reserve during the summer and in the snow dur- Bank of New York. ing the winter. Doyle’s areas of specialization are health economics, public economics, and

NBER Profile: Mikhail Golosov

Mikhail Golosov is a Research Associate a Visiting Assistant Professor at Harvard in the NBER’s Program on Public Econom­ University and the University of Chicago, and ics and a Professor of Economics at Yale a Visiting Scholar at the Einaudi Institute for University. Economics and Finance, the Federal Reserve He received his B.A. in Economics Board of Governors, the Federal Reserve and Banking from Belarus State Economic Bank of Atlanta, and the Federal Reserve University, his M.A. in Economics from Bank of Minneapolis. the University of British Columbia, and his Golosov lives in New Haven. In his spare Ph.D. in Economics from the University of time he enjoys playing tennis, horseback rid- Minnesota. ing, and traveling. Before joining Yale’s economics faculty in 2009, he taught at MIT. He has also been

NBER Profile: Aleh Tsyvinski

Aleh Tsyvinski is a Research Associate Economics and Banking. He received his in the NBER’s Programs on Economic Ph.D. in Economics from the University Fluctuations and Growth and Public of Minnesota in 2003. Before joining Yale’s Economics. He is also a Professor of economics department in 2008, he taught Economics at Yale University and Co- at the University of California, Los Angeles Director of the Macroeconomic Research and at Harvard University. Program of the Cowles Foundation for Tsyvinski’s research interests include Research in Economics at Yale. the analysis of fiscal policy and the effects Tsyvinski was born in Belarus, where of taxation. he received an undergraduate degree from the Belarus State Economic University in

16 NBER Reporter • 2010 Number 1 Conferences

Economic Research on African Development Successes

The first of three NBER conferences on “Economic Research on African Development Successes” took place in Cambridge on December 11 and 12, 2009. The conference organizers, all NBER Research Associates, were Sebastian Edwards of the University of California, Los Angeles, Simon Johnson of MIT, and David N. Weil of Brown University. Five of the research projects that were discussed at the meeting were approaching completion. They are:

• “Cape Verde and Mozambique as Development Successes in Sub-Saharan Africa” Jorge Braga de Macedo, Universidade Nova de Lisboa and NBER, and LuÍs Brites Pereira, Universidade Nova de Lisboa

• “Lesotho’s Export Performance: An African Success Story?” Lawrence Edwards, University of Cape Town, and Robert Z. Lawrence, Harvard University and NBER

• “Mauritius: African Success Story” Jeffrey Frankel, Harvard University and NBER

• “Borders or Barriers?The Impact of Borders on Agricultural Markets in West Africa (Niger, Nigeria)” Jenny C. Aker, Tufts University; Michael W. Klein, Tufts University and NBER; and Stephen O’Connell, Swarthmore College

• “The Greatest of All Improvements: Roads, Agriculture, and Economic Development in Africa” Douglas Gollin, Williams College, and Richard Rogerson, Arizona State University and NBER

Summaries of these papers, and videos of the corresponding conference presentations, may be found at: http://www.nber.org/confer/2009/ADSf09/summary.html

In addition, a number of other early-stage projects were discussed:

• “The Return to Capital for Small Retailers in Kenya” Michael Kremer, Harvard University and NBER; Jonathan Robinson, University of California, Santa Cruz; and Olga Rostapshova, Harvard University

•“Deals versus Rules: Policy Implementation Uncertainty and Why Firms Hate It” Mary Hallward-Driemeier, The , and Lant Pritchett, Harvard University

• “Family Ties, Inheritance Rights and Successful Poverty Alleviation (Ghana)” Edward Kutsoati, Tufts University, and Randall Morck, University of Alberta and NBER

• “The Financial System in Burundi: An Investigation of its Efficiency in Resource Mobilization and Allocation” Leonce Ndikumana, African Development Bank; Janvier Nkurunziza, United Nations Conference on Trade and Development (UNCTAD); and Prime Nyamoya, OGI Consulting Group, Burundi

• “An African Success: Banking in Nigeria and the Poor” Lisa Cook, Michigan State University

• “Evaluating the Effects of Large Scale Health Interventions in Developing Countries: The Zambian Malaria Initiative” , Harvard University and NBER; Gűnther Fink, Harvard University; and David N. Weil (continued on next page)

NBER Reporter • 2010 Number 1 17 • “What Drives Success in Children’s Educational Outcomes in Poor Villages in Rural West Africa, the Case of Guinea- Bissau?” Peter Boone, London School of Economics, and Simon Johnson

• “Health Impacts of a Schooling CCT Intervention (Malawi)” Sarah Baird, University of California, San Diego; Ephraim Chirwa, University of Malawi; Jacobus Joost De Hoop, Tinbergen Institute; Craig McIntosh, University Of California, San Diego; and Berk Özler, The World Bank

• “Reducing Gender-based Violence: Evaluating Interventions in South, Central, and East Africa” Radha Iyengar, London School of Economics and NBER

• “State versus Consumer Regulation: The Case of Road Safety in Kenya” James Habyarimana and William Jack, Georgetown University

Capitalizing China

The National Bureau of Economic Research and the Chinese University of Hong Kong jointly organized a conference on Capitalizing China, which took place in Hong Kong on December 15–16, 2009. The organizers were Joseph Fan of the Chinese University of Hong Kong and Randall Morck of NBER and the University of Alberta, Canada. These papers were presented and discussed:

• “Why Are Saving Rates So High in China?” Dennis Yang and Junsen Zhang, The Chinese University of Hong Kong, and Shaojie Zhou, Tsinghua University

• “The Visible Hand behind China’s Growth” Joseph Fan; Jun Huang, Shanghai University of Finance & Economics; Randall Morck; and Bernard Yeung, and University of Singapore

• “Financing Strategies for Nation Building” Zhiwu Chen, Yale University, and William N. Goetzmann, Yale University and NBER

• “China’s Financial System: Opportunities and Challenges” Franklin Allen and Chenying Zhang, University of Pennsylvania; Jun Qian, Boston College; and Mengxin Zhao, University of Alberta

• “Assessing China’s Top-Down Securities Markets” William Allen, New York University, and Han Shen, Davis Polk & Wardwell, Hong Kong

• “The Governance of China’s Finance” Katharina Pistor,

• “The Corporate Savings Puzzle in China: A Comparative Perspective” Tam Bayoumi and Hui Tong, IMF, and Shang-Jin Wei, Columbia University and NBER

• “Provincial and Local Governments in China: Fiscal Institutions and Government Behavior” Roger H. Gordon, University of California, San Diego and NBER, and Wei Li, University of Virginia

• “Institutions and Information Environment of Chinese Listed Firms” Joseph Piotroski, Stanford University, and T.J. Wong, The Chinese University of Hong Kong

Summaries of these papers may be found at: http://www.nber.org/confer/2009/CCf09/summary.html

18 NBER Reporter • 2010 Number 1 Making Crime Control Pay: Cost-Effective Alternatives to Incarceration

An NBER Conference on “Making Crime Control Pay: Cost-Effective Alternatives to Incarceration” took place at the University of California, Berkeley’s School of Law on January 15 and 16, 2010. NBER Research Associates Philip Cook of Duke University and Jens Ludwig of the University of Chicago, and NBER Faculty Research Fellow Justin McCrary of Berkeley’s Law School, organized the meeting and chose these papers for discussion:

• Steven N. Durlauf, University of Wisconsin, Madison and NBER, and Daniel S. Nagin, Carnegie Mellon University, “The Deterrent Effect of Imprisonment”

• Justin McCrary, “Possible Gains from Reallocating within the Criminal Justice System”

• Anne Piehl, Rutgers University and NBER, and Geoffrey F. Williams, Rutgers University, “Institutional Requirements for Effective Imposition of Fines”

• Jeffrey Grogger and Jonathan Guryan, University of Chicago and NBER; and Patrick Hill, Brent Roberts, and Karen Sixkiller, University of Illinois, Urbana-Champaign, “Decreasing Delinquency, Criminal Behavior, and Recidivism by Intervening on Psychological Factors other than Cognitive Ability: A Review of the Intervention Literature”

• Steve Raphael, University of California, Berkeley, “Improving Employment Opportunities for Former Prison Inmates: Changes and Policy”

• Sara B. Heller, University of Chicago; Brian A. Jacob, University of Michigan and NBER; and Jens Ludwig, “Transfer Programs and Crime”

• Lance Lochner, University of Western Ontario, “Education Policy and Crime”

• Christopher Carpenter, University of California, Irvine and NBER, and Carlos Dobkin, University of California, Santa Cruz and NBER, “Alcohol Regulation and Crime”

• Seth G. Sanders, Duke University, “Crime and the Family: Lessons from Teen Childbearing”

• John J. Donohue III, Yale University and NBER, and Benjamin Ewing and David Peloquin, Yale University, “Rethinking America’s Illegal Drug Policy”

• Harold Pollack, University of Chicago; Peter Reuter, University of Maryland; and Peter Sevigny, University of South Carolina, “If Drug Treatment Works so Well, Why Are so many Drug Users in Prison?”

• Richard G. Frank, Harvard University and NBER, and Thomas G. McGuire, Harvard University, “Mental Health Treatment and Criminal Justice Outcomes”

• Phillip J. Cook, and John MacDonald, University of Pennsylvania, “Mobilizing Private Inputs for Crime Prevention”

Summaries of these papers may be found at: http://www.nber.org/confer/2010/CRIs10/summary.html

NBER Reporter • 2010 Number 1 19 Eleventh Annual Conference in India

On January 17 and 18, 2010 the NBER, along with India’s National Council for Applied Economic Research (NCAER) and the Indian Council for Research on International Economic Relations (ICRIER), sponsored a meeting that united NBER research- ers with a number of economists from Indian universities, research institutions, and government departments. NBER Research Associates Abhijit Banerjee of MIT and Raghuram Rajan of the University of Chicago organized the conference jointly with Isher Ahluwalia of ICRIER. The NBER participants, in addition to the organizers, were: Martin S. Feldstein, Edward Glaeser, Rohini Pande, and Jeremy C. Stein, Harvard University; Severin Borenstein and Catherine Wolfram, University of California, Berkeley; Karthik Muralidharan, University of California, San Diego; and NBER Board member Jadgish N. Bhagwati of Columbia University. The topics discussed included the global financial crisis, the state of the Indian economy, the economics of affirmative action, economic aspects of environmental policy and urbanization, and the delivery of public services in India.

NBER News

NBER Celebrates 90 Years

January 2010 marked the ninetieth anniversary of the founding of the NBER. On December 29, 1919, six economists — T.S. Adams (Yale University), John R. Commons (University of Wisconsin), (Columbia University), Malcolm Rorty (AT&T), Nachum Stone, and Allyn Young (Cornell University) — met at the LaSalle Hotel in Chicago during the annual meeting of the American Economics Association to draft the bylaws of a new organization that would conduct timely research on important economic issues. Several weeks later, on January 23, 1920, that new organization — the National Bureau of Economic Research (NBER) — was chartered as a nonprofit corporation doing business in New York. Edwin Gay, who was NBER’s first presi- dent, was also the first Dean of the Harvard Business School. Wesley Clair Mitchell was the NBER’s first Director of Research. The NBER’s charter set a lofty goal for the organization: “to encourage, in the broadest and most liberal manner, investigation, research and discovery, and the application of knowledge to the well-being of mankind.” A later section of the charter provided a bit more specific guidance: “to conduct, or assist in the making of, exact and impartial investigations in the fields of economic, social, and industrial science.” The NBER remains dedicated to this important objective. The Cambridge staff celebrated this NBER milestone with a cake decorated to commemorate the historical chronology of NBER business cycle dates.

2009 Awards and Honors

A number of NBER researchers received honors, awards, and other forms of professional recognition during 2009 and early 2010. A list of these honors, excluding those that were bestowed by the researcher’s home university and listing researchers in alpha- betical order, is presented below.

Viral Acharya won the Viz Risk to Arbitrage and Hedging: Evidence III Jaime Fernandez de Araoz Corporate Management Prize on Energy Markets, from Commodity Markets,” which was Finance Best Paper Award for “The Securities, and Prices at the European co-authored by Lars Lochstoer and Internal Governance of Firms,” which Finance Association meetings for “Limits Tarun Ramadorai. He also received the was co-authored by Stewart Myers and

20 NBER Reporter • 2010 Number 1 Raghuram G. Rajan, and a Distinguished from Queen Mary, University of London, Aid Administrators for her contributions Referee Award from the Review of his undergraduate alma mater. to the literature on student financial aid. Financial Studies. Markus K. Brunnermeier received Ronald G. Ehrenberg was nom- Douglas Almond won a 5-year the German Bernacer Prize, given annu- inated by New York Governor David NSF CAREER Award for “Health ally to European economists under the Paterson in May 2009 for a term on the Determinants and Research Design.” age of 40 who have made outstanding SUNY (State University of New York) The Faculty Early Career Development contributions in the fields of macroeco- Board of Trustees. (CAREER) Program is an NSF-wide nomics and finance. Barry Eichengreen received the 2009 activity that supports the early career- John Y. Campbell was awarded Schumpeter Prize of the International development activities of those teacher- Doctor honoris causa degrees from Schumpeter Society. Previous winners scholars who most effectively integrate the University of Maastricht and the include Romano Prodi and Vaclav Klaus. research and education within the con- University of Paris-Dauphine and became Hanming Fang and Dan Silverman text of the mission of their organization. a Corresponding Fellow of the British won the International Health Economics Lee J. Alston was a Rockefeller Academy. Association’s 17th Award Fellow at the Bellagio Study and Bruce Carlin won the 2009 Swiss for the Best Paper in Health Economics Conference Center in 2009–2010 and a Finance Institute Award for the best published in 2008 for their paper, Visiting Research Fellow at the Australian paper of the year for his paper with “Sources of Advantageous Selection: National University in 2009. Gustavo Manso entitled “Obfuscation, Evidence from the Medigap Insurance Pol Antràs won the Fundación Learning, and the Evolution of Investor Market.” This paper, which was written Banco Herrero Prize, awarded annually Sophistication.” with Michael Keane, was published in to a Spanish social scientist under age Anne Case became a Fellow of the the Journal of Political Economy in April 40. in 2009. 2008. Anirban Basu received the Bernie John H. Cochrane was elected Henry Farber was selected as a Fellow O’Brien New Investigator Award from president of the American Finance of the Labor and Employment Relations the International Society for Pharmaco­ Association. Association for 2010 for his lifetime con- economics and Outcomes Research; Lauren Cohen won an NSF tributions to research on the employment was Labelle Lecturer in Health Services CAREER Grant for her work on rela- relationship. Only three academics are Research at McMaster University; and tionships in finance. elected each year across all disciplines. won the Society for Medical Decision Courtney Coile joined the Board of Niall Ferguson’s documentary Making Comparative Effectiveness Editors of the Journal of Pension Economics series “The Ascent of ” (PBS) was Research Essay Contest. and Finance. awarded the International Emmy for Best Marco Battaglini was awarded the Janet Currie was elected to the Documentary. Carlo Alberto Medal, presented to an post of Vice-President of the American was elected to the Italian economist under the age of 40 for Economic Association for 2010. Institute of Medicine. his/her outstanding research contribu- Angus S. Deaton received the John Kristin J. Forbes has been selected tions to the field of economics. He also Kenneth Galbraith Award from the as a member of the Council of Economic received the Michael Wallerstein Award Agricultural and Applied Economics Advisers for the state of Massachusetts, from the American Political Science Association Foundation and became an a member of the Congressional Budget Association for best article published in honorary fellow of Fitzwilliam College, Office’s Panel of Economic Advisers, and 2008 in the area of political economy Cambridge. He was also president of a lifetime member of the Council on (jointly awarded with Stephen Coate). the American Economic Association in Foreign Relations. Roland Benabou delivered the 2009. Nicola Fuchs-Schendeln received the Francois-Albert Angers Lecture at Stefano DellaVigna became co-edi- SOEP-Prize for Best Scientific Publication the Annual Congress of the Societé tor of the Journal of the European Economic based on the German Socio-Economic Canadienne de Sciences Economiques, Association (JEEA) in June 2009. Panel, which is awarded by the German in Saint-Adele, Canada in May 2009 Erwin Diewert was elected a Institute for Economic Research. and the 7th Toulouse Lectures at the Distinguished Fellow of the American Don Fullerton addressed the 27 Toulouse School of Economics, France, Economic Society. Finance Ministers of the European Union in December 2009. John J. Donohue was elected to the about a possible EU carbon tax at their Efraim Benmelech received an NSF American Academy of Arts and Sciences informal “Ecofin” meeting in Gothenberg, CAREER Award for “The Causes and in 2009. Sweden. He was also Keynote Speaker Consequences of Financial Distress.” Susan Dynarski received the Robert at larger conference of 500 policymak- David G. Blanchflower was awarded P. Huff Golden Quill Award from the ers from those 27 countries in Brussels, an Honorary Doctor of Science (DSc) National Association of Student Financial Belgium.

NBER Reporter • 2010 Number 1 21 Xavier Gabaix won the “best paper Michael C. Jensen received the “U.S. Pharmaceutical Policy in a Global award” from the Financial Research Morgan Stanley and American Finance Marketplace” published earlier this year Association for “Dynamic Incentive Association 2009 Award for Excellence in in Health Affairs. Accounts” (with A. Edmans, T. Sadzik, . Naomi R. Lamoreaux is president of and Y. Sannikov.) Marcin Kacperczyk received the Q- the Economic History Association. She Alan Garber received the Rock Carling Group (The Institute for Quantitative was also awarded the Clio “Can” for Fellowship from Nuffield Trust (U.K.) and a Research in Finance) Research Award. Exceptional Support to the Field of Career Achievement Award from the Edward J. Kane won the Warren . Society for Medical Decision Making. Samuels Prize for the best paper presented David S. Lee won the 2009 D. is a 2009 Alfred at the Annual Meeting of the Association J. Aigner award for “Randomized P. Sloan Research Fellow. for Social Economics. Experiments from Non-random Selection Robert Gibbons became a fel- Lawrence F. Katz received the 2009 in U.S. House Elections.” This honor is low of the American Academy of Arts Susan C. Eaton Outstanding Scholar- given to the most significant applied paper and Sciences. Practitioner Award from the Labor and published in the Journal of Econometrics Linda S. Goldberg has been Employment Relations Association in rec- in 2007 and 2008. appointed a member of the board of the ognition of outstanding research, teach- Steven Lehrer received the second Committee on the Status of Women in ing, and practice on labor and employ- Victor R. Fuchs Research Award for the the Economics Profession, part of the ment issues. Also, he and co-author best research paper with the potential to American Economic Association, begin- won two major awards spawn new research in an underdevel- ning January 1, 2010. for their book The Race between Education oped area of health economics or health Claudia Goldin won the John R. and Technology: the 2009 Richard policy. Commons Award from the Omicron A. Lester Award for the Outstanding Josh Lerner won Second Prize in the Delta Epsilon International Honor Society Book in Industrial Relations and Labor Fama/DFA Prizes for Capital Markets for Economics, a biennial award for career Economics and the R.R. Hawkins Award and Asset Pricing from the Journal of accomplishments. She also received the of the American Association of Publishers Financial Economics. He also received an Mincer Prize from the Society of Labor for the most Outstanding Professional, Honorary Doctorate from the Technical Economists (SOLE) for career achieve- Reference, or Scholarly Work of 2008. University of Munich. ment in the field of Labor Economics. Ryan Kellogg and co-author Annamaria Lusardi, Olivia S. Gene M. Grossman was awarded Hendrik Wolff received the 2009 Ralph Mitchell, and Arie Kapteyn received a an Honorary Doctor of Economics from C. d’Arge and Allen V. Kneese Award $3.1 million grant from the Social Secur­ University of St. Gallen, Switzerland. for Outstanding Publication in the ity Administration to create a Financial Michael Grossman is President of the Journal of Environmental Economics and Literacy Center (FLC), which officially American Society of Health Economists. Management for “Daylight Time and began operations on October 1, 2009. Sanford J. Grossman received Energy: Evidence from an Australian Charles F. Manski was elected the 2009 CME Group-MSRI Prize in Experiment.” a member of the National Academy of Innovative Quantitative Applications for William Kerr was awarded the Sciences. “Innovative Approaches to Asset Pricing Kauffman Foundation Junior Faculty Sara Markowitz and Erdal Tekin were Models.” Fellowship in Entrepreneurship Research. first runners-up for the Georgescu-Roegen Jonathan Guryan received the John T. Charles D. Kolstad was elected a fel- Prize, awarded each year by the Southern Dunlop Award for Outstanding Research low of the Association of Environmental Economic Association for the best aca- of National Significance on Labor and Resource Economists. demic article published in the Southern Issues from the Labor and Employment Amanda Kowalski received the Economic Journal. Their winning article Relations Association. The award is given 2009 Zellner Thesis Award in Business was “The Relationship between Suicidal to a labor economist within ten years of and . Behavior and Productive Activities of his/her terminal degree. He was honored Elisabeth Kremp received the honor Young Adults.” for his work on discrimination by race and of Chevalier de l’Ordre National du Alexandre Mas is a Sloan Research gender. Mérite. Jean Paul Betbeze presented the Fellow. He also received the IZA (The Robert E. Hall was President-Elect award at a ceremony held at the Bank of Institute for the Study of Labor) Young of the American Economic Association France. Labor Economist Award. in 2009. Darius Lakdawalla and his co-authors Kevin Milligan and his co-authors Oliver Hart was awarded hon- Dana Goldman, Pierre-Carl Michaud, Jon Gruber and Michael Baker won orary doctorates from Copenhagen Neeraj Sood, Robert Lempert, Ze Cong, the Doug Purvis Memorial Prize, an Business School and the University of Han de Vries, and Italo Gutierrez received “annual prize for a highly significant, writ- Paris-Dauphine. the Garfield Economic Impact Award for ten contribution to some issue related to

22 NBER Reporter • 2010 Number 1 Canadian economic policy in the pre- (2nd prize) at the Business Models in Per Strömberg and Michael Weis­ vious year” for their paper, “Universal Business Conference, Bocconi University, bach won the Brattle Group First Prize Child Care, Maternal Labor Supply, and Milan, Italy, for “The Impact of the for best corporate finance paper pub- Family Well Being.” It was published in U.S. Financial Crisis on Global Retail lished in the Journal of Finance for “Why the Journal of Political Economy in 2008. Lending,” co-authored by Jorg Rocholl Are Buyouts Levered? The Financial Jeffrey A. Miron received the Alfred and Sascha Steffen. Structure of Private Equity Funds” joint R. Lindesmith for Achievement in the James E. Rauch has been chosen to with Ulf Axelson. Field of Scholarship from the Drug Policy present the Nottingham Lectures in Inter­ Richard Sylla was re-elected vice Alliance. national Economics this year. chairman of the Board of Trustees of Kris James Mitchener is a National Harvey S. Rosen received the H.S. the Museum of American Finance in Fellow of the Hoover Institution in Warwick Research Award in Alumni . He was also appointed 2009–10. Relations for Educational Advancement. to the National Advisory Committee of Naci Mocan received the “2008 Best Andrew Samwick was selected the Hamilton Partnership for Paterson, Article Award” from Economic Inquiry as the New Hampshire Professor of a non-profit organization that will help for “What Determines Corruption? the Year by the Carnegie Foundation launch the new Paterson (NJ) Great Falls International Evidence from Micro for the Advancement of Teaching and National Historical Park. Data.” the Council for the Advancement and Alan M. Taylor was appointed to a Robert Moffitt received a Support of Education (CASE). The U.S. Houblon-Norman/George Fellowship at Guggenheim Fellowship for the academic Professors of the Year program salutes the The Bank of England. year 2009-10 to study “The Growth of most outstanding undergraduate instruc- Michele Tertilt was selected as a Volatility in the U.S. Labor Market.” tors in the country — those who excel in 2009 Alfred P. Sloan Research Fellow. Dale T. Mortensen became a teaching and positively influence the lives Sheridan Titman was elected Vice Distinguished Fellow of the American and careers of students. President of the American Finance Economic Association in January 2009. Antoinette Schoar won the Ewing Association. David Neumark and William Marion Kauffman Prize Medal for Dis­ John VanReenen was the winner of Wascher were co-authors of Minimum tinguished Research in Entrepreneurship. the 2009 Yrjö Jahnsson Award from the Wages (MIT Press), which was recognized The Kauffman Foundation established European Economics Association for best as an Outstanding Academic title in 2009 this prize for in 2005 to inspire promising economist under the age of 45 “who has by Choice (one of 26 titles in economics). young scholars to contribute new insight made a contribution that is significant to Joseph P. Newhouse received the into the field of entrepreneurship. The economics in Europe.” It is the most pres- 2009 Adam Yarmolinsky Medal. The Medal is awarded every two years to one tigious award in European economics, the Medal is awarded to a member of the scholar under age 40. European equivalent to the John Bates Institute of Medicine from a discipline G. William Schwert was elected Clark Medal. outside of the health and medical sci- a Fellow of the Financial Management Laura Veldkamp, Marcin ences, recognizing distinguished service Association in October 2009. Kacperczyk,and Stijn Van Nieuwer­ over a significant period of time. Robert Shiller won the third burgh were awarded a $10,000 research Nathan Nunn was selected a 2009– Deutsche Bank Prize in Financial grant from the Q-group for work on 10 Alfred P. Sloan Research Fellow. Economics, awarded every other year. “Attention Allocation over the Business Kevin H. O’Rourke was elected to He also received the Paul A. Samuelson Cycle.” Membership of the Royal Irish Academy. TIAA-CREF Award for his book Animal Michelle White was President He also was awarded a European Research Spirits (with George Akerlof ), awarded at of the American Council Advanced Investigator Grant. the ASSA Meetings in January 2010. Association in 2009. Paul Oyer won the Brattle Dis­ Pablo T. Spiller became editor-in- Lu Zhang received an Inaugural tinguished Paper Prize for the outstand- chief of the Journal of Law Economics Distinguished Referee Award from Review ing paper on Corporate Finance in the and Organization and President of the of Financial Studies for 2009. Journal of Finance. International Society of New Institutional Luigi Zingales, Luigi Guiso, and Thomas Philipponwon the Prize for Economics. Paola Sapienza won the Smith Breeden Best Young French Economist (Cercle des Robert N. Stavins was inducted as a distinguished paper award of the économistes/ Le Monde) in 2009. Fellow of the Association of Environmental American Finance Association for their James M. Poterba served as Vice- Economists in January 2010 at the ASSA article, “Trusting the Stock Market.” President of the American Economic meetings in Atlanta. Association and as President of the Richard H. Steckel was President National Tax Association in 2009. of the Economic History Association in Manju Puri won a Best Paper Award 2008–9.

NBER Reporter • 2010 Number 1 23 Program and Working Group Meetings

Entrepreneurship

The NBER’s Working Group on Entrepreneurship met in Cambridge on December 11, 2009. Directors Josh Lerner, Harvard Business School, and Antoinette Schoar, MIT’s Sloan School, organized the meeting. These papers were discussed:

• Robert W. Fairlie, University of California, Santa Cruz, and Kanika Kapur and Susan Gates, RAND, “Is Employer- Based Health Insurance a Barrier to Entrepreneurship?”

• Meghana Ayyagari, George Washington University; Asli Demirguç-Kunt, The World Bank; and Vojislav Maksimovic, University of Maryland, “Are Innovating Firms Victims or Perpetrators? Tax Evasion, Bribe Payments and the Role of External Finance in Developing Countries”

• Thomas Astebro, HEC, Paris; Jose Mata, Universidade Nova de Lisboa, and Luis Santos-Pinto, University of Lausanne, “Preference for Skew in Lotteries: Evidence from the Laboratory”

• Amitay Alter, Washington University in St. Louis, “The Organization of Venture Capital Firms”

• Xuan Tian, Indiana University, and Tracy Y. Wang, University of Minnesota, “Tolerance for Failure and Corporate Innovation”

• Ola Bengtsson, Cornell University, and S. Abraham Ravid, Rutgers University, “Geography and Financial Contracts”

• Mercedes Delgado, Temple University; Michael E. Porter, Harvard University; and Scott Stern, Northwestern University and NBER, “Clusters and Entrepreneurship”

Summaries of these papers may be found at: http://www.nber.org/confer/2009/ENTf09/summary.html

Economic Growth Workshop

An NBER workshop on Economic Growth, organized by Francisco J. Buera, NBER and University of California, Los Angeles, and James Feyrer, NBER and Dartmouth College, took place on February 4, 2010 at the Federal Reserve Bank of San Francisco. These topics were discussed:

• “Colonies” Matthias Doepke, Northwestern University and NBER, and Andrea Eisfeldt, Northwestern University

• “The Agricultural Basis of Comparative Development” Dietrich Vollrath, University of Houston

• “The Size Distribution of Farms and International Productivity Differences” Tasso Adamopoulos, York University, and Diego Restuccia, University of Toronto

24 NBER Reporter • 2010 Number 1 • “Two Perspectives on Preferences and Structural Transformation” (NBER Working Paper No. 15416) Berthold Herrendorf, Arizona State University; Richard Rogerson, Arizona State University and NBER; and Akos Valentinyi, Magyar Nemzeti Bank

• “Do Better Schools Lead to More Growth? Cognitive Skills, Economic Outcomes, and Causation” Eric A. Hanushek, Stanford University and NBER, and Ludger Woessmann, University of Munich

• “An Equilibrium Model of the African HIV/AIDS Epidemic” Jeremy Greenwood, University of Pennsylvania and NBER; Philipp Kircher, University of Pennsylvania; and Michele Tertilt, Stanford University and NBER

Summaries of these papers may be found at: http://www.nber.org/confer/2010/EGC10/summary.html

Economic Fluctuations and Growth Research Meeting

The NBER’s Program on Economic Fluctuations and Growth met at the Federal Reserve Bank of San Francisco on February 5, 2010. NBER Research Associates Andrew Atkeson of University of California, Los Angeles and Harald Uhlig of the University of Chicago organized the meeting. These papers were discussed:

• Francois Gourio, Boston University and NBER, “Disaster Risk and Business Cycles”

• Veronica Guerrieri and Erik Hurst, University of Chicago and NBER, and Daniel Hartley, Federal Reserve Bank of Cleveland, “Endogenous Gentrification and Housing Price Dynamics”

• Jack Favilukis, London School of Economics, and Sydney C. Ludvigson and Stijn Van Nieuwerburgh, New York University and NBER, “The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium”

• YiLi Chien, Purdue University; Harold Cole, University of Pennsylvania and NBER; and Hanno Lustig, University of California, Los Angeles and NBER, “Is the Volatility of the Market Price of Risk due to Intermittent Portfolio Re-Balancing?”

• Ricardo Lagos, New York University; Guillaume Rocheteau, University of California, Irvine; and Pierre-Olivier Weill, University of California, Los Angeles and NBER, “Crises and Liquidity in Over-the-Counter Markets”

• Christopher J. Erceg and Jesper Linde, Federal Reserve Board, “Is There a Fiscal Free Lunch in a ?”

Summaries of these papers may be found at: http://www.nber.org/confer/2010/EFGw10/summary.html

NBER Reporter • 2010 Number 1 25 Program Meeting

The NBER’s Program on Industrial Organization, directed by Nancy Rose of MIT, met in Stanford, CA on February 19 and 20, 2010. Justine S. Hastings, NBER and Yale University, and Stephen P. Ryan, NBER and MIT, organized the meeting. These papers were discussed:

• Ali Hortacsu and Chad Syverson, University of Chicago and NBER; Gregor Matvos, University of Chicago; and Sriram Venkataraman, Emory University, “Are Consumers Affected by Durable Makers’ Financial Distress? The Case of Auto Manufacturers”

• Francesco Decarolis, University of Chicago, “When the Highest Bidder Loses the Auction: Theory and Evidence from Public Procurement”

• Severin Borenstein, University of California, Berkeley and NBER, “The Redistributional Impact of Non-Linear Electricity Pricing”

• Ginger Z. Jin, University of Maryland and NBER, and Seth M. Freedman, University of Maryland, “Learning by Doing with Asymmetric Information: Evidence from Prosper.com”

• , Harvard University and NBER, and Denis Nekipelov, University of California, Berkeley, “A Structural Model of Sponsored Search Advertising Auctions”

• Katja Seim, University of Pennsylvania, and Joel Waldfogel, University of Pennsylvania and NBER, “Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board’s Entry Decisions”

• Igal Hendel and Aviv Nevo, Northwestern University and NBER, “A Simple Model of Demand Anticipation”

Summaries of these papers may be found at: http://www.nber.org/confer/2009/IOs09/summary.html

Development of the American Economy Program Meeting

The NBER’s Program on the Development of the American Economy, directed by Claudia Goldin of Harvard University, met in Cambridge on February 27, 2010. These topics were discussed:

• Nathan Nunn, Stanford University and NBER; William Easterly, New York and NBER; Daniel Berger and Shanker Satyanath, New York University, “Commercial Imperialism? Political Influence and Trade during the Cold War”

• Moritz Schularick, Free University of Berlin, and Alan M. Taylor, University of California, Davis and NBER, “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870 to 2008” (NBER Working Paper No. 15512)

• Eugene N. White, Rutgers University and NBER, “Lessons from the Great American Real Estate Boom and Bust of the 1920s”(NBER Working Paper No. 15573)

• Kenneth Snowden, University of North Carolina, Greensboro, “The Anatomy of a Residential Mortgage Crisis: A Look Back to the 1930s”

26 NBER Reporter • 2010 Number 1 • Werner Troesken, University of Pittsburgh and NBER, “The Elasticity of Demand with Respect to Product Failures; or Why the Market for Quack Medicines Flourished for More Than 150 years”(NBER Working Paper No. 15699)

• Zeynep K. Hansen, Boise State University and NBER, Gary D. Libecap, University of California, Santa Barbara and NBER, and Scott E. Lowe, Boise State University, “Climate Variability and Water Infrastructure: Historical Experience in the Western United States”(NBER Working Paper No. 15558)

Summaries of these papers may be found at: http://www.nber.org/confer/2010/DAEs10/summary.html

NBER Meeting on and Biofuels

Former NBER Director Jeffrey M. Perloff of the University of California, Berkeley, organized a meeting on Agricultural Economics and Biofuels, which took place in Cambridge on March 4 and 5, 2010. These papers were discussed:

• John Beghin, Iowa State University and INRA France; and Anne-Celia Disdier and Stephan Marette, INRA France and AgroParisTech, “The Economics and Potential Protectionism of Food Safety Standards and Inspections: An Application to the U.S. Shrimp Market”

• Rachel E. Goodhue, University of California, Davis, and Carlo Russo, Universitá di Cassino, “Modeling Processor and the Incidence of Agricultural Policy: An Exploratory Approach to the Behavioral Model Selection Process”

• Barry Goodwin, North Carolina State University; Ashok K. Mishra, Louisiana State University, and Francois Ortalo- Magne, University of Wisconsin, “The Buck Stops Where? The Distribution of Agricultural Subsidies”

• Jeffrey T. LaFrance, Washington State University; Rulon Pope, Brigham Young University; and Jesse Tack, Mississippi State University, “Risk Response in Agriculture”

• Bruce A. Babcock, Iowa State University, “The Politics and Economics of the U.S. Crop Insurance Program”

• Ethan Ligon, University of California, Berkeley, “Demand for and Effects of Specialty Crop Insurance”

• Michael J. Roberts, North Carolina State University, and Wolfram Schlenker, Columbia University and NBER, “The U.S. Biofuel Mandate and World Food Prices: An Econometric Analysis of the Demand and Supply of Calories”

• Xiaoguang Chen, Haixiao Huang, Madhu Khanna, and Hayri Onal, University of Illinois, Urbana-Champaign, “Meeting the Mandate for Biofuels: Implications for Land Use, Greenhouse Gas Emissions and Social Welfare”

• Thomas W. Hertel and Jayson Beckman, Economic Research Service, Department of Agriculture, “Commodity Price Volatility in the Biofuel Era: An Examination of the Linkage between Energy and Agricultural Markets”

• Steven Sexton and David Zilberman, University of California, Berkeley, “The Economics of Agricultural Biotechnology Adoption: Implications for Biofuel Sustainability”

Summaries of these papers may be found at: http://www.nber.org/confer/2010/AGs1010/summary.html

NBER Reporter • 2010 Number 1 27 Monetary Economics

Members and guests of the NBER’s Program on Monetary Economics met on March 5, 2010 at the Federal Reserve Bank of New York. Mark Gertler, NBER and New York University, and Emi Nakamura, NBER and Columbia Business School, organized the meeting. These papers were discussed:

• Martin Ellison, University of Oxford, and Thomas J. Sargent, New York University and NBER, “A Defense of the FOMC”

• V.V. Chari, University of Minnesota and NBER, and Patrick Kehoe, Federal Reserve Bank of Minneapolis and NBER, “Bailouts, Time Inconsistency, and Optimal Regulation”

• Pietro Veronesi and Luigi Zingales, University of Chicago and NBER, “Paulson’s Gift”(NBER Working Paper No. 15458)

• Markus K. Brunnermeier, Princeton University and NBER, and , Princeton University, “A Macroeconomic Model with a Financial Sector”

• Mary Amiti, Federal Reserve Bank of New York, and David Weinstein, Columbia University and NBER, “Exports and Financial Shocks” (NBER Working Paper No. 15556)

• Marco Del Negro, Gauti Eggertsson, Andrea Ferrero, Federal Reserve Bank of New York, and Nobuhiro Kiyotaki, Princeton University and NBER, “The Great Escape: A Quantitative Evaluation of the Fed’s Non-Standard Policies Response to the Crisis”

Summaries of these papers may be found at: http://www.nber.org/confer/2010/MEs10/summary.html

Technological Progress and Productivity Measurement

The NBER’s Program on Technological Progress and Productivity Measurement met in Cambridge on March 5, 2010. Program Director Ernst R.Berndt of MIT and NBER Research Associate David Popp of Syracuse University organized the meeting. These papers were discussed:

• Jan DeLoecker, Princeton University and NBER, and Frederic Warzynski, Aarhus University, “Markups and Firm-level Export Status”

• Jeffrey L. Furman, Boston University and NBER; Fiona E. Murray, MIT; and Scott Stern, Northwestern University and NBER, “Growing Stem Cells: The Impact of U.S. Policy on the Geography and Organization of Scientific Discovery”

• Robert S. Pindyck, MIT and NBER, and Neng Wang, Columbia University, “The Economic and Policy Consequences of Catastrophes”

Summaries of these papers may be found at: http://www.nber.org/confer/2010/PRs10/summary.html

28 NBER Reporter • 2010 Number 1 Environmental and Energy Economics

The NBER’s Environmental and Energy Economics Program met in Cambridge on March 5 and 6, 2010. Program Director Don Fullerton of the University of Illinois and NBER Research Associate David Popp of Syracuse University organized the meet- ing. These papers were discussed:

• Karen Fisher-Vanden, Pennsylvania State University; Erin Mansur, Yale University and NBER; and Juliana Wang, Yale University, “Costly Blackouts? Measuring Productivity and Environmental Effects of Electricity Shortages”

• Suzanne Scotchmer, University of California, Berkeley, and NBER, “Cap-and-Trade, Emissions Taxes, and Innovation”

• Thijs Dekker and Cees A. Withagen, VU University Amsterdam; Herman R.J. Vollebergh, Netherlands Environmental Assessment Agency; and Frans P. De Vries, University of Stirling, “Inciting Protocols: How International Environmental Agreements Trigger Knowledge Transfers”

• Juan-Pablo Montero, Pontificia Universidad Catolica de Chile, “Prices vs Quantities for the Development of Clean Technologies: The Role of Commitment”

• Wolfram Schlenker, Columbia University and NBER, and W. Reed Walker, Columbia University, “The Effect of Airports on Air Quality and Respiratory Problems”

• David Albouy and Ryan Kellogg, University of Michigan and NBER; Walter Graf, University of Michigan, and Hendrik Wolff, University of Washington, “Aversion to Extreme Temperatures, Climate Change, and Quality of Life”

• Grant D. Jacobsen, UC Santa Barbara, and Matthew J. Kotchen, Yale University and NBER, “Are Building Codes Effective at Saving Energy? Evidence from Residential Billing Data in Florida”

Summaries of these papers may be found at: http://www.nber.org/confer/2010/EEEs10/summary.html

NBER Reporter • 2010 Number 1 29 Bureau Books

The following four volumes may be ordered directly from the University of Chicago Press Distribution Center, at

The University of Chicago Press Customer Service and Order Fulfillment Chicago Distribution Center Telephone: (U.S. & Canada) 1-800-621-2736 11030 South Langley Avenue (Rest of world) 773-702-7000 Chicago, IL 60628 Fax: (U.S. & Canada) 1-800-621-8476 U.S.A. (Rest of world) 773-702-7212 Email: [email protected]

Measuring and Managing Federal Financial Risk

Measuring and Managing Federal and obligations up until now. This gathered in this book demonstrate that Financial Risk, edited by Deborah J. Lucas, NBER Conference Report contains new financial economics can be a useful tool is available now from the University of research, both empirical and method- for studying a range of federal activities. Chicago Press for $85.00. ological, on the measurement and man- Lucas is a Research Associate in the Although the U.S. government is the agement of these costs and risks. The NBER’s Programs on Asset Pricing and world’s largest financial institution, pro- analyses encompass a broad spectrum Economic Fluctuations and Growth and viding credit and assuming risk through of federal programs, including housing, a Professor of Finance at MIT’s Sloan diverse activities, there has been little catastrophe insurance, student loans, School of Management. understanding or measurement of the social security, and environmental lia- potential costs and risks of such actions bilities. Collectively, the contributions

Research Findings in the Economics of Aging

Research Findings in the Economics of sions are influenced by a set of incentives, nomic circumstances, health, and mortal- Aging, edited by David A. Wise, is avail- including retirement benefit programs ity, as well as the effects of poverty and able from the University of Chicago Press and health care. This volume includes lower levels of economic development on for $115.00. In this NBER Conference cross-national analyses of the effects of health and life satisfaction. Report, a group of leading researchers dis- such programs on these decisions. The Wise is the NBER’s Area Director cuss such topics as work and retirement volume also offers in-depth analysis of for Aging and Health, and the John behavior, disability, and how both shape the effects of retirement plans, employer F. Stambaugh Professor of Political policies designed to address them. We contributions for health insurance, and Economy at Harvard’s Kennedy School know, for example, that although indi- housing prices on retirement. It explores of Government. viduals choose when to retire, their deci- well-established relationships among eco-

30 NBER Reporter • 2010 Number 1 Social Security Programs and Retirement around the World: The Relationship to Youth Employment

Social Security Programs and between the incentives to retire and the employing older workers takes jobs away Retirement around the World: The proportion of older people in the work- from the young. Relationship to Youth Employment, edited force; the effects that reforming social Wise is NBER’s Area Director for by Jonathan Gruber and David A. Wise, is security would have on the employment Aging and Health, and Gruber directs the available from the University of Chicago rates of older workers; and how extend- NBER’s Program on Health Care. Wise is Press for $110.00. This NBER Conference ing labor force participation will affect also the John F. Stambaugh Professor of Report offers comparative analysis from program costs. This timely volume chal- Political Economy at Harvard’s Kennedy twelve countries and examines the issue lenges many assumptions about the rela- School of Government. Gruber is a of age in the labor force. A notable group tionship between old and young people Professor of Economics at MIT. of contributors analyze: the relationship in the workforce, dispelling the myth that

Agglomeration Economics

Agglomeration Economics, edited by transportation and communication costs understanding of agglomeration and its Edward L. Glaeser, is available from the have fallen, cities have become increas- implications for a globalized world. University of Chicago Press for $99.00. ingly important. And, even within cities, Glaeser directs the NBER’s Working When firms and people are located near industrial clusters remain vital. Group on Urban Economics and is the each other in cities and in industrial clus- This NBER Conference Report brings Fred and Eleanor Glimp Professor of Eco­ ters, which is termed “agglomeration,” together a group of essays that examine nomics at Harvard University. they benefit in various ways, including the reasons why economic activity con- through reduced costs of exchanging tinues to cluster together despite these goods and ideas. Surprisingly, even as falling costs. The studies here advance our

NBER Macroeconomics Annual 2009, Volume 24

NBER Macroeconomics Annual 2009, evolution of the U.S. wage distribution, at $90.00; the paperback is $60.00.The Volume 24, edited by Daron Acemoglu, and noisy business cycles. volume is also available electronically Kenneth Rogoff, and Michael Woodford, All three editors are Research for $50.00 (individual) or $25.00 (stu- is available from the University of Chicago Associates in the NBER’s Program on dent). To order by telephone, call Monday Press Journals Division. The papers and Economic Fluctuations and Growth. through Friday, 8 am to 5 pm Central accompanying discussions in this volume Acemoglu is also the Charles P. Time, (773) 753-3347; or toll-free in the address how heterogeneous beliefs inter- Kindleberger Professor of Applied U.S. and Canada, (877) 705-1878. To act with equilibrium leverage and poten- Economics at MIT. Rogoff is the Thomas order by mail, the address is: University tially lead to leverage cycles, the validity D. Cabot Professor of Public Policy at of Chicago Distribution Center, 11030 of alternative hypotheses about the rea- Harvard University. Woodford is the South Langley Avenue, Chicago, IL son for the recent increase in foreclosures Professor of Political 60628, (773)702-7000 on residential mortgages, the credit rating Economy at Columbia University. crisis, quantitative implications for the The loth c bound volume is priced

NBER Reporter • 2010 Number 1 31 Nonprofit Org. NBER U.S. Postage Reporter PAID NATIONAL BUREAU OF ECONOMIC RESEARCH National Bureau of Economic Research 1050 Massachusetts Avenue Cambridge, Massachusetts 02138-5398 (617) 868-3900

Change Service Requested

Top View