The Journal of Economic Perspectives Fall 2014
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The Journal of Economic Perspectives A journal of the American Economic Association Editor David H. Autor, Massachusetts Institute of Technology Co-editors Chang-Tai Hsieh, University of Chicago Ulrike Malmendier, University of California at Berkeley Associate Editors Benjamin G. Edelman, Harvard University Amy Finkelstein, Massachusetts Institute of Technology Gordon Hanson, University of California at San Diego Anil K Kashyap, University of Chicago Adam Looney, US Department of the Treasury David McKenzie, World Bank Richard Newell, Duke University Chad Syverson, University of Chicago Christopher Udry, Yale University Managing Editor Timothy Taylor Assistant Editor Ann Norman Editorial offices: Journal of Economic Perspectives American Economic Association Publications 2403 Sidney St., #260 Pittsburgh, PA 15203 email: [email protected] The Journal of Economic Perspectives gratefully acknowledges the support of Macalester College. Registered in the US Patent and Trademark Office (®). Copyright © 2014 by the American Economic Association; All Rights Reserved. Composed by American Economic Association Publications, Pittsburgh, Pennsylvania, USA. Printed by R. R. Donnelley Company, Jefferson City, Missouri, 65109, USA. No responsibility for the views expressed by the authors in this journal is assumed by the editors or by the American Economic Association. THE JOURNAL OF ECONOMIC PERSPECTIVES (ISSN 0895-3309), Fall 2014, Vol. 28, No. 4. The JEP is published quarterly (February, May, August, November) by the American Economic Association, 2014 Broadway, Suite 305, Nashville, TN 37203-2418. Annual dues for regular membership are $20.00, $30.00, or $40.00 depending on income; for an additional $15.00, you can receive this journal in print. E-reader versions are free. For details and further information on the AEA go to http://www.vanderbilt.edu/AEA/. Periodicals postage paid at Nashville, TN, and at additional mailing offices. POSTMASTER: Send address changes to the Journal of Economic Perspectives, 2014 Broadway, Suite 305, Nashville, TN 37203. Printed in the U.S.A. The Journal of Economic Perspectives Contents Volume 28 • Number 4 • Fall 2014 Symposia Social Networks Matthew O. Jackson, “Networks in the Understanding of Economic Behaviors” ..3 Vasco M. Carvalho, “From Micro to Macro via Production Networks” .........23 Kaivan Munshi, “Community Networks and the Process of Development” .....49 Tax Enforcement and Compliance Henrik Jacobsen Kleven, “How Can Scandinavians Tax So Much?” ...........77 Timothy Besley and Torsten Persson, “Why Do Developing Countries Tax So Little?” ....................................................99 Gabriel Zucman, “Taxing across Borders: Tracking Personal Wealth and Corporate Profits” .......................................... 121 Erzo F. P. Luttmer and Monica Singhal, “Tax Morale” ..................... 149 Articles Sheilagh Ogilvie, “The Economics of Guilds”. 169 Joshua Goodman, “The Wages of Sinistrality: Handedness, Brain Structure, and Human Capital Accumulation” ............................ 193 Features H. Spencer Banzhaf, “Retrospectives: The Cold-War Origins of the Value of Statistical Life” ............................................. 213 Timothy Taylor, “Recommendations for Further Reading” .................227 “Correspondence: The Missing Middle,” James Tybout ....................235 Statement of Purpose The Journal of Economic Perspectives attempts to fill a gap between the general interest press and most other academic economics journals. The journal aims to publish articles that will serve several goals: to synthesize and integrate lessons learned from active lines of economic research; to provide economic analysis of public policy issues; to encourage cross-fertilization of ideas among the fields of economics; to offer readers an accessible source for state-of-the-art economic thinking; to suggest directions for future research; to provide insights and read- ings for classroom use; and to address issues relating to the economics profession. Articles appearing in the journal are normally solicited by the editors and associate editors. Proposals for topics and authors should be directed to the journal office, at the address inside the front cover. Policy on Data Availability It is the policy of the Journal of Economic Perspectives to publish papers only if the data used in the analysis are clearly and precisely documented and are readily available to any researcher for purposes of replication. Details of the computations sufficient to permit replication must be provided. The Editor should be notified at the time of submission if the data used in a paper are proprietary or if, for some other reason, the above requirements cannot be met. Policy on Disclosure Authors of articles appearing in the Journal of Economic Perspectives are expected to disclose any potential conflicts of interest that may arise from their consulting activities, financial interests, or other nonacademic activities. Journal of Economic Perspectives Advisory Board Tim Besley, London School of Economics Robert E. Hall, Stanford University Greg Ip, The Economist Christopher Jencks, Harvard University Carmen Reinhart, Peterson Institute John Roemer, Yale University Paul Romer, New York University Howard Rosenthal, New York University Journal of Economic Perspectives—Volume 28, Number 4—Fall 2014—Pages 3–22 Networks in the Understanding of Economic Behaviors† Matthew O. Jackson he explosive changes in our abilities to communicate over distances— spurred by the evolution of communication technologies coupled with T increased capabilities of the internet and social media—have made social networks very salient. Thus, it is perhaps more than coincidental that there has been a growth in network-related research that has accompanied the dramatic changes in the wiring of the world.1 Although the increased salience of networks may have awakened people to their importance, there is another more fundamental force that is driving the recent growth in the study of networks in economics. The main impetus is that, as economists endeavor to build better models of human behavior, they cannot ignore that humans are fundamentally a social species with interaction patterns that shape their behaviors. People’s opinions, which products they buy, whether they invest in education, become criminals, and so forth, are all influenced by friends and acquain- tances. Ultimately, the full network of relationships—how dense it is, whether some groups are segregated, who sits in central positions—affects how information spreads 1 Note that this is not the first revolution in communication that has rewired human interaction, as the world has shrunk many times before: with the advent of letter writing, the telegraph, trains, the telephone, air travel, and others. Evidence from a study of the spread of the Black Death in 14th-century Europe suggests that the average social distance between individuals was much larger centuries ago than today (Marvel, Martin, Doering, Lusseau, and Newman 2013). ■ Matthew O. Jackson is the William D. Eberle Professor of Economics at Stanford University, Stanford, California. He is also a Senior Fellow of the Canadian Institute for Advanced Research, Toronto, Ontario, Canada, and an external faculty member of the Santa Fe Institute, Santa Fe, New Mexico. His email address is [email protected]. † To access the Data Appendix, visit http://dx.doi.org/10.1257/jep.28.4.3 doi=10.1257/jep.28.4.3 4 Journal of Economic Perspectives and how people behave. This impetus for the growth in network studies has been unleashed by the increased availability of data, which when coupled with increased computing power, allows us to analyze networks in economic settings in ways not previously possible. In this paper, I discuss and illustrate this driving force, and describe some of the ways in which networks are helping economists to model and understand behavior. I begin with an example that demonstrates the sorts of things that researchers can miss if they do not account for network patterns of interaction. Next, to provide a broader perspective on the different ways in which networks provide insights into economic behaviors, I discuss a taxonomy of network properties and how they impact behaviors. Each of these properties and its impact is illustrated via appli- cations.2 Finally, I discuss an important frontier of networks research—developing tractable models of network formation—which is essential in addressing issues of endogeneity when estimating network effects on behavior. Why Networks? Do economists really need to map out the network of interactions in order to understand economic phenomena? Can’t we ignore the patterns of interactions or proxy networks via other means such as peer groups or geography? Although we can circumvent network data in some situations, there are many settings in which network data provide essential insights into economic behaviors that are not available via other means. To make this point, I discuss a recent analysis in which network data play a vital role in disentangling potential explanations for behavior. In this example, house- holds are the nodes of the network, and links in the network concern things like the exchange of favors, kinship, the sharing of advice, and so forth. There are also many other sorts of networks, including contractual relationships among firms, alliances between countries, overnight lending among banks, and others in which nodes are organizations and relationships are