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Reporter OnLine at: www.nber.org/reporter 2011 Number 1

Program Report

IN THIS ISSUE Program Report Economics of Education Economics of Education 1

Research Summaries Caroline M. Hoxby* Urban Growth and Climate Change 6 Reducing the Risks of Catastrophes 9 Trade Agreements as Incomplete Contracts 12 The Economics of Education Program is both exciting and productive, The Impact of Employee Pension Promises 15 currently adding new Working Papers at the rate of 7.5 per month — a 50 percent increase from the rate at the time of my last program report in fall NBER Profiles 18 2006. The number of papers submitted for a typical Program Meeting is Conferences 20 often ten times the number of available slots, and attendance at those meet- NBER News 21 ings is high. Program and Working Group Meetings 25 I am particularly proud of three aspects of the Program. The first is Bureau Books 30 the quality of the research being produced and the methods used by mem- bers, including some of the latest, most rigorous methods in applied micro- econometrics. The second is the fact that members use some of the richest, most comprehensive datasets in economics — many of these datasets were initially compiled by schools or school-related organizations, and program members deserve enormous credit for their resourcefulness in making them useful for economic research by establishing strong, collegial relationships with data providers, convincing schools to conduct randomized and other policy experiments, matching data from diverse sources, and themselves surveying or testing people when data otherwise would be missing. Third, program members produce research that is policy relevant, credible to policymakers, and grounded in economic logic. The NBER’s Higher Education Working Group was integrated into the Economics of Education Program in 2009. We made the integration an occasion to celebrate the leadership of Charles T. Clotfelter, director of that working group, who oversaw an immense improvement in the quality of research on the economics of higher education. Although the practical policy questions differ across the two levels of education, all of the meth- ods, much of the data, and much of the deep economic logic are shared.

*Hoxby is the Director of the NBER’s Program on Economics of Education and the Scott and Donya Bommer Professor of Economics at Stanford University. The numbers in parends throughout this report refer to NBER Working Papers. A complete list of NBER Education Working Papers can be found at: www.nber.org/papersbyprog/ED.html

NBER Reporter • 2011 Number 1 Areas of Continuing Interest NBER Reporter and New Interest In my last review, I focused on three areas in which research was advancing particularly rap- idly: the analysis of peer effects; the estimation of teachers’ effects on achievement; and mak- The National Bureau of Economic Research is a private, nonprofit research orga- nization founded in 1920 and devoted to objective quantitative analysis of the ing sense of students’ college choices (not just American economy. Its officers and board of directors are: whether to attend college in the first place, but President and Chief Executive Officer — James M. Poterba which schools to attend and whether to persist Controller — Kelly Horak at each school). These three areas continue to be highly productive. For instance, Elias Bruegmann BOARD OF DIRECTORS and C. Kirabo Jackson (15202) demonstrate that, Chairman — John S. Clarkeson when a teacher whose own effect on achievement Vice Chairman — Kathleen B. Cooper Treasurer — Robert Mednick is strongly positive moves into a new school, her new colleagues improve. They further show that DIRECTORS AT LARGE the colleagues’ improved ability to raise achieve- Peter Aldrich Jessica P. Einhorn Michael H. Moskow ment is attributable to their changing, not merely Elizabeth E. Bailey Mohamed El-Erian Alicia H. Munnell to selection. That is, incumbent teachers in the Richard Berner Jacob A. Frenkel Robert T. Parry John Herron Biggs Judith M. Gueron James M. Poterba new school raise their performance. For another John S. Clarkeson Robert S. Hamada John S. Reed example, we now have substantial evidence on Don R. Conlan Peter Blair Henry Marina v. N. Whitman what happens to a student who goes to a school Kathleen B. Cooper Karen N. Horn Martin B. Zimmerman Charles H. Dallara John Lipsky where other students are high-achieving: his own George C. Eads Laurence H. Meyer achievement rises. This evidence relies on regres- sion discontinuity methods, that is, on compar- DIRECTORS BY UNIVERSITY APPOINTMENT ing the later achievement of students who are just George Akerlof, California, Berkeley Mark Grinblatt, California, Los Angeles above and just below some admissions thresh- Jagdish W. Bhagwati, Columbia Marjorie B. McElroy, Duke Glen G. Cain, Wisconsin Joel Mokyr, Northwestern old, where the threshold is not known to stu- Alan V. Deardorff, Michigan Andrew Postlewaite, Pennsylvania dents when they apply. Christian Pop-Eleches Ray C. Fair, Yale Uwe E. Reinhardt, Princeton and Miguel Urquiola (16886) study this situation Franklin Fisher, MIT Craig Swan, Minnesota John P. Gould, Chicago David B. Yoffie, Harvard in Romania; Damon Clark (“Elite Schools and Academic Performance”, presented at the spring DIRECTORS BY APPOINTMENT OF OTHER ORGANIZATIONS 2007 Program Meeting) studies this situation in Jean Paul Chavas, Agricultural and Applied Economics Association England; and C. Kirabo Jackson (16598) studies Martin Gruber, American Finance Association this situation in Trinidad and Tobago. Turning to Ellen Hughes-Cromwick, National Association for Business Economics college-going behavior, some of the most inter- Arthur B. Kennickell, American Statistical Association Thea Lee, American Federation of Labor and esting new research provides rigorous evidence Congress of Industrial Organizations on how students respond to scholarships and William W. Lewis, Committee for Economic Development other financial aid designed to improve their col- Robert Mednick, American Institute of Certified Public Accountants Alan L. Olmstead, Economic History Association lege outcomes. Aimee Chin and Chinhui Juhn John J. Siegfried, American Economic Association (15932) show that allowing undocumented stu- Gregor W. Smith, Canadian Economics Association dents to pay in-state tuition (usually just one-third Bart van Ark, The Conference Board to one-half of out-of-state tuition) has no statis- The NBER depends on funding from individuals, corporations, and private foun- tically significant effect on their college atten- dations to maintain its independence and its flexibility in choosing its research activities. Inquiries concerning contributions may be addressed to James M. dance. Stephens Desjardins and Brian McCall Poterba, President & CEO, NBER 1050 Massachusetts Avenue, Cambridge, MA (“The Impact of the Gates Millenium Scholars 02138-5398. All contributions to the NBER are tax deductible. Program”, presented at the spring 2008 Program The Reporter is issued for informational purposes and has not been reviewed by Meeting) show that Gates Scholarships very mod- the Board of Directors of the NBER. It is not copyrighted and can be freely repro- estly improved persistence among the low-income duced with appropriate attribution of source. Please provide the NBER’s Public Information Department with copies of anything reproduced. minority students eligible for them. Since my last report, several new themes Requests for subscriptions, changes of address, and cancellations should be sent also have emerged in Economics of Education to Reporter, National Bureau of Economic Research, Inc., 1050 Massachusetts Avenue, Cambridge, MA 02138-5398. Please include the current mailing label. research. Two notable ones are the importance of information and the role of incentives for stu-

2 NBER Reporter • 2011 Number 1 dents, teachers, and schools. Because any Oreopoulos, and Lisa Sanbonmatsu when viewed against the background of program review is necessarily selective, I (15361) designed an experiment in coordi- family income or the potential returns to focus here mainly on illustrating these new nation with the tax preparer H&R Block. college attendance. Yet, the policy change themes. Some families with college-aged children caused about 40 percent of students to were randomly assigned to be given infor- send their scores to an additional school. The Importance of Information mation on their child’s eligibility for gov- This generated some additional informa- ernment-based financial aid and on local tion for students because, when a student Much of the existing research on edu- college-going options. Some families also who is a plausible applicant sends his scores cation concerns the change in some con- were randomly assigned to receive help to a school, that school responds with bro- crete resource: a salary increase for teach- in filing the federal application for finan- chures and other materials describing its ers; a reduction in class size; a scholarship cial aid (“FAFSA”). The results, which offerings. It is striking that such a modest or other financial aid for students; the are highly credible owing to the random- change in information produced such siz- extension of compulsory schooling; or ized design, suggest that the intervention able effects on behavior. the opening of a program. Although such that combined information and FAFSA Avery and Turner (“Playing the resource changes often can be shown to help actually caused people to be 25 to 30 College Application Game”, presented at change educational outcomes, their effects percent more likely to enroll in college. the fall 2009 Program Meeting) and Avery typically are much smaller than proponents These effects are dramatic in size for such a and Hoxby (“The Missing One-Offs”, pre- believed they would be. Also, two students modest intervention — one that, if imple- sented at the 2010 Summer Institute) dem- with similar prior achievement often react mented routinely, would cost only a few onstrate that low-income students apply to to resources in very different ways. For dollars per family. fewer and less selective colleges than their instance, although making financial aid Todd Stinebrickner and Ralph more affluent counterparts who have the more generous causes some students to Stinebrickner (14810) investigate whether same test scores and achievement in high attend college or to persist longer in college, students learn about their academic ability school. This fact holds even for low-income a good share of students do not respond. in college and make decisions about per- students whose achievement is so high Frustratingly for researchers, the students sisting in a logical way, based on that infor- that they qualify for free tuition and liv- who do not respond often look very simi- mation. To study this question, they com- ing expenses at the most selective colleges lar to the students who do. (On this point, bine rich administrative data from Berea in the United States. The authors of these see for instance the Desjardins and McCall College with data from surveys they con- papers assemble an array of evidence that paper mentioned above.) Put another way, ducted themselves. Thus, they are able to indicates that low-income students lack researchers have been unable to show that observe not just students’ academic behav- information about college-going. While it policymakers could control and improve ior, such as their course-taking patterns is hard to argue that these students do not most people’s educational outcomes simply and the grades they earn, but also stu- have access to materials (since most col- by controlling policies that are concerned dents’ beliefs about their academic aptitude leges’ materials are readily available online), with educational resources. and expectations about college completion. they have few contacts with people who Responding to the weak explanatory The authors show that students enter col- attended selective colleges. They are fre- power of resource-type policies, research- lege with beliefs about their academic abil- quently too isolated geographically to find ers increasingly have wondered whether ity that are both optimistic and diffuse. a critical mass of college-going peers or differences in students’ and families’ infor- Moreover, the students update their beliefs advisors. In fact, the latter paper shows that mation can account for variation in edu- in the manner predicted by the Bayesian it would not even make sense for selective cational outcomes. Recent findings from learning model. Students’ learning about colleges’ staff to visit the schools or cities of behavioral economics, which often show their own aptitude explains much of their most low-income, high-achieving students: that apparently small differences in the decision to drop out of college. they are simply too isolated for the benefits content or framing of information can Amanda Pallais (“Why Not Apply?” of such visits to outweigh the costs. The have large effects, have only intensified presented at the spring 2008 Program bottom line is that information interven- education researchers’ focus on informa- Meeting) shows that an apparently tiny tions might be warranted, but they may tion. There are practical reasons to focus on change in ACT policy produced a 20 per- prove hard to design — see Avery (16359). information as well: information interven- cent increase in students’ applications to Informational differences among stu- tions tend to be very inexpensive compared colleges. The change was that ACT, one dents are also important in primary and to resource-type interventions (so that even of the two college aptitude testing orga- secondary education. Parag Pathak and modest benefits may outweigh costs) and nization in the United States, gave stu- Tayfun Sönmez (16783; also “Leveling often have positive spillovers (useful infor- dents four free score reports instead of the Playing Field,” 2008 Summer Institute) mation given to one person tends to spread three. Because an additional score report show that school choice mechanisms to other people). cost only $6 before and after the pol- that are susceptible to strategic manipula- Eric Bettinger, Bridget Long, Philip icy change, the intervention was negligible tion tend to generate better outcomes for

NBER Reporter • 2011 Number 1 3 families who are more informed. That is, private schools. The authors interpret these Incentives for Students, although all students have the same oppor- results as showing that report cards gen- Teachers, and Schools tunities under these mechanisms, students erate competitive pressure on schools to who understand how the mechanisms work increase price-adjusted quality. Even though improving incentives is and which schools are in demand end up Jonah Rockoff, Douglas Staiger, often more expensive than improving infor- enrolling in schools that are higher in their Thomas Kane, and Eric Taylor (16240) mation, incentive-type interventions are preference rankings. These better informed study another informational intervention often much less expensive than resource- students disproportionately have parents that appears small yet had big effects. They type interventions, especially when their who are affluent and educated. Thus, supe- evaluate the effect of a program in which relative efficacy is taken into account. This rior information is one reason why stu- New York City school principals were pro- is shown by an array of recent research dents’ outcomes are correlated with their vided with estimates of how much each done by program members. family’s socioeconomic circumstances. of their teachers had raised students’ test Joshua Angrist, Daniel Lang, and Abigail Wozniak and Ofer Malamud scores. Principals were randomly assigned Philip Oreopoulos (12790) and Joshua (16463) explore another reason why stu- to this program, so the study’s findings Angrist, Philip Oreopoulos, and Tyler dents from more educated families have are highly credible. The authors show that Williams (16643) explore incentives better outcomes. They investigate the principals update their beliefs about teach- for students to improve their grades in a long-standing hypothesis that more edu- ers’ effects in accordance with the Bayesian Canadian university. In the former paper, cated people respond more elastically to learning model: for instance, principals they study students who are randomly changes in opportunities. (Theodore W. update their beliefs more when the esti- assigned to receive a merit scholarship if Schultz often is credited with originating mates provided to them are more precise they maintain solid grades. In the second this idea. See Bowman, 1980, cited in end- and their own prior opinions are less pre- paper, they study students who are ran- note.) Specifically, Wozniak and Malamud cise. More importantly, principals are like- domly assigned to receive cash for better investigate people who were induced to lier to retain their effective teachers (and grades: $100 for each grade of 70 or better attend college because they had a higher not retain their ineffective ones) when they and an additional $20 for each percentage risk of being drafted for the Vietnam War. are provided with the estimated teacher point above 70 percent. They find that the They use draft induction risk as an instru- effects. The change in the sensitivity of merit scholarship improved the grades and ment for attending and graduating from retention to performance improves stu- persistence of female students, though not college, and they show that college educa- dent achievement by a statistically signif- of males. Interestingly, they also find that tion makes a person more likely to subse- icant though small amount. Here, it is the availability of the merit scholarship quently choose his labor market experience worthwhile to remember the cost-bene- caused female students to seek out more based on expected earnings, as opposed to fit ratios typical of information interven- help with their courses: they were more the market’s mere proximity to his place of tions: although the change in achievement likely to take advantage of supplemental origin. is small, the cost of the intervention is very instructional services. In the latter paper, School report cards — simple reports small on an ongoing basis. the authors find that the cash rewards that describe students’ achievement in Finally, Eric Taylor and John Tyler improved males’ achievement, though not absolute terms and relative to other local (16877) examine a highly reputed teacher females! The effects on males are modest schools — are very inexpensive to provide. evaluation system and find that it improves overall, but larger for males who under- Asim Khwaja, Tahir Andrabi, and Jishnu teachers’ performance, as measured by their stood the function linking performance Das (“Report Cards,” spring 2009 Program effects on student achievement. While the to rewards. Meeting) arranged to provide reports in cost-benefit ratio of the program they study Judith Scott-Clayton (“On Money 112 randomly selected educational markets is not as impressive as the results of the and Motivation”, fall 2008 program meet- in Pakistan. The intervention was purely information program in New York City ing) studies a West Virginia incentive informational: no explicit rewards or pun- (16240), the improvement that Taylor and scheme for college students. The program ishments were included. The authors find Tyler see is entirely within teacher. As a offered free tuition to students who main- that the report cards improved learning rule, it has been hard for researchers to tained a certain minimum course load by 0.10 standard deviations and increased produce credible evidence that teachers and minimum GPA (2.75 in the fresh- enrollment slightly. Private schools that improve simply through being evaluated men year, 3.0 thereafter). Since students were initially bad — those with below and then informed about how to improve were not randomly assigned to the pro- median scores at baseline — improved their instruction. Even if such evaluation gram, Scott-Clayton exploits differences especially strongly: learning gains were systems are an expensive means of improv- in the timing of implementation and dis- 0.34 standard deviations. Private schools ing achievement relative to some of the continuities in the eligibility formula to that were initially good did not improve informational interventions described generate credible estimates. Not only does learning but did cut their fees. Government above, they remain inexpensive relative to she find substantial effects on achieve- schools were somewhat less responsive than most resource-type interventions. ment, she also finds that the effects are

 NBER Reporter • 2011 Number 1 highly concentrated around the thresh- times what we would predict if the dis- lyzed by David Figlio and Cassandra Hart olds for annual scholarship renewal, indi- trict had spent the same amount on class (16056) and by Winnie Chan and Robert cating that the program’s effects come via size reduction. (The class size comparison McMillan (“School Choice and Public the incentives it provides, not simply via is based on Project Star, which generates School Performance, fall 2009 program relaxing financial constraints. some of the highest credibly estimated meeting). Although the authors investi- C. Kirabo Jackson (15722) studies effects of class size reduction.) gate programs in different locations — Fi- incentives for students and teachers based Karthik Muralidharan and Venkatesh glio and Hart analyze a Florida corpo- on Advanced Placement (AP) scores. Sundararaman (15323) investigate per- rate tax credit program and Chan and The program he analyzes (“APIP”) pays formance pay for teachers, using a pro- McMillan analyze a tax credit program high school students and their teachers gram in India that they themselves largely in Ontario — both teams of authors between $100 and $500 per score of three designed. Hundreds of schools were ran- exploit variation in pressure on public or above on an AP exam. To give a sense domly assigned to have their teachers schools that arises through pre-existing of magnitude of rewards that a person receive higher pay for higher students’ differences in the local availability of pri- could earn, the maximum that a teacher scores. Hundreds of schools were assigned vate schools. Both teams find that pub- has ever earned in one year is $11,500, to an alternative treatment that gave them lic schools respond to the potential loss and the maximum that a student has ever additional resources equal to the value of of students to private schools by raising earned in high school is $1,400. Because the performance pay. Muralidharan and their students’ achievement. Neither team the program is not randomly assigned to Sundararaman find that students in incen- of authors finds evidence that differen- schools, Jackson has to use a detrended dif- tive schools improved their performance tial student sorting (poor students dispro- ference-in-differences strategy: essentially, by 0.28 and 0.16 standard deviations in portionately leaving the public schools) the achievement trends of schools that math and language tests, relative to con- accounts for the improvement. adopted the program earlier are compared trol scores. Students scored significantly to the achievement trends of schools that higher on “conceptual” as well as “mechan- Summing Up adopted it later. Because the program’s ical” components of the tests and also per- sponsors were not able to roll out the formed better on subjects for which no New themes emerge in research program in a single year to every school incentives were given. These results sug- because researchers find themselves con- interested in adoption, the late adopters gest that the students’ gains in achieve- vinced by previous studies that some ques- are fairly idiosyncratically selected from ment were authentic, not mere “teaching tions remain answered, thereby exposing among schools who applied. Thus, the to the test.” The gains in schools that sim- other questions as likely to be important. results are quite credible. Jackson finds ply received the extra resources were one- Thus, I think that it is a measure of the suc- that students who participate in the pro- third to one-half as large as the incentive- cess of the NBER’s Economics of Education gram are more likely to attend college driven gains. Program that, although some recent and persist in college beyond their fresh- Several authors have examined what research extends and elaborates themes man year. In addition, Black and Hispanic happens when schools face incentives. I identified previously, I did not predict students are more likely to graduate from For instance, Jonah Rockoff and Lesley the themes of much recent research in college. Turner (14564) and Hanley Chiang my previous program review. In particu- Eric Bettinger (16333) examines cash (“Accountability Pressure on Failing lar, it is encouraging that so much current incentives for students funded by a philan- Schools,” fall 2008 Program Meeting) research focuses on issues like informa- thropist in Coshocton, a poor city in the use regression discontinuity methods to tion and incentives that economists have Appalachian area of Ohio. Schools and show that schools that “just fail” accord- long regarded as important. That informa- grades in the city were randomly assigned ing to their state’s accountability program tion and incentive-type interventions also to have their students get rewards of up raise their students’ achievement more tend to have propitious cost-benefit ratios $75 per year for “proficient” scores and than schools that “just pass.” In these two is a bonus. Finally, it is important that $100 per year for “advanced” scores on studies, failing schools faced several pos- NBER researchers continue to pioneer Ohio’s statewide exams. Bettinger finds sible consequences: students could trans- rigorous methodological designs and cre- that the incentives improve math scores by fer out, principals could lose their jobs, ate good data that allow them to analyze 0.15 standard deviations but he does not and schools could be closed completely such interventions. find similar effects on other subject exams. (though this was rare). Since the pass- The Coshocton program was highly bene- ing thresholds were unknown to schools ficial relative to its costs: the program costs in advance, the regression discontinuity M.J. Bowman, “Theodore W. Schultz’s were only fifteen hundredths of 1 percent designs produce convincing results. Contributions to Economics,” The (0.15 percent) of the district’s per-pupil A very different source of school Scandinavian Journal of Economics, Vol. expenditures. The effects of this inexpen- incentives — competitive pressures gener- 82, No. 1 (1980), pp. 80–107 sive program on achievement were 250 ated by private school vouchers — is ana-

NBER Reporter • 2011 Number 1 5 Research Summaries

Urban Growth and Climate Change

Matthew E. Kahn*

My recent research focuses on the print because they encourage densifica- States to Mexico under NAFTA.5 As it implications of urban economic growth tion and living closer to the city center.3 turns out, NAFTA can be viewed as an for greenhouse gas production. I also Today, households who live in early “cash for clunkers” program. While examine how the quality of life in dif- Daqing — China’s “brownest city” — pro­ it provided cash for U.S households, this ferent cities around the world may be duce only one fifth of the emissions of type of trade can have detrimental envi- affected by climate change. households who live in San Diego, the ronmental consequences. Even though U.S.’s “greenest city”. Building on my U.S Mexican households drive fewer miles per Low Carbon Cities research, I recently ranked the house- year than U. S. households, the exported hold carbon footprint for 74 Chinese vehicles would have been scrapped had Edward L. Glaeser and I ranked U.S cities using high quality data from the they remained in the United States. Our cities with respect to their household 2006 Chinese Urban Household Survey.4 best estimate is that U.S vehicles that are greenhouse gas emissions.1 Using micro In the case of China, the dirtiest cit- imported into Mexico, and are 10 to 15 data on household consumption of trans- ies are to the North where coal is used years old at the time, live on for another portation, electricity, and home heating, for winter heating. These results are sig- ten years. Thus free trade in used durables we document significant differences across nificant because Chinese regional eco- between richer and poorer nations slows major cities. For example, if the average nomic development policy is encouraging down the overall vehicle scrappage rate. household chose to live in Houston versus growth in the Northern region to deflect In the case of residential homes, San Francisco, it would produce roughly growth away from the mega cities along energy consumption varies across differ- 16 more tons of carbon dioxide each year. the eastern coast. If Northern China’s cit- ent birth cohorts. Using different data- San Francisco is ranked as a “greener” city ies continue to rely on coal for heat rather sets from California, Dora Costa and I because of its temperate climate, which than substituting to natural gas, then this document that homes built in the 1970s means that households there use less elec- spatial trend could have significant aggre- consume more electricity than observa- tricity, the region relies more on natural gate carbon implications. tionally identical homes.6 Using panel gas rather than coal for power generation, data for the same home over time, we dis- and this lowers the electric utility’s emis- Durable Capital miss the hypothesis that this effect sim- sions factor. San Francisco is also more ply reflects aging. Instead, our preferred compact than Houston, with more of Over time, new versions of products explanation is that during times when res- the metropolitan area’s total employment such as the Toyota Prius or Tesla elec- idential electricity prices are low, homes located downtown. The suburbanization tric car or Zero Net Energy homes will built under such incentive regimes are of employment has contributed to a ris- have much smaller carbon footprints than more likely to be energy inefficient, and ing carbon footprint. When people work earlier makes of cars and homes. Such this effect persists decades later.7 As the in the suburbs, they are likely to live in “green” products often represent a tiny share of California homes that were built the suburbs, and to live in a larger home share of the existing capital stock because in the 1970s shrinks over time, overall and rely on a private vehicle for transpor- cars and buildings are long lived capi- California residential energy efficiency tation.2 Policies such as declining center tal. This means that it can take decades will rise. city crime and improved urban public for average energy efficiency of homes or schools help to shrink a city’s carbon foot- vehicles to improve. The Political Economy I examine the consequences of dura- of Carbon Legislation * Kahn is a Research Associate in the ble capital for the greenhouse gas miti- NBER’s Program on Environmental and gation progress in one study with Lucas In June 2009, the U.S House of Energy Economics and a Professor at the Davis. We collected detailed vehicle-level Representatives passed the American University of California, Los Angeles. His information on the scale and composition Clean Energy and Security Act (ACES). Profile appears later in this issue. of used vehicles exported by the United This complex carbon mitigation legisla-

 NBER Reporter • 2011 Number 1 tion bundled together a wide range of because of pass through. The conven- do not literally believe that registering policies all intended to increase energy tional wisdom is that such states will for the Democratic Party causes you to efficiency and reduce greenhouse gas emis- lose manufacturing jobs because those buy a Prius and to live a green lifestyle. sions. For example, the ACES included jobs seek out cheaper places to do busi- Instead, such political party registration legislation to enact an electric utility cap- ness. Erin Mansur and I investigate this data provides a signal of one’s otherwise and-trade system for carbon emissions. claim10 by comparing employment counts difficult to observe “ideology.” In the summer of 2010, the Senate chose by manufacturing industry in adjacent This research contributes to a grow- to not vote on this legislation. I exam- counties. Adjacent counties share many ing economics literature on the role of ine the correlates of carbon voting on common factors such as amenities and a ideology in determining economic out- key pieces of legislation such as this one.8 common local labor market and similar comes. There are several open research Representatives from high carbon, poor, access to final consumers. But two adja- questions here. First, how does a person conservative areas have been the least cent counties can differ along key dimen- “acquire” an environmentalist ideology? likely to vote in favor of this legislation. sions such as energy prices and exposure What role do peers play in how this ide- Representatives in districts where indus- to government labor and environmental ology evolves over time? The economics try is a large share of local emissions also policy. We exploit this variation in energy of identity literature offers some fruitful were less likely to vote in favor. prices and labor and environmental reg- pathways for exploring this issue.13 During this slow recovery from the ulation within county-pairs to provide Documenting the role of ideology most recent recession, environmental- new estimates of their effects on the loca- in explaining population heterogene- ists are deeply concerned that climate tional pattern of manufacturing. We con- ity would be less important if we collec- change is not a policy priority. Indeed, clude that employment in only a handful tively taxed negative externalities. But, President Obama did not mention the of energy intensive manufacturing indus- in the absence of formal carbon pric- words “climate change” in his 2011 State tries, such as primary metals (NAICS ing, society as a whole benefits when a of the Union address. In recent work 331), paper manufacturing (NAICS 322) subgroup of citizens volunteers to be Matthew Kotchen and I examine trends and textile mills (NAICS 313), is respon- “guinea pigs” by purchasing the first in Google searches to test for the relation- sive to electricity prices. generation of new green products and ship between business cycles and inter- enacting novel new legislation such as est in the broad issue of climate change.9 Environmental Ideology and California’s AB32. Google Insights allows us to search at the Living the “Green” Life state/year/week level and permits a peek Urban Adaption to into the “zeitgeist” at that moment. We In the absence of formal Pigouvian Climate Change match this data to state unemployment carbon pricing, households have no data by month and document that in financial incentive to economize on their My book titled Climatopolis: How those states in which the unemployment production of greenhouse gas emissions, Our Cities Will Thrive in the Hotter rate increases, searches for “global warm- yet at any point in time we observe many Future was published in fall 2010.14 ing” decline and searches for “unemploy- households living the “green life.” In In it, I examine how urban quality of ment” increase. These findings support Berkeley, California, I see people driv- life will be affected by climate change. the claim that the recession has chilled ing Prius vehicles, biking to work, hav- Assuming free market capitalist growth interest in prioritizing climate change as ing solar panels installed, and even hav- and the fundamental worldwide free a pressing policy issue. This finding is ing the grass ripped out of their lawns. rider problem, global greenhouse gas important because it challenges the con- Each of these actions contributes to emissions will continue to rise. Facing ventional wisdom that recessions are good the public good. In a series of papers, this reality, what will climate change do for the environment. The traditional view I seek to describe who lives the “green to our urban economy? is that industry activity is dirty and pro- life.”11 Controlling for standard demo- Although I cannot predict what will cyclical. These facts imply that pollution graphic variables such as age, education, happen to a city such as Moscow in improves during recessions. But, if we income and ethnicity, I focus strictly on the year 2050, I am confident that the need to introduce a Pigouvian incentive the role of political ideology. It seems insights generated by NBER research to combat climate change, then my results that people who are registered members have direct implications for the com- suggest that the probability of this taking of liberal political parties (Democrats, plex challenge of climate change adapta- place will decline during recessions. Green Party) literally “walk the walk.” tion. Microeconomics provides a pow- States that rely on coal fired power They are more likely to own a Prius, use erful tool for thinking about how we plants, such as Indiana, have worried that public transit, and consume less elec- will cope with this emerging ambigu- if carbon emissions are priced through a tricity, and to respond to conservation ous threat. The book’s core thesis is that carbon tax or cap-and-trade regulation, “nudges” than observationally identical urban capitalism will play a crucial role then their local electricity prices will soar non-liberal households.12 Of course, I in helping us to adapt to the challenge

NBER Reporter • 2011 Number 1 7 posed by climate change. 1 E. Glaeser and M. Kahn, “The Recession,” NBER Working Paper No. For example, climate change is likely Greenness of Cities: Carbon Dioxide 16241, July 2010. to raise the average temperature in cer- Emissions and Urban Development,” 10 M. Kahn and E. Mansur, “How tain cities. Because of that, cities such as NBER Working Paper No. 14238, Do Energy Prices and Labor and Detroit and Buffalo will have an easier August 2008. Environmental Regulations Affect Local time competing against Sun Belt cities 2 E. Glaeser and M. Kahn, Manufacturing Employment Dynamics? whose warm winter temperatures have “Decentralized Employment and the A Regression Discontinuity Approach,” acted as a magnet, attracting population Transformation of the American City,” NBER Working Paper No. 16538, migration. 15 NBER Working Paper No. 8117, November 2010. In Climatopolis, I argue that house- February 2001. 11 M. Kahn, “Do Greens Drive holds will learn from climate scientists 3 M. Kahn, “Urban Policy Effects on Hummers or Hybrids? Environmental about the new challenges that differ- Carbon Mitigation,” NBER Working Ideology as a Determinant of Consumer ent cities will face. If specific cities do Paper No. 16131, June 2010. Choice,” Journal of Environmental experience a decline in their quality 4 S. Zheng, R. Wang, E. Glaeser, and Economics and Management, 54(2) of life, then their real estate prices will M. Kahn, “The Greenness of China: pp.129–45, 2007. decline, and they will suffer a net out- Household Carbon Dioxide Emissions 12 D. Costa and M. Kahn, “Why Has flow of people. Households will “vote and Urban Development,” NBER California’s Residential Electricity with their feet” and this nimbleness will Working Paper No. 15621, December Consumption Been So Flat Since the help them to cope with the evolving 2009. 1980s?: A Microeconometric Approach,” challenge of climate change. Cities com- 5 L. Davis and M. Kahn, op. cit. and “Energy Conservation pete to attract and retain the skilled. If “International Trade in Used ‘Nudges’ and Environmentalist a city’s quality of life declines because Durable Goods: The Environmental Ideology: Evidence from a Randomized of climate change, then the skilled will Consequences of NAFTA,” NBER Residential Electricity Field Experiment,” leave and economic growth will slow. Working Paper No. 14565, December NBER Working Paper No. 15939, April My book emphasizes the potential 2008. 2010. for endogenous technological advance 6 D. Costa and M. Kahn, “Why Has 13 D. Costa and M. Kahn, “Shame to play a key role in helping us to adapt. California’s Residential Electricity and Ostracism: Union Army Deserters The billions of people who will be Consumption Been So Flat Since the Leave Home,” NBER Working Paper No. affected by climate change create a large 1980s? A Microeconometric Approach,” 10425, April 2004. market opportunity for entrepreneurs NBER Working Paper No. 15978, May 14 M. Kahn, Climatopolis: How Our who can serve this market.16 In the pres- 2010. Cities Will Thrive in the Hotter World ence of fixed costs to develop new prod- 7 D. Costa and M. Kahn, “Electricity (see climatopolis3.com), Basic Books, ucts, the scale of the market is a key Consumption and Durable Housing: 2010. determinant. If billions of people seek Understanding Cohort Effects,” NBER 15 O. Deschenes and E. Moretti, an energy efficient air conditioner to Working Paper No. 16732, January “Extreme Weather Events, Mortality, offset hot summers, then there will be 2011. and Migration,” NBER Working Paper sharp incentives to invest in developing 8 M. Cragg and M. Kahn, “Carbon No. 13227, July 2007. such products. Some of these producers Geography: The Political Economy of 16 D. Acemoglu and J. Linn, “Market will succeed. In a globalized world mar- Congressional Support for Legislation Size in Innovation: Theory and Evidence ket, the pay-off to the successful entre- Intended to Mitigate Greenhouse Gas from the Pharmaceutical Industry,” preneur will be huge. In new research, I Production,” NBER Working Paper No. NBER Working Paper No. 10038, will continue to explore microeconomic 14963, May 2009. October 2003. issues related to climate change mitiga- 9 M. Kahn and M. Kotchen, tion and adaptation. “Environmental Concern and the Business Cycle: The Chilling Effect of

 NBER Reporter • 2011 Number 1 Reducing the Risks of Catastrophes

Howard Kunreuther*

Given the hundreds of billions of dol- lars in economic losses that catastrophes have caused in the United States since 2001, people often are surprised to learn that Hurricane Hugo, which struck the South Carolina coast in 1989, was the first disaster to inflict more than $1 bil- lion of insured losses. Sixteen years later, Hurricane Katrina cost insurers and rein- surers an estimated $48 billion.1 A comparison of economic losses from natural catastrophes alone reveals a large increase over time: $528.3 billion (1981–1990); $1,196.8 billion (1991– 2000); and $1,213.5 billion (2001–2010). (See Figure 1.) There have been many types of extreme events in recent years (for exam- ple, the 9/11 terrorist attacks, natural disasters such as Hurricane Katrina, tech- nological accidents such as the BP oil Figure 1 — Natural catastrophes worldwide 1980–2010. spill, and the financial crisis of 2008), Overall and insured losses with trend. but they all have the following features in © 2011 Münchener Rückversicherungs-Gesellschaft, common: • A failure of key decision makers to undertake risk reducing measures in Failure of individuals to under- and protective measures.2 After a major advance of the disaster; take protective measures flood, earthquake, or hurricane, the • A lack of availability of insur- government may provide at least some ance to cover some potential catastrophic There are two types of measures financial assistance to aid the recovery losses (such as from terrorism). When that those at risk can undertake to of the unprotected victims. Hurricane insurance is available, it generally does not reduce the financial consequences of Katrina provided vivid evidence of this. provide financial incentives to encourage low probability adverse events: invest- Many homeowners who suffered water investment in risk reducing measures; ing in loss reduction measures and pur- damage from the disaster did not have • Growing interdependencies and chasing insurance. However, there is flood insurance, even though they were interconnectedness in the world, and our a key difference between these two eligible to purchase such a policy at a inability to appreciate how weak links can protective actions. Insurance normally subsidized rate through the National cause systemic failures. is purchased on an annual basis with Flood Insurance Program (NFIP). Over the past ten years, much of my an option to renew for the coming In the Louisiana parishes affected by research, in collaboration with colleagues, year. Investing in loss-reduction mea- Katrina, the percentage of homeowners seeks to explain these issues and consid- sures involves an upfront cost, such as with flood insurance ranged from 57.7 ers ways to mitigate the losses from future the outlay to install shutters to pre- percent in St. Bernard’s to 7.3 percent catastrophes. vent losses from hurricanes; the bene- in Tangipahoa. Only 40 percent of the fits normally accrue over the life of the residents in Orleans parish had flood structure. insurance.3 *Kunreuther is Co-Director of the NBER’s Prior to a disaster, many individu- Furthermore, homeowners are Working Group on Insurance and a als believe that the event is below their likely to cancel their flood insurance Professor at the Wharton School. His pro- threshold level of concern and thus policies, even if they had been required file appears later in this issue. do not invest voluntarily in insurance to purchase a policy as a condition for

NBER Reporter • 2011 Number 1 9 a federally insured mortgage. A large- Insurers’ reluctance to pro- over Lockerbie, Scotland, in 1988. In that scale analysis of the 7.9 million new vide protection against instance, the weak link was an obscure policies issued by the NFIP over the catastrophic risks airport, Gozo in Malta, where terror- period January 1, 2000–December 31, ists checked a bomb on Malta Airlines 2009 revealed that the median length Insurers exhibit biases similar to that eventually was loaded onto Pan Am of time before those flood policies lapse those of consumers. The case of terrorism 103 at London’s Heathrow Airport. Pan is only three years.4 coverage illustrates this point rather dra- Am could not have prevented the crash Most individuals are reluctant to matically. Even after the terrorist attack without inspecting every item transferred invest in protective measures, even if on the World Trade Center in 1993 and from other airlines. they recognize the likelihood of a disas- the Oklahoma City bombing in 1995, Based on a game-theoretic analysis, ter. They are highly myopic and tend to insurers in the United States did not view we show that the incentive of any agent to focus on the returns only over the next either international or domestic terrorism invest in risk-reduction measures depends couple of years. The effect of placing as a risk that should be explicitly consid- on how he expects others to behave in too much weight on immediate consid- ered when pricing their commercial insur- this respect. If he thinks that they will not erations is that the upfront costs of mit- ance policies. invest in security, then his incentive to do igation will loom disproportionately Following the terrorist attacks of so is reduced. On the other hand, should large relative to the delayed expected 9/11, insurers found themselves with sig- he believe that they will invest in secu- benefits in losses over time.5 nificant amounts of terrorism exposure rity, it might be best for him to do so as A 1974 survey of more than 1,000 in their existing portfolios and only lim- well. Thus there may be an equilibrium in California homeowners in earthquake- ited possibilities of obtaining reinsurance which no one invests in protection, even prone areas revealed that only 12 per- to reduce the losses from a future attack. though all would be better off if they had cent of the respondents had adopted Insurers warned that another event of incurred this cost. This situation, which any protective measures.6 Fifteen years comparable magnitude could do irrepa- we termed interdependent security (IDS), later, there was little change, despite the rable damage to the industry, and most does not have the structure of a prisoners’ increased public awareness of the earth- companies excluded terrorism protection dilemma game, even though it has some quake hazard. In a 1989 survey of 3,500 from their commercial policies, with the similarities.12 homeowners in four California coun- remaining insurers charging extremely Alex Muermann and I apply the IDS ties at risk from earthquakes, only 5 to high premiums for coverage. This led model to the case where insured individu- 9 percent of the respondents in these Congress to pass the Terrorism Risk als face negative externalities in the form areas reported adopting any loss reduc- Insurance Act of 2002, which involved of potential contamination. We show tion measures.7 Other studies have risk sharing between the insurance indus- that individuals will want to under-invest found a similar reluctance by residents try and federal government.10 in mitigation measures to reduce their in flood-prone areas to invest in mitiga- Similar withdrawal of insurance cov- future losses. Limiting insurance cover- tion measures.8 erage occurred after the Florida hurricanes age through deductibles, or selling “at- As a way of characterizing behavior of 2005 when the state of Florida refused fault” insurance, can partially internalize that deviates from standard models of to provide the rate increases demanded this negative externality and thus improve choice, such as expected utility theory, by insurers. Instead, Florida established a individual and social welfare.13 David Krantz and I propose a model of state insurer, Citizens Property Insurance At a more general level, a central goals and plans that is based on a con- Corporations. Citizens’ rates were highly problem in today’s networked world is structive model of choice. More specifi- subsidized for those residing in hurri- that the risks a firm or individual faces cally, the weights associated with dif- cane prone areas, which led several insur- partially depend on the actions of others. ferent goals may change over time as a ers to refuse to offer new coverage in the Put more starkly: we no longer control function of resources, past information, state.11 our own destinies, even when we under- and social norms.9 We apply this model take protective measures. Consider the to protective decisions in an attempt to Interdependencies and following examples: explain anomalies, such as people insur- weak links in the system • The August 2003 blackout over ing against non-catastrophic events, the northeastern United States and south- underinsuring against catastrophic After the terrorist bombing of the eastern Canada was caused by an Ohio risks, and allowing such factors as anxi- World Trade Center on 9/11, Geoffrey utility whose inability to provide elec- ety and peace of mind to influence their Heal and I began exploring the impact tricity was passed on to other utilities insurance purchases and other protec- that weak links in an interconnected sys- and customers through an interconnected tive actions. Neither expected utility tem would have on the decisions of oth- grid.14 theory nor prospect theory can explain ers to invest in protective measures. We • Actions of even a small division these anomalies satisfactorily. focused on the tragic Pan Am 103 crash in a giant corporation can cause the entire

10 NBER Reporter • 2011 Number 1 firm to go under and may have significant annual policies, in particular when there is Paradoxes of Government Disaster Policy: effects on the global financial system. One a cost that consumers will have to pay Bringing about Wise Governmental only has to look at the failure of Baring’s if they decide to cancel their policy and Decisions for Hazardous Areas,” Annals of Bank in February 1995, driven by the switch to an annual contract.19 Michel- the American Academy of Political and actions of a single trader in its Singapore Kerjan and I have studied the impact of Social Science 604, 2006, pp.171–91; branch, or the demise of Arthur Andersen attaching multi-year flood insurance con- S.B. Laska, Floodproof Retrofitting: in 2002 attributable to criminal action by tracts to the property, not to the owner, Homeowner Self-Protective Behavior, its Houston branch auditing Enron.15 with premiums reflecting risk. Multi- Boulder, CO: Institute of Behavioral • With respect to the financial cri- year contracts coupled with short-term Science, University of Colorado, 1991. sis of 2008, the American International incentives and well-enforced regulations 9 D. Krantz and H. Kunreuther, “Goals Group (A.I.G.), the world’s largest insurer, comprise one strategy for dealing with and Plans in Protective Decision Making,” suffered severe financial losses because of the problems of myopia that characterize NBER Working Paper No. 12446, August the actions of a 377-person London unit behavior with respect to low probability/ 2006, and Judgment and Decision known as A.I.G. Financial Products, run high consequence.20 Making, Vol. 2, No. 3, June 2007, pp. with almost complete autonomy from 137–168. the parent. That one unit decimated the 1 For more details on the increased losses 10 H. Kunreuther and E. Michel-Kerjan, entire company.16 from catastrophes, see H. Kunreuther “Policy Watch: Terrorism Risk Insurance On a more positive note, Heal and and E. Michel-Kerjan, At War with the in the United States,” NBER Working I show that if agents are heterogeneous Weather, Cambridge, MA: MIT Press, Paper No. 10870, November 2004, and with respect to costs or the degree they 2009. Journal of Economics Perspectives, 18 impact others, then under relatively weak 2 H. Kunreuther and M. Pauly, “Neglect­ (4), 2004, pp. 201–14. assumptions there is a tipping set — a group ing Disaster: Why Don’t People Insure 11 At War with the Weather, op. cit. of agents who can tip the equilibrium Against Large Losses?”, Journal of Risk 12 H. Kunreuther and G. Heal, from one where no one joins to one where and Uncertainty 28 , 2004, pp. 5–21. “Interdependent Security,” NBER Working everyone does. To make this idea more 3 H. Kunreuther and M. Pauly, “Rules Paper No. 8871, April 2002, and Journal concrete, suppose there are 50 agents. rather than Discretion: Lessons from of Risk and Uncertainty, Springer, 26(2– Initially they are at an equilibrium at Hurricane Katrina” NBER Working 3), 2003, pp. 231–49 which none of them invests in risk reduc- Paper No. 12503, August 2006, and 13 A. Muermann and H. Kunreuther, ing measures. If agents 1 through 5 form a Journal of Risk and Uncertainty, Vol. “Self-Protection and Insurance with tipping set, that is if they change from not 33, Numbers 1-2, September 2006, pp. Interdependencies,” NBER Working Paper investing in protection to investing, then 101–16. No. 12827, January 2007, and Journal all others will follow suit; the best strategy 4 E. Michel-Kerjan, S. Lemoyne de of Risk and Uncertainty, 36, 2008, for agents 6 through 50, conditional on 1 Forges, and H. Kunreuther, “Policy pp. 103–23. through 5 investing in risk reducing mea- Tenure under the U.S. National Flood 14 G. Heal and H. Kunreuther, sures, is for them to also join.17 Insurance Program (NFIP)” Wharton “Interdependent Security: A General Risk Management and Decision Processes Model”, NBER Working Paper No. Multi-year, risk-based contracts Center, (mimeo), 2010. 10706, August 2004, and “Modelling with short-term incentives 5 H. Kunreuther, R. J. Meyer, and E. Interdependent Risks”, Risk Analysis, 27, Michel-Kerjan, “Strategies for Better 2007, pp. 621–34. One way of addressing many of the Protection against Catastrophic Risks”, 15 G. Heal and H. Kunreuther, “You problems described above is for insurance forthcoming in Behavioral Foundations Only Die Once: Managing Discrete policies to encourage adoption of risk- of Policy, E. Shafir, ed., Princeton, NJ: Interdependent Risks”, NBER Working reducing measures against catastrophic Princeton University Press. Paper No. 9885, August 2003, and “You risks.18 Insurance premiums based on risk 6 H. Kunreuther, R. Ginsberg, L. Miller, Only Die Once: Interdependent Security provide signals to individuals about the P. Sagi, P. Slovic, B. Borkan, and N. Katz, in an Uncertain World, in The Economic hazards they face, and encourage them to Disaster Insurance Protection: Public Impacts of Terrorist Attacks, H.W. engage in cost-effective mitigation mea- Policy Lessons, New York: John Wiley Richardson, P. Gordon, and J.E. Moore sures that reduce their vulnerability to and Sons, 1978. II, eds., Cheltenham, UK: Edward Elgar, catastrophes. This principle is necessary 7 R. Palm, M. Hodgson, R. D. 2005. for a competitive insurance market to Blanchard, and D. Lyons, Earthquake 16 H. Kunreuther, “The Weakest Link: operate efficiently. Dwight Jaffee, Erwann Insurance in California: Environmental Managing Risk Through Interdependent Michel-Kerjan, and I further show the Policy and Individual Decision Making, Strategies”, in Network Challenge: conditions under which multi-year insur- Boulder, CO: Westview Press, 1990. Strategy, Profit and Risk in an ance contracts may be superior to standard 8 R. Burby, “Hurricane Katrina and the Interlinked World, P. R. Kleindorfer and

NBER Reporter • 2011 Number 1 11 Y. Wind, eds., Upper Saddle River, NJ: Microeconomics, 2(1), 2010, pp.86–99. 20 H. Kunreuther and E.O. Michel- Wharton School Publishing, 2009. 18 At War with the Weather, op. cit. Kerjan, “Market and Government 17 G. Heal and H. Kunreuther, 19 D. Jaffee, H. Kunreuther, and E. Failure in Insuring and Mitigating “Supermodality and Tipping,” NBER Michel-Kerjan, “Long-Term insur- Natural Catastrophes: How Long-Term Working Paper No. 12281, June 2006, ance (LTI) for Addressing Catastrophic Contracts Can Help” in Public Insurance and “Social Reinforcement: Cascades, Market Failure,” NBER Working Paper and Private Markets, J. R, Brown, ed., Entrapment and Tipping,” NBER No. 14210, August 2008, and Journal of Washington, DC: AEI Press, 2010. Working Paper No. 13579, November Insurance Regulation, 2010 Issue, (29)7, 2007, and American Economic Journal: pp. 167-187.

Trade Agreements as Incomplete Contracts

Giovanni Maggi*

The traditional theory of international suggests that one important role for the stances. Finally, the agreement only stip- trade typically views trade agreements as WTO’s court may be to “complete” an ulates upper bounds on the tariffs, thus complete, or as contracts that specify all incomplete agreement. leaving governments with discretion to go the relevant policy instruments and cover All of this leads to important ques- below the bounds. all possible contingencies. Implicit in this tions: How do we explain the particu- Our key assumption is that it is costly approach is the assumption that all rel- lar structure that trade agreements take to negotiate and draft a trade agreement, evant policy instruments and contingen- in reality? Can an incomplete-contract- and that contracting costs are higher cies can be specified in the contract and ing perspective help us interpret the rules when the agreement is more detailed, verified by a court. In reality, though, even and institutions that have emerged in the both in terms of the policies that it seeks the most elaborate trade agreement — the world trading system? to constrain and the contingencies that it GATT/WTO — is a vastly incomplete specifies.2 We explicitly incorporate the contract: the constraints imposed by the Rigidity and Discretion costs of contracting over policies and con- agreement on governments’ policy choices in Trade Agreements tingencies into our model, and study the are largely non-contingent, and many rel- optimal design of a trade agreement in the evant policy instruments are left out of In one paper, Henrik Horn, Robert presence of these costs.3 the agreement. Staiger, and I propose a simple incom- We find first that it cannot be optimal Another counterfactual implica- plete-contracting model of trade agree- to contract over domestic subsidies while tion of the complete-contracting view of ments in which the contractual incom- leaving tariffs to discretion. This result trade agreements is that judicial bodies, pleteness arises from the presence of accords well with the emphasis on trade such as the WTO’s Dispute Settlement contracting costs.1 We argue that this measures that characterizes the GATT/ Body, should play only a pure enforce- incomplete-contracting perspective can WTO. And, while this feature is often ment role. In reality, however, most trade help to explain some core features of the informally explained as deriving from dis- disputes in the WTO concern not simply GATT/WTO. In particular, the agree- tinct levels of contracting costs across the enforcement of clearly specified obli- ment binds trade policy instruments, these instruments, our model imposes gations but rather the interpretation of while leaving the choice of most domes- no such distinction and thus identifies a vague provisions, or of instances in which tic policy instruments to the discretion of more fundamental explanation. the text of the agreement is silent. This governments. One exception is that the Next we find that it is optimal to leave WTO has introduced some regulation of subsidies to discretion if: 1) countries have *Maggi is a Research Associate in the domestic subsidies. Second, the restric- little monopoly power in trade, in which NBER’s Program on International tions in the GATT/WTO are not usually case they have little ability to manipulate Trade and Investment and a Professor of conditioned on any information about terms of trade; or 2) they trade little, in Economics and International Affairs at the state of the economy, except for some which case they gain little from exploit- Yale University. His profile appears later “escape clauses” that allow for temporary ing their power over terms of trade; or 3) in this issue. protection under some specific circum- subsidies are a poor substitute for tariffs as

12 NBER Reporter • 2011 Number 1 a tool for manipulating the terms of trade. DSB roles with the help of a formal model ity of error by the DSB, governments are The trade volume effect identified above and address two more specific questions: tempted to game the system within the suggests a possible explanation for the How “activist” should the DSB be? That leeway offered by the incompleteness of fact that the WTO has introduced a reg- is, should it have authority to interpret the contract: the importer is tempted to ulation of domestic subsidies that was not vaguely-stated obligations, to fill gaps in protect when it should not, hoping to get present in GATT, namely that a general the agreement, or to modify rigid obliga- away with it; and the exporter is tempted increase in trade volumes over time has tions? And, should DSB rulings set prec- to force free trade by filing a dispute when increased the cost of discretion, thereby edent for future rulings? it should not. One implication of these heightening the need to constrain domes- We find that, if the DSB has- suffi findings is that the intensity of DSB use tic policies. ciently accurate information, it is optimal is not a reliable indicator of the perfor- We then examine whether the opti- to build discretion into the contract and mance of the institution. mal agreement will include contingencies to provide the DSB with a mandate to fill We next examine whether DSB rul- regarding the state of the economy, and if the gaps. On the other hand, if the DSB’s ings should set legal precedent for future so, what variables should be used to con- information is poor, it is optimal to write rulings. On one hand, precedent reduces dition the agreement’s terms. A key obser- a contract that is either vague or rigid and the probability of having disputes tomor- vation is that, since the incentive to dis- to then bar the DSB from attempting to row, by removing uncertainty about the tort subsidies for terms-of-trade purposes “complete” the contract. If the accuracy of rights and obligations that will apply increases with trade volume, making tar- the DSB’s information falls into an inter- should the same situation occur again, iffs state-contingent can help to mitigate mediate range, then it is optimal to write and this leads to a beneficial savings in lit- this incentive against especially high trade a vague contract and to provide the DSB igation costs. On the other hand, we find volumes. This effect is at the core of our with a mandate to interpret the contract that precedent increases the probability of third result: conditional on leaving sub- when disputes arise. a dispute today, with the associated waste sidies to discretion, it can be optimal to Interestingly, our analysis does not in litigation costs and a less efficient policy make tariffs contingent on variables that support the “modification” role of the selection (because the DSB is imperfectly affect the trade volume but are irrelevant DSB: it is never optimal to allow the court informed). When we examine how the to the first-best tariff level. One implica- to void obligations that are clearly stated resolution of these opposing effects varies tion of this result is that it can be optimal in the agreement. We also find that, if the with key parameters of the model, we find to specify an escape-clause type rule that DSB is sufficiently accurate, the first-best that the introduction of precedent is more allows governments to raise tariffs when outcome can be achieved even though the likely to enhance the performance of the the level of import demand is high. contract is highly incomplete, the use of institution when the accuracy of DSB rul- Finally, we show that the presence of the DSB is costly, and the DSB rulings ings is low and when governments care lit- contracting costs can explain the fact that are imperfect. That is because the threat tle about the future, or are not very likely the constraints imposed by the agreement of invoking the DSB, and the expecta- to interact repeatedly. on tariffs take the form of upper bounds, tion of a sufficiently precise DSB ruling, rather than exact tariff levels. is sufficient to induce governments to act Liability Rules versus Property efficiently. Therefore, our model suggests Rules in Trade Agreements Dispute Settlement Procedures that imperfection in the DSB informa- tion does not necessarily impair the per- A further potential strategy for cop- In a subsequent paper, Staiger and I formance of the institution; the presence ing with the incompleteness of trade take the incomplete-contracting approach of an activist DSB potentially can gener- agreements is to structure trade policy to trade agreements one step further by ate dramatic efficiency gains, in spite of its commitments as “liability” rules. A liabil- examining the potential role of a Dispute (inevitable) information limitations. ity rule leaves a government free to raise Settlement Body (DSB) as a mechanism for At the same time, our analysis offers trade barriers in response to changing cir- “completing” an incomplete agreement.4 a warning. We find that, if litigation costs cumstances, but requires the government Although in economic models trade are not too high, the equilibrium policy to compensate its trading partners with a disputes typically are treated as synony- tends to be efficient when the DSB is not certain amount of “damages.” This type of mous with concerns about enforcement, invoked in equilibrium. Moreover, we rule builds some flexibility into the agree- in reality most WTO disputes seem to find that equilibrium disputes are more ment without the need to describe con- concern the interpretation of vague provi- frequent when the DSB is less accurate. tingencies explicitly. The alternative to lia- sions, or instances in which the agreement Thus, in effect the motives that trigger bility rules is given by “property rules.” A is silent. Some have suggested that the a DSB filing are inefficient, and the effi- property rule either endows the exporting WTO’s DSB could usefully grant excep- ciency-enhancing effect of the DSB is asso- country (or countries) with the right to tions to rigid contractual obligations. In ciated with its off-equilibrium impacts. free trade or endows the importing coun- this paper, we examine these potential This is because, anticipating the possibil- try with the right to trade protection.

NBER Reporter • 2011 Number 1 13 Such entitlements can only be transferred liability rule tends to be optimal when action costs in determining the optimal through a voluntary transaction (renego- ex-ante uncertainty is high. This suggests rules. We find that a property rule tends tiation). There is a large law-and-econom- that as uncertainty over the joint bene- to be preferable to a liability rule when ics literature on the choice between liabil- fits of free trade falls, the optimal institu- the cost of transfers is high. We also find ity rules and property rules in the design tional arrangement should tend to move that the introduction of frictions in bar- of domestic law, but there is little formal away from liability rules toward prop- gaining tends to favor property rules over research on this question in the context of erty rules. Conversely, liability (property) liability rules. These results contrast with international trade agreements. rules should be more prevalent in issue the findings in the law-and-economics lit- In another paper, Staiger and I forge areas characterized by a higher (lower) erature that liability rules tend to be pref- a link between the theory of trade agree- degree of uncertainty. erable to property rules when transaction ments and the law-and-economics theory When we allow the DSB to con- costs are high. of the optimal design of legal rules.5 We duct a noisy investigation ex post, and if propose a simple model that highlights the DSB information is sufficiently accu- the role of transaction costs, renegotia- rate either because ex-ante uncertainty 1 H. Horn, G. Maggi, and R.W. Staiger, tion, and settlement “in the shadow of is small or because the signal observed “Trade Agreements as Endogenously the law.” We ask under what conditions by the DSB is very precise, we find that Incomplete Contracts,” NBER Working liability rules are preferable to property a property rule is optimal, but with the Paper No. 12745, December 2006, and rules and, in cases where liability rules are assignment of entitlements contingent on American Economic Review, 100(1) desirable, what the optimal level of dam- the DSB signal. Thus at a broad level, if (March 2010), pp. 394–419. ages is. one accepts that the accuracy of DSB rul- 2 This approach broadly follows the It is important to understand the dif- ings has increased over time, or that the contracting-costs framework proposed in ference between domestic law as studied degree of ex-ante uncertainty about the P. Battigalli and G. Maggi, “Rigidity, in the law-and-economics literature and joint benefits of free trade has fallen over Discretion and the Costs of Writing international trade agreements, which time, then our model predicts a gradual Contracts,” American Economic Review, are our focus. In international bargain- shift from liability rules to property rules. 92(4) (September 2002), pp. 798–817. ing there is a salient feature that is plausi- As we discuss in the paper, the majority of 3 For an early attempt to model trade bly absent in the domestic context: there legal scholars maintain that this shift can agreements as incomplete contracts, see P. are no efficient government-to-govern- indeed be seen in the GATT/WTO. Battigalli and G. Maggi, “International ment compensation mechanisms. In the We also find that, in circumstances Agreements on Product Standard: an GATT/WTO, the typical means by which where a liability rule is desirable, it is Incomplete Contracting Theory”, NBER a government achieves compensation is never optimal to set damages high enough Working Paper No. 9533, March 2003. through “counter-retaliation” — that is, to make the exporter “whole.” This runs 4 G. Maggi and R.W. Staiger, “On the by raising its own tariffs. Such compen- counter to the “efficient breach” argu- Role and Design of Dispute Settlement sation mechanisms entail important inef- ment in the law-and-economics litera- Procedures in International Trade ficiencies that introduce a novel trans- ture, according to which damages should Agreements,” NBER Working Paper action cost in the international context be set at a level that makes the injured No. 14067, June 2008, and “The Role (which we refer to as the “cost of trans- party whole. In addition, we find that the of Dispute Settlement Procedures in fers”). A major point of departure of our damages for breach should be responsive International Trade Agreements,” forth- model is precisely this difference between to both the harm caused to the exporter coming in the Quarterly Journal of the domestic setting and the international and the benefit garnered by the importer. Economics. government-to-government setting. We suggest that this feature is reminiscent 5 G. Maggi and R.W. Staiger, “Breach, One of our key findings concerns of some aspects of the injury criterion Remedies and Dispute Settlement in Trade the impact of ex-ante uncertainty about and the rules of compensation for WTO Agreements,” NBER Working Paper No. the joint benefits of free trade. We find escape clause actions. 15460, October 2009. that a property rule is optimal if ex-ante Our model also generates interesting uncertainty is sufficiently low, whereas a insights with regard to the role of trans-

14 NBER Reporter • 2011 Number 1 The Impact of Employee Pension Promises on State and Local Public Finance

Joshua Rauh*

Most U.S. state and local governments What is the Present Value of severely understate their liabilities.1 In face legal restrictions on the extent Public Pension Promises? particular, government accounting stan- to which they can run deficits and dards require states to discount their lia- issue debt. However, like the U.S. fed- Most U.S. state governments offer bilities at the expected return on their eral government, state and local gov- their employees DB pension plans. This assets. In practice, this usually amounts ernments have substantial off-balance- arrangement contrasts with the defined to discounting pension liabilities at an sheet liabilities in the form of pension contribution (DC) plans that now pre- approximately 8 percent rate. The govern- promises. At the state and local level, vail outside the public sector, such as ment pension accounting approach also these liabilities arise primarily from 401(k) or 403(b) plans in which employ- presents analytical problems: the magni- defined benefit (DB) pension prom- ees save for their own retirement and tude of pension liabilities, and how a pen- ises made to government employees, manage their own investments. In a DB sion’s funds are invested, are two separate including teachers, public safety offi- plan, the employer promises the employee issues to be considered independently. In cials, and other employees of states, an annual payment that begins when practice, however, the accounting stan- cities, and counties. An underfunded the employee retires, and that payment dard being used sets up a false equivalence pension promise can be thought of depends on the employee’s age, tenure, between pension payments, which are as an alternative form of government and late-career salary. extremely likely to be made, and the much debt: the government is borrowing When a state government promises less certain outcome of a risky investment from public employees through prom- a future payment to a worker, it creates a portfolio. ises to pay them pensions when they financial liability for its taxpayers. When Our work on liability measurement retire. the worker retires, the state must make begins by focusing only on payments that Robert Novy-Marx and I have writ- the benefit payments. To prepare for this, already have been promised and accrued. ten a series of papers in which we inves- states typically contribute to and manage In other words, even if the pension plans tigate the issues in public finance and their own pension funds, pools of money could be frozen completely, states would financial markets that have arisen as a dedicated to providing retirement ben- contractually owe these benefits. This quan- result of this substantial form of off-bal- efits to state employees. If these pools tity is known as an Accumulated Benefit ance-sheet borrowing at the state and do not have sufficient funds when the Obligation (ABO) or termination liability. local level. These papers focus on mea- worker retires, then the states will have to The ABO is a narrow measure, and is not suring the present value of public pen- raise taxes or cut spending at that time, affected by uncertainty about future wages sion promises, examining the potential or default on their obligations to retired and service. effects of different policy measures on employees. According to the principles of financial the value of pension promises, and ask- State governments have approxi- economics, the present value of a stream of ing whether municipal bond markets mately $2 trillion set aside in pension cash flows is calculated using discount rates have reacted to unfunded pension lia- funds. Yet we do not know how the value that reflect the risk of the payments. We bilities. This line of inquiry is related of these assets compares to the present collect a unique database of 116 pension to my previous work on corporate value of states’ pension liabilities. Just plans sponsored by the 50 states to perform defined benefit pension plans and the as future Social Security and Medicare these calculations. The calculations require issues they pose for firms’ investment liabilities do not appear in the headline us to model the prospective stream of pay- and capital structure decisions. numbers of the U.S. federal debt, the ments from state pension promises using financial liability from underfunded pub- each state’s stated liability, discount rate, lic pensions does not appear in the head- and actuarial cost method, as well as infor- *Rauh is a Research Associate in line numbers of state debt. If pensions are mation on benefit formulas, the numbers the NBER’s Programs on Corporate Finance, Public Economics, and Aging, underfunded, then the gap between pen- and average wages of state employees by and an Associate Professor of Finance at sion assets and liabilities is off-balance- age and service, salary growth assumptions Northwestern University’s Kellogg School sheet government debt. by age, mortality assumptions, cost of liv- of Management. His Profile appears later In fact, government accounting stan- ing adjustments (COLAs), and separation in this issue. dards require states to use procedures that (job leaving) probabilities by age.

NBER Reporter • 2011 Number 1 15 If benefits have the same default and If on a per-member basis the unfunded than a 5 percent chance that the current recovery characteristics as state general liability is the same for the one-third pattern of pension fund investments will obligation debt, then the national total of of workers covered by municipal plans meet the needs of retirees in 15 years. promised liabilities based on current sal- that are not in our sample, then the total Under state accounting rules, however, ary and service is $3.20 trillion as of June unfunded ABO liability for all munici- this distribution was deemed to be under- 1999.2 If pensions have higher priority pal plans in the U.S. is $574 billion. It is funded by only $1 trillion. than state debt, then the present value of worth emphasizing that, while teachers It is important to emphasize that liabilities is much larger. Using zero-cou- are hired at the local level, their pension state DB pension plans and individual pon Treasury yields, which are default- systems are sponsored at the state level DC pension plans have different objec- free but contain other priced risks, prom- and hence count as part of the state total. tives. An individual 401(k) or 403(b) ised liabilities are $4.43 trillion. Liabilities One question related to the fund- plan is a savings vehicle for an individual. are even larger under broader concepts ing status of public pensions is whether Optimal asset allocation in such plans is that account for projected salary growth taxpayers should be concerned about the governed by the maximization of indi- and future service. fact that state pension funds are invested vidual lifetime utility. A state DB pension There are important caveats about in risky assets. Under current pension plan serves to deliver a contractually pre- using the Treasury yield curve as a mea- fund investment policy, there is a wide specified annuity for the state employees, sure of risk in a default-free pension liabil- distribution of possible future funding with taxpayers responsible for shortfalls. ity. Although the Treasury yield curve is outcomes. The outcomes are skewed in generally viewed as default-free, it reflects such a way that there is a small probabil- Effects of Policy Measures other risks that may not be present in the ity of an extremely good outcome and a on Pension Liabilities pension liability. State employee pensions large probability of poor outcomes. There typically contain cost of living adjust- are some theoretically plausible reasons A number of states have enacted ments (COLAs). If inflation risk is priced, why current taxpayers might not care changes designed to reduce the liabilities then an appropriate default-free pension about this distribution. Equity invest- associated with their pension systems. discount rate would involve a downward ing inside of public pension funds can Most of these changes affect new employ- adjustment of nominal yields to remove be viewed as equivalent to matching lia- ees only, and hence have no impact on the inflation risk premium. This adjust- bilities with bonds, and making side bets standard liability measures, which do ment would further increase the present that entail borrowing money from the not consider future employees. However, value of ABO liabilities. A countervail- states’ employees and investing in the some changes, such as the reductions in ing factor is the fact that Treasuries trade stock market. In terms of the intergen- the cost of living adjustments (COLAs) at a premium because of their liquid- erational consequences of pension fund passed by Colorado and Minnesota this ity. Pension obligations are nowhere near asset allocation, a starting point is the idea year, do affect existing plan members and as liquid as Treasuries. Therefore, ide- that citizens may be able to undo govern- hence the economic present value of cur- ally a liquidity price premium should be ment actions. Equity exposure in pension rent state pension liabilities. removed from Treasury rates before using plans passes through to the taxpayers of Motivated by these changes, we them to discount default-free but illiquid the state. If the state increases its pension examine the present value of state pen- obligations. fund exposure to equities, households can sion liabilities under existing policies and The $4.43 trillion in state pension lia- rebalance their own portfolios away from then under several sets of hypothetical bilities compares to assets in state pension equities. Of course, in order for the pub- policy measures.5 In particular, we con- funds worth around $2 trillion, so there is lic to unwind the government’s position, sider changes to COLAs, full retirement an unfunded liability under the Treasury it must be aware of the full extent of the ages, early retirement ages, and buyout rate measure of around $2.5 trillion at government’s net equity position. rates for early retirement. the state level. For comparison, total state It is possible to calculate a distribu- A single percentage point reduction non-pension debt was $1 trillion and tion of outcomes so that taxpayers can in COLAs would lower total liabilities total state tax revenues were $0.8 trillion decide for themselves whether the state is by 9–11 percent; implementing actuari- in 2008. It is worth emphasizing that the taking an acceptable level of risk on their ally fair early retirement would reduce optimal level of pension underfunding behalf. 4 We estimate that as of September them by 2–5 percent; and increasing may not be zero, just as the optimal level 2008, the median 15-year outcome under the retirement age by one year would of public debt may not be zero. the investment strategies used by states reduce them by 2–4 percent. Dramatic We also estimate unfunded liabilities was a shortfall of $2.8 trillion. The 25th policy changes, such as the elimination at the local level3 by examining 77 local percentile outcome is a shortfall of $3.4 of COLAs or the implementation of plans sponsored by 50 major U.S. cities trillion, the 10th percentile is a shortfall Social Security retirement age parame- and counties, and we perform the same of $3.8 trillion, and the 5th percentile is ters, would leave liabilities around $1.5 calculations as in the case of the states. a shortfall of $4.0 trillion. There is a less trillion more than plan assets.

16 NBER Reporter • 2011 Number 1 Reaction of Municipal Comparison to Regulatory expected returns on assets. Especially given Bond Markets Framework for Corporate the recent introduction of legislation in DB Sponsors Congress that might begin to regulate state To what extent do the markets for and local pension disclosure at the fed- state and local government debt provide Corporate DB pension systems face eral level, the differential effect that these discipline to states with unfunded pen- an entirely different regulatory structure accounting systems have on pension fund- sion liabilities? 6 Public employee pen- than do the states. While states regulate ing and investment policy is an important sion obligations generally enjoy high themselves in consideration of rules set avenue for future research. levels of legal protection in state consti- by the Government Accounting Standards tutions and statutes. As a result, increases Board, corporate DB sponsors are directly 1 R. Novy-Marx and J. Rauh, “The in unfunded pension liabilities are a seri- regulated by the federal government. This Intergenerational Transfer of Public Pension ous concern for municipal bond investors. regulation stems from the 1974 ERISA Promises,” NBER Working Paper 14343, In the final three months of 2008, there legislation and the creation of the Pension September 2008. was great variation in pension funding. In Benefit Guaranty Corporation (PBGC). 2 R. Novy-Marx and J. Rauh, “Public the aggregate, a new unfunded liability of Because they receive PBGC insurance, Pension Promises: How Big Are They and around 42 percent of the total amount of companies must pay premiums to the gov- What Are They Worth?” forthcoming in existing municipal bond debt appeared in ernment, make contributions to remedy Journal of Finance. the capital structure of state governments. funding shortfalls on certain specified 3 R. Novy-Marx and J. Rauh, “The In the quarter ending December 2008, schedules, and discount liabilities for fund- Crisis in Local Government Pensions in the losses in state pension funds amounted ing purposes using segment rates calculated United States,” forthcoming in Growing Old, to between 1 percent and 6 percent of by the IRS based on the yields on high- Brookings Institution: Washington D.C. annual gross state product, and between quality corporate bonds. 4 R. Novy-Marx and J. Rauh, “The 9 percent and 48 percent of annual state Companies also prepare liability cal- Liabilities and Risks of State-Sponsored revenue, depending on the state. culations for the purposes of their account- Pension Plans,” Journal of Economic Using this cross-sectional variation, ing statements. In statements to investors, Perspectives 23(4), 2009, pp. 191–210. we estimate that tax-adjusted municipal they follow prescriptions of the Financial 5 R. Novy-Marx and J. Rauh, “Policy bond spreads rose by 10–20 basis points Accounting Standards Board. Since 2006, Options for State Pension Systems and Their for each 1 percent of annual gross state the balance sheet of firms must reflect Impact on Plan Liabilities,” NBER Working product lost in pension funds by states in unfunded liabilities, although firms still Paper 16453, October 2010, forthcoming in the lower half of the credit quality spec- book as income an expected return on Journal of Pension Economics and Finance. trum. A similar result holds for each 10 their plan assets. There is some evidence 6 R. Novy-Marx and J. Rauh, “Fiscal percent of annual state revenues lost. The that the ability to manage earnings with Imbalances and Borrowing Costs: Evidence effect is approximately constant over the pension assumptions may have been used from State Investment Losses,” working paper, yield curve, suggesting a constant upward opportunistically by corporate managers 2010. shift in annual risk-neutral default prob- during the 1990s.8 7 J. Rauh, “Are State Public Pensions abilities. These results are robust to con- Using nonlinearities in the schedule of Sustainable? Why the Federal Government trols for credit ratings and other mea- mandatory pension contributions, we can Should Worry About State Pension sures of the state’s fiscal strength. They show that when firms face binding contri- Liabilities,” National Tax Journal 63(3) hold within credit rating categories and bution requirements, there is a significant Forum, 2010. are strongest among states with the weak- and negative impact on firm-level capital 8 D. Bergstresser, M. Desai, and J. est ratings. expenditures.9 This is one possible expla- Rauh, “Earnings Manipulation, Pension Furthermore, a number of systems in nation for why firms do not seem to follow Assumptions, and Managerial Investment the United States face the possibility of the risk-shifting hypothesis in their invest- Decisions,” NBER Working Paper No. a squeeze in liquidity if asset returns and ment strategies, but rather allocate their 10543, June 2004, and Quarterly Journal of contributions to the funds are not very pension assets to safer securities when they Economics 121(1), 2006, pp. 157–95. strong.7 For several major states, includ- are closer to financial distress.10 Because of 9 J. Rauh, “Investment and Financing ing Illinois and New Jersey, the assets in these different regulatory structures, state Constraints: Evidence from the Funding of pension funds are insufficient to pay for and local governments face very differ- Corporate Pension Plans,” Journal of Finance today’s already-promised benefits through ent incentives from corporations in man- 61(1), 2006, pp. 33–71. the end of this decade, even if the assets aging their pension systems. Actuarially 10 J. Rauh, “Risk Shifting versus Risk do earn an 8 percent return. Local gov- required contributions for government Management: Investment Policy in ernments in Philadelphia, Boston, and pension systems are not legally binding in Corporate Pension Plans,” Review of Chicago face similarly precarious funding many states, and in any case are based on Financial Studies 22(7), 2009, pp. 2687– situations. liability calculations that are a function of 734.

NBER Reporter • 2011 Number 1 17 NBER Profile: Matthew E. Kahn

Matthew E. Kahn is a Research Associate Professor at Harvard University and Stanford in the NBER’s Program on Environmental University. and Energy Economics. He is also a Professor Kahn is the author of Green Cities: Urban in the Institute of the Environment and the Growth and the Environment (Brookings Departments of Economics and Public Policy Institution Press, 2006), the co-author of at the University of California, Los Angeles Heroes and Cowards: The Social Face of War (UCLA). (Princeton University Press, 2009), and Kahn holds an undergraduate degree in Climatopolis (Basic Books, 2010). He also economics from Hamilton College and a blogs about environmental economics for the Ph.D. in Economics from the University Christian Science Monitor. of Chicago. Before joining the UCLA fac- Kahn is married to his favorite co-author, ulty in January 2007, he taught at Columbia Dora L. Costa. They have a happy nine-year- University and at Tufts University’s Fletcher old son named Alexander. School. He also has served as a Visiting

NBER Profile: Howard Kunreuther

Howard Kunreuther is co-director of in Reducing Risks from Natural Disasters’” the NBER’s Working Group on Insurance and is currently involved with the WEF and the James G. Dinan Professor of Risk Response Network. He is also a mem- Decision Sciences and Public Policy ber of the OECD’s High Level Advisory at the Wharton School, University of Board on Financial Management of Pennsylvania. He is also Co-Director Large-Scale Catastrophes and a chap- of the Wharton Risk Management and ter lead author for the 5th Assessment Decision Processes Center. Report of the Intergovernmental Panel Kunreuther received his undergrad- on Climate Change. His most recent uate degree from Bates College and his books are At War with the Weather (with Ph.D. in Economics from MIT. He is a Erwann Michel-Kerjan, July 2009, MIT Fellow of the American Association for Press) and Learning from Catastrophes: the Advancement of Science (AAAS); Strategies for Reaction and Response (with a member of the National Academy of Michael Useem, January 2010, Financial Sciences’ Panel on Increasing National Times Press) which was named to two Resilience to Hazards and Disasters; and “top” lists: Risk Management Monitor’s a Distinguished Fellow of the Society list of Top 10 books in 2010 for Business for Risk Analysis, having received its Managers and “Best Business Books” in time in their New York City apartment, Distinguished Achievement Award 2010 by Strategy + Business magazine. closer to their four children and grand- in 2001. He co-chaired the World Kunreuther and his wife Gail, who children and to his research with col- Economic Forum (WEF) Global Agenda works with young children and their par- leagues at Columbia University. They Council on “Innovation and Leadership ents, live in Philadelphia. They also spend enjoy bicycling and travel.

18 NBER Reporter • 2011 Number 1 NBER Profile: Giovanni Maggi

Giovanni Maggi is a Research Associate faculty in 1994 as an Assistant Professor, in the NBER’s Program on International was promoted to Associate Professor in Trade and Investment and a Professor of 2001, and to full Professor in 2002. He Economics and International Affairs at came to Yale University in 2007. He is also Yale University. He is also Co-Director of a Visiting Professor at the Getulio Vargas the Leitner Program for Comparative and Foundation. International Political Economy at Yale Maggi’s research and teaching interests University. include International Trade, International Maggi received his undergraduate Political Economy, and the Theory of degree from Universita’ Bocconi in Milan Contracts and Institutions. His work has in 1989 and his Ph.D. in Economics from been published in a number of economic Stanford University in 1994. He then journals, and he is currently Co-Editor of joined the Princeton University economics the Journal of International Economics.

NBER Profile: Joshua Rauh

Joshua Rauh is an NBER Research to joining the Kellogg faculty, he taught at Associate in the Corporate Finance and the University of Chicago’s Booth School of Public Economics Programs and an Associate Business. He also has worked as an Associate Professor of Finance at the Kellogg School of Economist for Goldman Sachs in London. Management at Northwestern University. He Rauh serves on the editorial boards of studies corporate investment, public pension the Journal of Finance, the Review of Corporate liabilities, and the financial structure of pen- Finance Studies, and the Journal of Pension sion funds and their sponsors. Economics and Finance. He is married and has Rauh holds a B.A. from Yale University two young children. and a Ph.D. in economics from MIT. Prior

NBER Reporter • 2011 Number 1 19 Conferences

Fiscal Policy and Crisis

The 23rd NBER-TCER-CEPR Conference on “Fiscal Policy and Crisis” took place in Tokyo on December 16–17, 2010. These conferences are sponsored jointly by the Centre for Economic Policy Research in London, NBER, and the Tokyo Center for Economic Research. Organizers Shin-ichi Fukuda, University of Tokyo and TCER, Takeo Hoshi, University of California, San Diego and NBER, and Eric Leeper, Indiana University and NBER, chose these papers to discuss:

• Troy Davig, Federal Reserve Bank of Kansas City, and Eric Leeper, “Temporarily Unstable Government Debt and Inflation”

• Shin-ichi Fukuda and Junji Yamada, University of Tokyo and TCER, “ ‘Stock Price Targeting’ and Fiscal Deficit in Japan: Why was Japan’s Fiscal Deficit Accelerated in the Lost Decades?”

• Masaya Sakuragawa, Keio University, and Kaoru Hosono, Gakushuin University, “Fiscal Sustainability in Japan”

• David Cook, HKUST, and Michael B. Devereux, University of British Columbia and NBER, and “Cooperative Fiscal and Monetary Policy at the Zero Lower Bound”

• Arata Ito and Tsutomu Watanabe, Hitotsubashi University, and Tomoyoshi Yabu, Keio University, “Estimating Fiscal Policy Rules for Japan, US, and UK”

• Stefano Eusepi, Federal Reserve Bank of New York, and Bruce Preston, Columbia University and NBER, “The Maturity Structure of Debt, Monetary Policy, and Expectations Stabilization”

• Takero Doi, Keio University and TCER; Takeo Hoshi; and Tatsuyoshi Okimoto, Hitotsubashi University, “Japanese Government Debt and Sustainability of Fiscal Policy”

Summaries of the papers are available at: http://www.nber.org/confer/2010/TRIO10/summary.html

Twelfth Annual Conference in India

On December 19 and 20, 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 Suman Bery and Anil Sharma of NCAER. The NBER participants, in addition to the organizers, were: Alberto Alesina, Amitabh Chandra, David Cutler, and Martin Feldstein, Harvard University; Mikhail Golosov and Nancy Qian, Yale University; Bengt Holmstrom and Scott Stern, MIT; Chang-Tai Hsieh and Steven Kaplan, University of Chicago; Anne O. Krueger, Johns Hopkins University; and NBER Board member John Lipsky of the International Monetary Fund. The topics discussed included global growth and adjustment, the state of the Indian economy, development strategies, and the politics of sustaining growth.

20 NBER Reporter • 2011 Number 1 NBER News

2010 Awards and Honors

A number of NBER researchers Economic History Association (he assumes “Financial Frictions and the Macroeconomy.” received honors, awards, and other forms of the Presidency in September 2011). He also received the 2010 T.W. Schultz Prize professional recognition during 2010 and Katherine Baicker was appointed to the from the University of Chicago and became early 2011. A list of these honors, excluding Medicare Payment Advisory Commission a Fellow of the Econometric Society. those that were bestowed by the researcher’s and named a member of the Congressional Richard V. Burkhauser was the 2010 home university and listing researchers in Budget Office’s Panel of Health Advisers and President of the Association for Public alphabetical order, is presented below. a Fellow of TIAA-CREF Institute. She also Policy Analysis and Management. His co- Viral Acharya received the Goldman became Vice Chair of the AcademyHealth authored paper “Minimum Wages and Sachs International Award at the European Board of Directors. Her paper (with David Poverty: Will a $9.50 Federal Minimum Finance Association Meetings for best con- Cutler and Zirui Song) received a prize Wage Really Help the Working Poor?” ference paper in 2010, for “The Seeds of for “outstanding journal article” by the won the 2010 best article award from the a Crisis: A Theory of Bank Liquidity and Continuing Care Alliance. Southern Economic Journal. Risk Taking over the Business Cycle,” joint Spencer Banzhaf won the History of Leonard E. Burman is president of the with Hassan Naqvi. Economic Society’s 2010 award for “best National Tax Association. James D. Adams was appointed ASA/ paper in the history of economics” for Ricardo Caballero was elected a fel- NSF/BEA Senior Research Fellow at the “Objective or Multi-Objective: Two Histori­ low of the American Academy of Arts and Bureau of Economic Analysis during aca- cally Competing Visions for Benefit-Cost Sciences. He also delivered the Paolo Baffi demic year 2010–11. He also won an Analysis,” published in Land Economics in Lecture at the Bank of Italy and the Mundell American Statistical Association/National 2009. Fleming Lecture at the IMF. Science Foundation Fellowship to conduct Lucien Bebchuk was vice-president Murillo Campello received the RPI/ research on “Technological Determinants of the Western Economic Association NYU-Stern “Rising Star” award, awarded of the Quality and Price of Innovative International for 2010–11. bi-annually to researchers in Finance. He Industrial Products,” at the Bureau of Francine D. Blau is the 2010 winner of also received a Distinguished Referee Award Economic Analysis (BEA) in Washington, the IZA (Institute for the Study of Labor) from the Review of Financial Studies. DC for 2010-11. Prize in Labor Economics. Francesco Caselli was elected a fel- Heitor Almeida received an award Alan S. Blinder received the Doctor low of the British Academy. He also deliv- from the Review of Financial Studies for of Humane Letters (honoris causa) from ered the 2010 CREI (Centre de Recerca “Referee of the Year” in 2010. Bard College in 2010. He also delivered en Economia Internacional) Lectures in Douglas Almond won a five-year NSF the Homer Jones Memorial Lecture at the Barcelona, and became a managing editor CAREER Award for “Health Determinants Federal Reserve Bank of St. Louis in April of the Review of Economic Studies. and Research Design.” The Faculty Early 2010. Judith A. Chevalier and Dina Mayzlin Career Development (CAREER) Program Nick Bloom won an Alfred Sloan were selected as recipients of the 2011 is an NSF-wide activity that supports the Fellowship, an NSF Career Grant, and William F. O’Dell Award for their article early career-development activities of those the Frisch Medal from the Econometric “The Effect of Word of Mouth on Sales: teacher-scholars who most effectively inte- Society. Online Book Reviews,” which appeared in grate research and education within the con- Michael Brandt, Ralph Koijen, and the 2006 Journal of Marketing Research. text of the mission of their organization. Jules van Binsbergen, won the 2010 Swiss The honor goes to the article published in Joseph Altonji was elected to the Finance Institute Award for the best paper 2006 that has made the most significant, American Academy of Arts and Sciences. of the year for “On the Timing and Pricing long-term contribution to marketing the- Andrew Ang won a three-year of Dividends.” ory, methodology, and/or practice. grant from Netspar on optimal portfolio Jeffrey R. Brown was appointed to John H. Cochrane was elected presi- strategies. the Board of Trustees of TIAA (the insur- dent of the American Finance Association. Orley Ashenfelter became a Fellow ance company side of TIAA-CREF) and Iain Cockburn and Rebecca of the Labor and Employment Relations was elected to the Board of Directors of the Henderson are recipients of the Dan Association. He is also president-elect of the American Risk and Insurance Association. and Mary Lou Schendel Best Paper Prize American Economic Association. Markus K. Brunnermeier received from the Strategic Management Journal Jeremy Atack is President-Elect of the a Guggenheim Fellowship for studying for 2010. Their paper is titled “Measuring

NBER Reporter • 2011 Number 1 21 Competence: Exploring Firm Effects in ASHEcon Medal from the American a Presidential Early Career Award for Pharmaceutical Research.” Society of Health Economists in spring Scientists and Engineers. Courtney Coile and Kevin Milligan 2010. It is awarded every two years “to the Mark Gertler was elected to the were awarded the 2010 Kendrick Prize, economist age 40 or under who has made American Academy of Arts and Sciences. a bi-annual award given to the best paper the most significant contributions to the Linda S. Goldberg joined the Board published in the Review of Income and field of health economics.” of Directors of CSWEP (Committee on Wealth, for “How Portfolios Evolve after Susan Dynarski was elected to the the Status of Women in the Economics Retirement: The Effect of Health Shocks” board of the Association for Education Profession, AEA). Diego Comin won the inaugural Finance and Policy and appointed to Pinelopi Goldberg received the John award of the Institute for New Economic MDRC advisory board. Simon Guggenheim Memorial Fellowship Thinking (INET). Janice Eberly joined the Panel of for 2010–11. She also was appointed next George Constantinides received an Economic Advisors of the Congressional Editor-in-Chief of the American Economic Honorary Degree from the International Budget Office in spring 2010. Review. Hellenic University in Greece in May Ronald G. Ehrenberg was confirmed William N. Goetzmann was awarded 2010. by the New York State Senate for a term on the annual Graham and Dodd Award for Arnaud Costinot was selected a 2010– the State University of New York (SUNY) Best Article from the Financial Analysts 12 Alfred P. Sloan Research Fellow. Board of Trustees in March 2010. Journal. His article, co-authored by Stephen Mario J. Crucini was appointed co- Barry Eichengreen was awarded the Brown, Bing Liang, and Christopher editor of the Canadian Journal of Economics Schumpeter Prize of the International Schwarz, was “Estimating Operational Risk on July 1, 2010. Schumpeter Society in January 2010. for Hedge Funds: The ?-Score.” Janet Currie is Vice President of the Henry Farber was selected as a Fellow Marvin Goodfriend was appointed American Economic Association for 2010. of the Labor and Employment Relations an Honorary Advisor to the Institute for She also became the editor of the Journal Association for 2010 for his lifetime contri- Monetary and Economic Studies, Bank of of Economic Literature in July 2010 and butions to research on the employment rela- Japan. delivered a keynote lecture at the German tionship. Only three academics are elected Yuriy Gorodnichenko won the Russian Economic Association meetings in each year across all disciplines. National Prize in Applied Economics. September 2010. Emmanuel Farhi won a Sloan Michael Grossman completed his Angus S. Deaton became a Fellowship and the Bernacer Prize for the term as President of the American Society Distinguished Fellow of the American best European economist under the age of of Health Economists. He also gave the Economic Association in 2010. He also was 40. presidential address at the Third Biennial elected to a Corresponding Fellowship in Jesus Fernandez-Villaverde received Conference of the American Society of the Royal Society of Edinburgh (amongst the Herrero Prize, awarded yearly to the best Health Economists at Cornell University. whose founders were Adam Smith and David Spanish social scientist under the age of 40. The title of his address was “It’s Better to be Hume) and to an Honorary Fellowship at Daniel K. Fetter received the Allan the First, or One of the First, Even if You’re Fitzwilliam College, Cambridge. Nevins Prize for the Best Dissertation in Wrong.” Michael Devereux was awarded the U.S. or Canadian Economic History from James J. Heckman became a mem- John Rae Prize by the Canadian Economics the Economic History Association. He also ber of the National Academy of Education Association. won the 2010 American Real Estate and in 2010. He was also a Keynote Speaker Francis X. Diebold was elected Urban Economics Association Dissertation at the First Annual MOVE Distinguished President of the Society for Financial award. Visitor’s Lecture in Barcelona, Spain; Econometrics for a three-year term begin- Erica Field was awarded the Elaine the Italian Statistical Society’s Scientific ning in June 2011. Bennett Research Prize in 2010, given by Meeting in Padua, Italy; and at a conference David Donaldson received the 2010 the Committee for the Status on Women in on Understanding Ageing: Health, Wealth, WTO [World Trade Organization] Young the Economics Profession every other year and Wellbeing to Age Fifty and Beyond Economists Award. to a female economist “to recognize, sup- held at St. Catherine’s College Oxford, John J. Donohue is President-elect port, and encourage outstanding contribu- UK. In addition, Heckman became an of the American Law and Economics tions by young women in the economics Honorary Academician, Academica Sinica, Association. profession.” Republic of China/Taiwan in July, 2010; an Esther Duflo received the John Bates David Figlio received the “Outstanding Honorary Professor, Renmin University, P. Clark Medal from the American Economic Service Award” from the American R. China, in June, 2010; and an Honorary Assocation in 2010 and a Doctorat hono- Education Finance Association. He was the Professor, Beijing Normal University, P. R. ris causa from Université Catholique de first person younger than 50 to win this China in June, 2010. Louvain. award. Rebecca Henderson and Iain Mark Duggan was awarded the Amy Finkelstein was honored with Cockburn received the Dan and Mary Lou

22 NBER Reporter • 2011 Number 1 Schendel Best Paper Prize from the Strategic for research that displays originality, breadth Income Industry Association’s Award for Management Journal for 2010. of interest and impact, and soundness of Achievement in Applied Retirement Kate Ho won the Arrow Award for methodology. Research and was named one of the Top best paper of the year from the International Gary Libecap is the Pitt Professor 50 Women in Wealth by the Wealth Health Economics Association for “Insurer- of American History and Institutions at Management Association. Provider Networks in the Medical Care Cambridge University for 2010–11. The Dale T. Mortensen, Christopher Market.” The paper appeared in the Pitt Professor was established in 1946 to Pissarides, and Peter Diamond were American Economic Review in 2009. build stronger academic links between the awarded the 2010 Sveriges Riksbank Prize Bengt Holmstrom was elected US and UK—an economist is selected for in Economic Sciences in Memory of Alfred President of the Econometric Society for this honor every four years. Nobel for their analysis of markets with 2011. His book with Jean Tirole, Inside Frank R. Lichtenberg received a search frictions. and Outside Liquidity, was published by the 2010 Garfield Economic Impact Award Emi Nakamura received an NSF MIT Press in 2010. from The Eugene Garfield Foundation and Career Award for “Integrating Micro and Douglas Irwin delivered the 2010 “Research!America” for the publication Macro Evidence on Price Dynamics.” Ohlin Lectures at the Stockholm School of “The Effect of New Cancer Drug Approvals Joseph P. Newhouse is Co-chair of the Economics. on the Life Expectancy of American Cancer Medicare Trustees Advisory Panel, 2010-11. Nobuhiro Kiyotaki and co-author Patients, 1978 –2004.” Philip Oreopoulos is the 2010-11, and John Moore received the 2010 Stephen A. Sydney C. Ludvigson won the Richard youngest-ever, William Lyon Mackenzie Ross Prize in Financial Economics from Stone Prize in Applied Econometrics for King Visiting Professor of Canadian Studies the Foundation for the Advancement of the best paper in the Journal of Applied at Harvard University. Research in Financial Economics for “Credit Econometrics in 2008 and 2009 (with Daniel Paravisini and co-authors Cycles” which was published in1997. Xiaohong Chen). won First Prize, the Brattle Award, for best Michael Klein has been appointed Jens Ludwig received an Investigator paper in corporate finance published in the Chief Economist in the Office of Award in Health Policy Research from the Journal of Finance in 2010. Their paper was International Affairs of the United States Robert Wood Johnson Foundation and was “Information and Incentives inside the Firm: Treasury. selected as a visiting scholar to the Russell Evidence from Loan Officer Rotation. Edward J. Kane received an Sage Foundation in New York City. Thomas Philippon was appointed to Outstanding Author Contribution Award Hanno Lustig, Hal Cole, and Yi-Li serve on the Commission on Key National from Emerald Literati Network in 2010. Chien won the NASDAQ OMX Award Indicators. The eight members of this biparti- Charles D. Kolstad and Robert N. for Best Paper on Asset Pricing for “Is the san commission are selected by Congressional Stavins were elected/appointed Fellows Volatility of the Market Price of Risk due to leaders; the Key National Indicator System of the Association of Environmental and Intermittent Portfolio Rebalancing?” will be executed by the National Academy Resource Economists (AERE) at the January Ulrike Malmendier was selected a of Sciences. He also received the Michael 2010 ASSA meetings. 2010–12 Alfred P. Sloan Research Fellow. Brennan & BlackRock Award, Best Paper, Kevin Lang became a Fellow of the Robert C. Merton delivered the Review of Financial Studies, 2010, for “The Society of Labor Economists. Kolmogorov Lecture at the University of Economics of Fraudulent Accounting,” joint Edward Lazear received an honorary London, the Nathan and Beatrice Keyfitz with Simi Kedia. doctorate from the University of Zurich. Lecture at the Fields Institute in Toronto, the Giorgio Primiceri was selected a 2010– Josh Lerner was elected a Fellow 9th Carroll Round Lecture at Georgetown 12 Alfred P. Sloan Research Fellow. of the European Corporate Governance University, the CME Group Lecture on Carmen M. Reinhart and Kenneth S. Institute. He also won the Global Financial Markets at the Chicago Council Rogoff were selected by the TIAA-CREF Entrepreneurship Research Award of the on Global Affairs, and the Hamilton Lecture Institute as winners of the fifteenth annual Government of Sweden. He received the at the Royal Irish Academy, Dublin. TIAA-CREF Paul A. Samuelson Award for Axiom Business Book Award Gold Medal Atif Mian and Jose Liberti won the Outstanding Scholarly Writing on Lifelong in the Entrepreneurship Category and Brattle Distinguished Paper Prize at the Financial Security. They were recognized for the 2009 PROSE Award for Excellence American Finance Association meetings their best-selling book, This Time is Different: in the Business, Management, & Finance for their article, “Collateral Spread and Eight Centuries of Financial Folly. Category from the Association of American Financial Development.” Kenneth S. Rogoff also was elected a Publishers, both awarded in 2010, for Grant Miller, Diana Pinto, and Marcos member of National Academy of Sciences. Boulevard of Broken Dreams. Vera-Hernández received the Inter-American Allison B. Rosen received the Christian Leuz and his coauthor Prize for Research on Social Security given Outstanding Junior Investigator Award from Luzi Hail were awarded the AAA’s 2010 by the Conferencia Interamericana de the Society of General Internal Medicine for Notable Contributions to Accounting Seguridad Social (CISS) based in Mexico. her research on measuring and improving Literature Award, which is given annually Olivia Mitchell received the Retirement the value of U.S. health care spending. The

NBER Reporter • 2011 Number 1 23 award recognizes early career achievements International Society for New Institutional Fellowship to study the design and imple- and an overall body of work that has made Economics. mentation of new teacher evaluation sys- a national impact on generalist research. Robert Stambaugh was elected tems that incorporate student performance Emmanuel Saez won a MacArthur Vice President of the American Finance data in the evaluation process. Grant. Association and a Fellow of the Financial John VanReenen was elected a Fellow Richard Schmalensee gave one of Management Association. of the British Academy, the oldest and three keynote addresses at the 4th World Robert N. Stavins was inducted as a most prestigious society in the UK devoted Congress of Environmental and Resource Fellow of the Association of Environmental to advancement of the social sciences. Economists, as well as the IV Stackelberg Economists. Jacob Vigdor received the 2009 Lecture at the University of Milan, Betsey Stevenson received the John IPUMS-USA Research Award for best Bicocca. T. Dunlop Outstanding Scholar Award, published work for his book, From G. William Schwert gave the key- awarded by the Labor and Employment Immigrants to Americans: The Rise and note speech at the European Financial Relations Association. Fall of Fitting In. IPUMS-USA is a proj- Management meetings in Aarhus, Richard Sylla was elected Chairman ect dedicated to collecting and distributing Denmark in June 2010. of the board of trustees of the Museum of United States census data. Robert Shimer was elected a mem- American Finance, a Smithsonian affiliate Gianluca Violante was an invited ber of the American Academy of Arts and located on Wall Street. speaker (to the session on Macroeconomics) Sciences and received the Sherwin Rosen Adam Szeidl is a 2010 Alfred P. Sloan at the 2010 World Congress of the Prize for Outstanding Contributions in Research Fellow. Econometric Society. the Field of Labor Economics from the M. Scott Taylor was awarded an hon- Martin L. Weitzman won the Society of Labor Economists. orary doctorate by the University of Basel FEEM 20th Anniversary Prize for Christopher Sims is now presi- “In acknowledgement of his pioneering Most Outstanding Contributions to dent-elect of the American Economic contributions to International Trade, the Environmental Economics in Last Twenty Association — he assumes the presidency Environment and Renewable Resources, Years. in 2012. Orley Ashenfelter is the current which have sparked and shaped research in Dean Yang received an award for president. this field, and how it is taught on the grad- the best paper on the economics of food Neeraj Sood and Jose Escarce were uate level, all over the world.” safety or nutrition from the Agricultural finalists for the 16th Annual NIHCM Richard Thaler received an honorary and Applied Economics Association Health Care Research Award for “Employer Doctor of Science degree by the University (AAEA) for “Under the Weather: Health, Sponsored Insurance, Health Care Cost of Rochester, the Tjalling Koopmans Asset Schooling, and Economic Consequences Growth, and the Economic Performance Award by Tilburg University, and he was of Early-Life Rainfall” (American Economic of U.S. Industries” which was co-authored elected Vice President of the American Review, 2009, with Sharon Maccini). with Arkadipta Ghosh and published in Economic Association. the journal Health Services Research. John Tyler was awarded a William Pablo T. Spiller was a president of the T. Grant Foundation Distinguished

NBER Announces Nonprofit Fellowships

The NBER has awarded four disser­ zations and Government Crowd-Out: NBER Nonprofit Fellowships was com- tation fellowships to graduate students Evidence from The War on Poverty”; Ben posed of four NBER Research Associates: whose research focuses on “The Econo­ Marx, Columbia University, whose disser- James Andreoni, University of California, mics of the Nonprofit Sector.” The four tation examines “Regulation, Taxation, San Diego; David M. Cutler, Harvard students are: Nikhil Agarwal, Harvard and Private Charitable Foundations”; and University; Caroline M. Hoxby , Stanford University, whose topic is “Centralized Benjamin Schoefer, Harvard University, University; and John List, University of Matching Markets”; Nicholas Duquette, who is studying “Herd Behavior in the Chicago. University of Michigan, who is studying Market for Nonprofit Funding”. “Direct Grants to Nonprofit Organi­ The selection committee for the

24 NBER Reporter • 2011 Number 1 Program and Working Group Meetings

Economic Fluctuations and Growth Research Meeting

The NBER’s Program on Economic Fluctuations and Growth met at the Federal Reserve Bank of New York on February 4, 2011. NBER Research Associates Russell Cooper of European University Institute and Mark Gertler of New York University orga- nized the meeting. These papers were discussed:

• Robert Shimer, University of Chicago and NBER, “Wage Rigidities and Jobless Recoveries”

• Alan B. Krueger, Princeton University, and Andreas Meuller, Stockholm University, “Job Search and Job Finding in a Period of Mass Unemployment: Evidence from High-Frequency Longitudinal Data”

• Virgiliu Midrigan and Daniel Xu, New York University and NBER, “Finance and Misallocation: Evidence from Plant- level Data” (NBER Working Paper No. 15647)

• Craig Burnside, Duke University and NBER, and Martin S. Eichenbaum and Sergio Rebelo, Northwestern University and NBER, “Understanding Booms and Busts in Housing Markets” (NBER Working Paper No. 16734)

• Andrew Glover, University of Minnesota; Jonathan Heathcote, Federal Reserve Bank of Minneapolis; Dirk Krueger, University of Pennsylvania and NBER; and Jose-Victor Rios-Rull, University of Minnesota and NBER, “Inter-genera- tional Redistribution in the Great Recession”

• Vasco M. Carvalho, CREI, and Xavier Gabaix, New York University and NBER, “The Great Diversification and Its Undoing” (NBER Working Paper No. 16424)

Summaries of these papers may be found at: http://www.nber.org/confer/2011/EFGw11/summary.html

Industrial Organization Program Meeting

The NBER’s Program on Industrial Organization, directed by Nancy Rose of MIT, met in Stanford, CA on February 25 and 26, 2011. John Asker, NBER and New York University, and Tom Hubbard, NBER and Northwestern University, orga- nized the meeting. These papers were discussed:

• Alessandro Gavazza, New York University, “An Empirical Equilibrium Model of a Decentralized Asset Market”

• Joseph A. Cullen, Harvard University, “Dynamic Response to Environmental Regulation in the Electricity Industry”

• Ryan C. McDevitt, University of Rochester, “ ‘A’ Business by Any Other Name: Firm Name Choice as a Signal of Firm Quality”

• Allan Collard-Wexler, New York University and NBER, “Mergers and Sunk Costs: An Application to the Ready-Mix Concrete Industry”

NBER Reporter • 2011 Number 1 25 • Mark R. Cullen and Liran Einav, Stanford University and NBER; Amy Finkelstein and Stephen P. Ryan, MIT and NBER; and Paul Schrimpf, MIT, “Selection on Moral Hazard in Health Insurance”

• Brett R. Gordon, Columbia University; and Wesley R. Hartmann, Stanford University, “Advertising Effects in Presidential Elections”

Summaries of these papers may be found at: http://www.nber.org/confer/2011/IOs11/summary.html

IFM Program Meeting

The NBER’s Program on International Finance and Macroeconomics met in Cambridge on March 4, 2011. NBER Research Associates Roberto Chang, Rutgers University, and Kristin Forbes, MIT, organized the meeting. These papers were discussed:

• Gianluca Benigno, London School of Economics; Huigang Chen, JD Power; Christopher Otrok, University of Virginia; Alessandro Rebucci, Inter-American Development Bank; and Eric Young, University of Virginia, “Financial Crises and Macro-Prudential Policies”

• Olivier Jeanne, Johns Hopkins University and NBER, and Anton Korinek, University of Maryland, “Managing Credit Booms and Busts: A Pigouvian Taxation Approach”

• Barry Eichengreen, University of California, Berkeley and NBER, and Hui Tong, International Monetary Fund, “The Impact of Chinese Exchange Rate Policy on the Rest of the World: Evidence from Firm-Level Data”

• Daniel Paravisini and Daniel Wolfenzon, Columbia University and NBER; Veronica Rappoport, Columbia University; and Philipp Schnabl, New York University, “Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data”

• Charles Engel, University of Wisconsin, Madison and NBER, “The Real Exchange Rate, Real Interest Rates, and the Risk Premium”

• Michael Kumhof, International Monetary Fund, “International Currency Portfolios”

• Andrew K. Rose, University of California, Berkeley and NBER, and Tomasz Wieladek, Bank of England, “Financial Protectionism: the First Tests”

• Stephanie E. Curcuru and Charles P. Thomas, Federal Reserve Board, and Francis E. Warnock, University of Virginia and NBER, “On Returns Differentials”

Summaries of these papers may be found at: http://www.nber.org/confer/2011/IFMs11/summary.html

26 NBER Reporter • 2011 Number 1 Labor Studies Program Meeting

The NBER’s Program on Labor Studies, directed by David Card of the University of California, Berkeley, met in San Francisco on March 4, 2011. These papers were discussed:

• Douglas Miller, Marianne E. Page, and Ann Huff Stevens, University of California, Davis and NBER, and Mateusz Filipski, University of California, Davis, “The Best of Times, the Worst of Times: Understanding Pro-cyclical Mortality”

• Philippe Belley, Kansas State University; Marc Frenette, Social Research & Demonstration Corporation; and Lance Lochner, University of Western Ontario and NBER, “Post-Secondary Attendance by Parental Income in the U.S. and Canada: What Role for Financial Aid Policy?”

• Nicholas J. Sanders, Stanford University, “What Doesn’t Kill You Makes You Weaker: Prenatal Pollution Exposure and Educational Outcomes”

• Florian Hoffman, University of British Columbia, “An Empirical Model of Life-Cycle Earnings and Mobility Dynamics”

• Camille Landais, Stanford University; Henrik Kleven, London School of Economics; and Emmanuel Saez, University of California, Berkeley and NBER, “Taxation and International Migration of Superstars: Evidence from the European Football Market” (NBER Working Paper No. 16545)

• Peter J. Kuhn, University of California, Santa Barbara and NBER, and Kailing Shen, Xiamen University, “Gender Discrimination in Job Ads: Theory and Evidence”

Summaries of these papers may be found at: http://www.nber.org/confer/2011/LSs11/summary.html

Monetary Economics Program Meeting

The NBER’s Monetary Economics Program met in Chicago on March 4, 2011. NBER Research Associate Valerie A. Ramey of the University of California, San Diego and Jon Steinsson of Columbia University, organized this program:

• Harrison Hong, Princeton University and NBER, and David Sraer, Princeton University, “Quiet Bubbles”

• Judith Chevalier, Yale University and NBER, and Anil K Kashyap, University of Chicago and NBER, “Best Prices”

• Douglas Davis and Oleg Korenok, Virginia Commonwealth University, “Nominal Price Shocks in Monopolistically Competitive Markets: An Experimental Analysis”

• James D. Hamilton, University of California, San Diego and NBER, and Jing Wu, University of California, San Diego, “The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment”

• Karel O. Mertens, Cornell University, and Morten Ravn, University College London, “Fiscal Policy in an Expectations Driven Liquidity Trap”

• Isabel Correia, Universidade Catolica Portuguesa; Emmanuel Farhi, Harvard University and NBER; Juan Pablo Nicolini, Federal Reserve Bank of Minneapolis; and Pedro Teles, Universidad di Tella, “Unconventional Fiscal Policy at the Zero Bound”

Summaries of these papers may be found at: http://www.nber.org/confer/2011/MEd11/summary.html

NBER Reporter • 2011 Number 1 27 DAE Program Meeting

The NBER’s Program on the Development of the American Economy, directed by Claudia Goldin of Harvard University, met in Cambridge on March 5, 2011. These topics were discussed:

• Richard C. Sutch, University of California, Riverside and NBER, “Hard Work, Nonemployment, and the Wealth-Age Profile: Evidence of a Life-Cycle Strategy in the United States During the Nineteenth Century”

• Daniel K. Fetter, Wellesley College and NBER, “How Do Mortgage Subsidies Affect Home Ownership? VA Home Loans and the Mid-20th Century Transformation in U.S. Housing Markets”

• Leah Platt Boustan, University of California, Los Angeles and NBER, and Robert A. Margo, Boston University and NBER, “White Suburbanization and African-American Home Ownership, 1940–1980” (NBER Working Paper No. 16702)

• Karen Clay, Carnegie Mellon University and NBER; Jeff Lingwall, Carnegie Mellon University; and Melvin Stephens, University of Michigan and NBER, “Compulsory Attendance Laws and Nineteenth Century Schooling”

• Erik Heitfield, Federal Reserve Board of Governors; Gary Richardson, University of California, Irvine and NBER; and Shirley Wang, Cornell University, “Contagion During the Initial Banking Panic of the Great Depression”

• Douglas A. Irwin, Dartmouth College and NBER, “Did France Cause the Great Depression?”(NBER Working Paper No. 16350)

Summaries of these papers may be found at: http://www.nber.org/confer/2011/DAEs11/summary.html

Productivity Program Meeting

The NBER’s Program on Technological Progress and Productivity Measurement, directed by NBER Research Associates Nick Bloom of Stanford University and Josh Lerner of the Harvard Business School, met in Cambridge on March 11, 2011. These papers were discussed:

• Oriana Bandiera and Andrea Prat, London School of Economics; Luigi Guiso, European University Institute; and Raffaella Sadun, Harvard University and NBER, “What Do CEOs Do?”

• Yi Qian, Northwestern University and NBER, “Counterfeiters: Foes or Friends”(NBER Working Paper No. 16785)

• Nicola Lacetera, University of Toronto, and Justin Sydnor, Case Western Reserve University, “Is High-Quality Production Location-Specific? Evidence from the Automobile Industry”

• Leonardo Iacovone, The World Bank; Wolfgang Keller, Princeton University and NBER; and Ferdinand Rauch, London School of Economics, “Innovation Responses to Import Competition”

• Iwan Barankay, University of Pennsylvania, “Rank Incentives: Evidence from Field Experiments”

Summaries of these papers may be found at: http://www.nber.org/confer/2011/PRs11/summary.html

28 NBER Reporter • 2011 Number 1 International Trade and Investment

The NBER’s Program on International Trade and Investment met in Cambridge on March 25 and 26, 2011. Program Director Robert C. Feenstra of the University of California, Davis organized the meeting. These papers were discussed:

• Matthieu Bussiere and Giulia Sestieri, Banque de France; Giovanni Callegari, IMF; Fabio Ghironi, Boston College and NBER; and Norihiko Yamano, OECD, “Estimating Trade Elasticities: Demand Composition and the Trade Collapse of 2008–9”

• Daniel Paravisini and Daniel Wolfenzon, Columbia University and NBER; Veronica Rappoport, Columbia University; and Philipp Schnabl, New York University, “Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data”

• Arnaud Costinot, MIT and NBER; Jonathan Vogel, Columbia University and NBER; and Su Wang, MIT, “An Elementary Theory of Global Supply Chains”

• Richard Baldwin, Graduate Institute, Geneva and NBER, and Anthony Venables, University of Oxford, “Relocating the Value Chain: Offshoring and Agglomeration in the Global Economy” (NBER Working Paper No. 16611)

• Beatriz de Blas, Universidad Autonoma de Madrid, and Katheryn Russ, University of California, Davis and NBER, “Teams of Rivals: Endogenous Markups in a Ricardian World” (NBER Working Paper No. 16587)

• David H. Autor, MIT and NBER; David Dorn, CEMFI and IZA; and Gordon H. Hanson, University of California, San Diego and NBER, “The China Syndrome: Local Labor Market Effects of Import Competition in the U.S.”

• John McLaren, University of Virginia and NBER, and Shushanik Hakobyan, University of Virginia, “Looking for Local Labor-Market Effects of the NAFTA” (NBER Working Paper No. 16535)

• Kyle Handley, University of Maryland, and Nuno Limao, University of Maryland and NBER, “Trade and Investment under Policy Uncertainty: Theory and Firm Evidence”

Summaries of these papers may be found at: www.nber.org/confer/2011/ITIs11/summary.html

NBER Reporter • 2011 Number 1 29 Bureau Books

The following five volumes may be ordered directly from the University of Chicago Press Distribution Center, at Telephone: 1-800-621-2736 Email: [email protected] For more information on ordering and electronic distribution, see http://www.press.uchicago.edu/Misc/Chicago/infopage.html

Commodity Prices and Markets

Commodity Prices and Markets, edited ing the price of oil, and provides both a Ito and Rose are both Research by Takatoshi Ito and Andrew K. Rose, is general analysis and a particular focus on Associates in the NBER’s Program currently available from the University the countries of the Pacific Rim. The vol- on International Finance and Macro­ of Chicago Press for $99.00. This is the ume addresses three subjects in particular: economics. Ito is also a professor of twentieth volume in the NBER’s East the difficulties in forecasting commod- economics at the University of Tokyo and Asia Seminar on Economics series. ity prices; the effects of commodity price Rose is a professor of economic analysis Commodity Prices and Markets helps shocks on the domestic economy; and the and policy at the University of California, us to understand the consequences of relationship between price shocks and Berkeley’s Haas School of Business. fluctuations in commodity prices, includ- monetary policy.

Explorations in the Economics of Aging

Explorations in the Economics of undergo a dramatic demographic tran- Wise directs the NBER’s Program on Aging, edited by David A. Wise, will be sition. This NBER Conference Report the Economics of Aging and is the John F. available this spring from the University includes important new findings on Stambaugh Professor of Political Economy of Chicago Press for $110.00. how economic decisions by households at Harvard University’s Kennedy School As baby boomers become eligible for and policy choices by governments will of Government. Social Security and Medicare over the influence the effects of that shift in the next twenty years, the United States will population.

The Economics of Climate Change: Adaptations Past and Present

The Economics of Climate Change: omies—particularly that of the United Libecap and Steckel are Research Adaptations Past and Present, edited by States—have adjusted to the challenges Associates in the NBER’s Program on the Gary D. Libecap and Richard H. Steckel, posed by climate change, including devel- Development of the American Economy. is available from the University of Chicago oping new crop varieties, using both irri- Libecap is also a professor of econom- Press this spring for $110.00. gation and flood control, and creating ics at the University of California, Santa This NBER Conference Report takes ingenious ways to extend cultivation to Barbara. Steckel is a professor of econom- a close look at the ways in which econ- new geographic areas. ics at Ohio State University.

30 NBER Reporter • 2011 Number 1 Economic Aspects of Obesity

Economic Aspects of Obesity, edited by economic environment, and that incen- evaluating the costs and benefits of vari- Michael Grossman and Naci Mocan, will tives can influence individual behaviors, ous proposals designed to control obesity be available this spring from the University which in turn will affect weight. Food rates. Editor Michael Grossman directs the of Chicago Press for $110.00. prices, the availability of food outlets and NBER’s Program on Health Economics, of Over the past thirty years, the num- recreational facilities, health insurance, which co-editor Naci Mocan is a member. ber of obese adults in the United States and minimum wage levels all influence Grossman also directs the Ph.D. Program has doubled; the number of obese chil- what we eat, whether we exercise, and in Economics at City University of New dren has nearly tripled. Economic analysis how we control our weight. York Graduate Center, and Mocan is a has shown that weight gain results from This timely NBER Conference professor of economics at Louisiana State individual choices that respond to the Report provides a strong foundation for University.

Accelerating Energy Innovation: Insights from Multiple Sectors

Accelerating Energy Innovation: agriculture and the life sciences to infor- Henderson is a Research Associate Insights from Multiple Sectors, edited by mation technology. The book includes in the NBER’s Program on Productivity Rebecca M. Henderson and Richard chapters highlighting the factors that have and Heinz Professor of Environmental G. Newell, will be available from the determined the impact of past policies. Management at Harvard Business School. University of Chicago Press this spring The research results reported here suggest Newell is the Gendell Associate Professor for $99.00. that effectively managed federal fund- of Energy and Environmental Economics This NBER Conference Report ing, strategies for increasing customer at Duke University and administra- explores the roles of public and private demand, and enabling aggressive compe- tor of the U.S. Energy Information policy in enabling and sustaining inno- tition from new firms are all important Administration. vation in a variety of industries, from for encouraging innovative activity.

The following volume may be ordered directly from the University of Chicago Press Journals Division. To order by telephone, call Monday through Friday, 8 am to 5 pm Central Time, (773) 753-3347; or toll-free in the U.S. and Canada, (877) 705-1878. To order by mail, the address is: University of Chicago Distribution Center, 11030 South Langley Avenue, Chicago, IL 60628, (773)702-7000

NBER Macroeconomics Annual 2010, Volume 25

NBER Macroeconomics Annual Among the topics discussed in this Both volume editors are NBER 2010, Volume 25, edited by Daron volume are: what fiscal policy is effec- Research Associates in the Program on Acemoglu and Michael Woodford, is tive at zero interest rates; the relationship Economic Fluctuations and Growth. available this spring, both in paperback between technology diffusion and postwar Acemoglu is also a professor at MIT and for $60.00 and online at this address: growth; how oil, automobiles, and the U.S. Woodford is at Columbia University. http://www.jstor.org/action/showPublication? economy interact; and some macroeco- journalCode=nbermacrannu nomic lessons from the Great Deviation.

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