PERSPECTIVES
COLUMBIA ECONOMICS
VOL. 5/ISSUE 3
FALL 2011
from thE dirEctor of thE ProgrAm
for Economic rEsEArch
in this issuE
nEWs & fEAturEs
1 From the Director of the Program
for Economic Research
1 News from the
Graduate Program
2 Letter from the Chair
2 New Columbia
Economics Website
By David Weinstein
The Program for Economic
Research (PER) continues
to expand its role within
the university as a major
force in bringing prominent
researchers to Columbia
and fostering research and
teaching. This can be seen
by dramatic expansions in
our programmatic activities as well as PER’s ability
to leverage the talent of our faculty to help them
11 MacLeod Honored As Sami
Mnaymneh Professor
of Economics
12 The Price of Climate Change-
Food Production Loss Since 1980
rEsEArch notEs
7 Sponsored Research Currents
9 Recent Discussion Papers
10 Recent Faculty Articles
13 Recent Faculty Books
13 NBER Working Papers
Ama Baafra Abeberese and Todd J. Kumler, with
Leigh L. Linden, recently published an NBER
Working Paper entitled “Improving Reading
Skills by Encouraging Children to Read: A
Randomized Evaluation of the Sa Aklat Sisikat
Reading Program in the Philippines” (#17185).
The paper looks at the impact of a 31-day read-athon on the students’ propensity to read and their
scores on a reading assessment, and fi nds that the
positive impact persists.
Rethinking of the Way to Fight
Global Poverty
5 Fourth Annual Kenneth J. Arrow
6 The Escalating European Debt
Problem: Is There a Way Out?
Moreover, our Economics Advisory Council has
taken a major leadership role in helping us to reach
out to more Columbia alumni and friends and
dramatically expand our support for economics at
continued on page 3
nEWs from thE grAduAtE ProgrAm
in PicturEs
4 Poor Economics: A Radical
Lecture
to succeed in winning more grants and research
funding. Our research portfolio now includes
sponsored projects totaling over 7 million dollars.
This is a major, positive change for the department,
which had virtually no grant support prior to PER’s
founding.
Jonathan Dingel (left) and Hyunseung Oh (right)
won the Vickrey Prize for best third-year papers.
Jonathan’s paper “Consumer cities in general
equilibrium” introduces a model in which the
cross-city allocation of heterogeneous workers and
cross-city pattern of consumption opportunities
are jointly determined in spatial equilibrium. In
contrast to the prior literature’s partial-equilibrium
prediction that higher-income consumers will
experience a wage discount in larger cities with
better consumption opportunities, it demonstrates
that differences in consumption opportunities
can explain why average wages are higher in
larger cities. Hyunseung Oh’s paper is entitled
“Durables replacement and market power in a
new Keynesian model.” By allowing households
to resell and repurchase their durables through
a secondary market, the model generates timevarying markups within the durables sector. The
model predicts that durability deteriorates market
power and that procyclical replacements generate
countercyclical markups. The model resolves the
co-movement puzzle of durables and nondurables
with regards to a monetary policy shock.
Ilton Soares’s paper “Returns
to Skills and the College
Premium”, with Flavio Cunha
and Fatih Karahan, was
published in the August 2011
issue of the Journal of Money,
Credit and Banking. The paper
looks at the evolution of the
college premium in the U.S. labor market over
the last 40 years.
VOL. 5/ISSUE 3
PAGE 2
lEttEr from thE chAir
Columbia Economics made great strides forward in the
past eight years. It is a remarkable story of regeneration still
incomplete.
The university in 2003 embarked on an ambitious plan
to rebuild the department and restore its reputation for
excellence. Just eight years earlier, Columbia Economics
was ranked twelfth among graduate economic programs in
the United States, but it fell to fourteenth place in 1998,
where it remained through 2001. This was the nadir of a
long decline. Columbia arguably ranked among the top
five economics departments in the country as late as the
1960s, and continued to hire outstanding faculty into
the 1980s, but the department drifted, and by the 1990s
faculty size had shrunk by a third from a decade earlier. The
department approached the end of the century in sad shape.
A concerted effort was made to restore the size of the faculty in the late 1990s. Kyle Bagwell
and Xavier Sala-i-Martin arrived in 1996. Richard Clarida became chair in 1997, and recruited
Don Davis, David Weinstein and me. Lena Edlund, now tenured, joined the faculty as an
assistant professor that year. The department gained cachet when Robert Mundell won the
Nobel Prize in 1999, and again when Joseph Stiglitz won in 2001 just after joining Columbia.
Meanwhile, Economics had become increasingly important in the university’s curriculum, as
women undergraduates entered the major in large numbers and the share of Columbia College
students majoring in Economics roughly doubled. The faculty remained too small to keep up
with the growing curriculum needs.
This growth in demand for Economics courses created at opportunity to rebuild the department
by growing faculty size along with student size. That was the plan. Don Davis stepped up to
become department chair in 2001, and, over the next two years, negotiated with Vice President
of Arts and Sciences David Cohen a plan to increase regular faculty size by at least 25%, with an
additional five visiting professorships. The plan gained the approval of Provost Jonathan Cole
and incoming President Lee Bollinger. It became known as the Economics Initiative.
suPPort columbiA
Economics
Your tax-deductible donation can directly provide
crucial support for students and faculty through
the Economics Department’s Program for
Economic Research. To donate, please use the link
on the departmental homepage: https://giving.
columbia.edu/giveonline/index.jsp
You may also write to us at Program for Economic
Research, Department of Economics, Columbia
University, 1022 International Affairs Building,
420 W. 118th Street, New York, NY 10027.
nEW columbiA
Economics WEbsitE
The Economics Initiative got off to promising start. Macroeconomist Michael Woodford
arrived in 2004. Microeconomists Patrick Bolton, Yeon-Koo Che, Pierre-Andre Chiaporri,
and Bernard Salanié joined the next year. So did econometrician Ed Vytlacil. Suddenly, the
department had impressive new strength in the core fields, but, perhaps even importantly,
finally had a critical mass of younger senior faculty committed to restoring the department
to the top ranks. During this period, the department also appointed a remarkable group of
assistant professors, many of whom are now tenured or coming up for tenure; these include
Stefania Albanesi, Douglas Almond, Katherine Ho, Wojciech Kopczuk, Christian Pop-Eleches,
Miguel Urquiola, Wolfram Schlenker, Till von Wachter, and Eric Verhoogen. The Economics
Initiative was working. By 2005, Columbia Economics had climbed to eleventh place.
The Economics Initiative progressed fitfully for a few years. Janet Currie and Bentley MacLeod
arrived to the senior ranks in 2006, when Currie replaced Davis as chair. Labor economist
David Lee came in 2006, but departed for Princeton a year later. Vytlacil left for Yale in 2007,
but was replaced by Serena Ng to hold steady in econometrics. The department also joined
forces with Political Science to recruit Massimo Morelli, strengthening the microeconomic
theory and political economy groups. Meanwhile, Edmund Phelps burnished the department’s
prestige by winning the Nobel in 2006. Crucially, Nick Dirks, who replaced David Cohen at
the helm of Arts and Sciences, held steady the course by continuing to authorize aggressive
recruitment in the senior market.
The breakthrough came in 2008 when five newly recruited full professors joined the
department. Jushan Bai and Marcelo Moreira joined the econometrics group, while Stephanie
Schmitt-Grohé, Ricardo Reis and Martin Uríbe bolstered macroeconomics. The department
The Department is happy to unveil its newly
remodeled website, located at econ.columbia.edu.
Information on faculty, academic programs and
seminars is now readily available for economics
students, faculty, alumni and friends. The Program
for Economic Research now maintains its own site,
with a focus on highlighting faculty research and
the department’s series of public events, including
an archive of past events featuring photos and
video. Please check back to keep up to date with
happenings at Columbia Economics!
VOL. 5/ISSUE 3
PAGE 3
Letter from the Chair continued from page 2
also recruited rising microeconomic theorist Navin Kartik, whom it soon
promoted to tenure, and lured macroeconomists Emi Nakamura, Jaromir
Nosal and Jón Steinsson, as well as international economist Jon Vogel, to
the junior faculty. The Economics Initiative was paying off. By 2008 the
department re-entered the top ten.
Just after I became department chair in 2009, the financial crisis hit. This
put the brakes on the Economics Initiative. The department was able
to do a limited amount of junior recruiting in the next two years, hiring
Chris Conlon in industrial organization, Qingmin Liu in microeconomic
theory, and Eduardo Morales in international economics. Meanwhile, the
department lost two of its most prominent researchers, as Bagwell departed
for Stanford and Currie for Princeton. Those losses will be hard to replace, but
as Columbia recovers from the financial crises, the department is engaging in
a normal recruitment cycle, similar to other top ten departments, with a focus
on junior recruiting and selective target-of-opportunity senior recruiting.
Over the next few years, Columbia Economics expects to complete the
ambitious plan of the Economics Initiative, by moving to its target faculty
size, and also by fundraising for endowed visiting professorships. If the
department can attract top economists to visit Columbia, spending a pleasant
year in New York City on leave from their home institutions, some may stay.
Setting its sights on top five status, the department must compete with higher
ranked peers for the very best academic talent. Columbia’s NYC location is
an advantage, and visiting professorships can leverage that advantage.
Along the way, Columbia Economics is fortunate to be supported by an
engaged group of leadership alumni who compose our Economics Advisory
Council. EAC support is part of the department’s ongoing success story. For
example, it helps fund the Program for Economic Research, the research
arm of the department. PER’s investment in high performance computing
is critical for recruiting and retaining the best empirical economists, as well
as for training graduate students. PER’s excellent grants administration staff
and seed grant program equally help recruit and retain a world-class research
faculty and supports student research.
Going forward, Columbia Economics seeks to broaden it relationships with
alumni. I encourage you to visit the Columbia Economics website at http://
econ.columbia.edu/ and read about our research, teaching, and public events.
You can access the newsletter archive to learn more about the department’s
story of regeneration. The site announces upcoming public events sponsored
by PER, and will keep you up to date on the many accomplishments of the
Economics faculty and students. Please be a little patient with the site. Like
the department itself, it is newly constructed, still needs some finishing, and
awaits some new elements.
Yours truly,
Michael H. Riordan
From the Director of the Program for Economic Research continued from page 1
at Columbia. The support of the Council has been instrumental in
providing the infrastructure and support our students and faculty need.
This semester we were able to significantly expand our programmatic
activities and put on five major events. The first of these paired MIT’s
Esther Duflo – listed as one of Time Magazine’s 100 most influential
people – Abhijit Banerjee (also from MIT) with Columbia’s Jeffrey Sachs
(who also had been listed as one of the 100 most influential people) for a
session on “Poor Economics: A Radical Rethinking of the Way to Fight
Poverty”. This widely attended event sparked a fascinating debate about
approaches to alleviating global poverty.
We then followed up this event with one aimed at reaching our Columbia
alumni in Midtown. Professors Charles Calomiris, Richard Clarida and
Ricardo Reis treated an audience at the Columbia Club to a timely panel
discussion entitled, “The Escalating European Debt Problem: Is There a
Way Out?” A key element of this discussion was the introduction of new
ideas about how to solve Europe’s continuing economic woes.
In October, PER paired up with the World Leaders Forum to cosponsor an address by Daniel K. Tarullo, of the Board of Governors
of the Federal Reserve System, entitled “Unemployment, the Labor
Market, and the Economy.” This event was held in Low Library and
was covered extensively in the press. In November, in conjunction with
Duke and Northwestern Universities PER organized a major conference
on industrial organization which overlaps quite closely with what the
business community calls corporate strategy. This conference is unique
in its aims to foster the presentation and discussion of work by younger
scholars. Finally, in December, we partnered again with the World Leaders
Forum to present a panel discussion with our own Jagdish Bhagwati on
multilateral approaches to the Doha round of WTO talks.
However, it is important to remember that PER does not just run events
– we also facilitate research and teaching at Columbia. Our faculty have
been traditionally extremely successful in winning National Science
Foundation awards, winning two such prestigious multi-year awards
in the latest round. However, we actively have begun to expand the
set of funding partners and sponsors for our research portfolio. This
year, faculty also received our second award from the Institute for New
Economic Thinking on the link between the financial and real sectors.
The Institute for New Economic Thinking also funded a project on
the impact of credit channels on real economic activity. An award from
Google was also granted to aid in the study of internet pricing. Work on
such sponsored awards help to support student stipends and mentorship
at the same time as they produce new ideas and new areas of knowledge.
The funding from these grants, along with the generous support from
the EAC, not only benefits faculty, but also helps PER to provide an
increasing array of benefits for the broader economics community
including computer support, mentorship programs, undergraduate
publications, and student research awards. This is an instrumental part
of PER’s mission at Columbia.
David E. Weinstein is the Executive Director of the Program for Economic
Research and the Carl S. Shoup Professor of the Japanese Economy.
VOL. 5/ISSUE
X/ISSUE 3X
PAGE 4
2
Poor Economics: A Radical
Rethinking of the Way to
Fight Global Poverty
On September 14, 2011, Esther Duflo and Abhijit Banerjee of MIT discussed their latest book, Poor Economics, with a discussion by Columbia
professor and director of the Earth Institute Jeffrey Sachs. Their book,
written for an audience of policy makers, philanthropists, and activists,
argues that much of anti-poverty policy has failed over the years because
of an inadequate understanding of poverty.
Esther Duflo (left) and Jeffrey Sachs (right) provide a response to the previous discussion
Left to Right: Abhijit Banerjee, David Weinstein, Esther Duflo and Jeffrey Sachs
David Weinstein and the panelists
Columbia faculty and students listen to Abhijit Banerjee discuss global poverty
Professor Banerjee and Professor Duflo sign copies of Poor Economics
VOL. 5/ISSUE 3
PAGE 5
Fourth Annual Kenneth J. Arrow Lecture
The Fourth Annual Kenneth J. Arrow lecture was held on April 12, 2011, entitled “Persons and Time in the Welfare Economics of Climate Change” and
delivered by Sir Partha Dasgupta, the Frank Ramsey Professor of Economics and past chairman of the faculty of economics and politics at the University
of Cambridge. Sir Dasgupta’s lecture focused on the weakness in customary formulations of the idea of intergenerational well-being, and the resulting
literature on the economics of climate change. His lecture was followed by remarks from Kenneth Arrow, Professor Emeritus of Economics at Stanford
University; Scott Barrett, Lenfest-Earth Institute Professor of Natural Resource Economics, Columbia University; Geoffrey Heal, Paul Garrett Professor
of Public Policy and Business Responsibility at Columbia Business School; and University Professor Joseph Stiglitz. The annual Arrow Lecture is cosponsored with the Committee on Global Thought and Columbia University Press.
Left to right, Jeffrey Sachs, Geoffrey Heal, Scott Barrett and Sir Partha Dasgupta; front, Kenneth Arrow and University Professor Joseph Stiglitz
Sir Partha Dasgupta speaks to the audience
Audience listens to the Fourth Annual Kenneth J. Arrow Lecture
VOL. 5/ISSUE 3
PAGE 6
The Escalating European
Debt Problem:
Is There a Way Out?
The Program for Economic Research hosted a panel on September 21,
2011 in midtown for Columbia alumni entitled “The Escalating European Debt Problem: Is There a Way Out?” The panel included Professors Richard Clarida and Ricardo Reis from the Department of Economics and Charles Calomiris, Henry Kaufman Professor of Financial
Institutions at Columbia Business School. The faculty presented their
perspectives on the current situation in European finance and answered
questions from the audience. Video of the presentation is available at:
http://econ.columbia.edu/per
Charles Calomiris
Richard Clarida
Ricardo Reiss
The panelists respond to audience questions
Economics graduate students discuss the current European situation
VOL. 5/ISSUE 3
PAGE 7
Sponsored Research Currents
New Awards at the Program for Economic Research
Pierre-André Chiappori – Heterogeneity, Individual Decision
Making and Matching Equilibria Under Uncertainty
(National Science Foundation, SES-1124277)
The first part of this project will extend results obtained on non-parametric
identification of continuous and discrete choice models using partial
differential equations, and provide an application to decision under
uncertainty by heterogeneous agents. We shall consider the issue of nonparametric identification from a general, theoretical perspective, a particular
emphasis being put on contexts in which identification conditions generate
systems of (at least two) first order PDEs in one unknown function - a
structure common in several economic models, including ‘collective’ models
of household behavior. These theoretical ideas can then be applied to specific
questions, regarding in particular non-parametric identification of discrete
choice models. Particularly, we plan to analyze models of (multiple) discrete
choice with heterogeneous agents and unobserved product characteristics,
frequently used in the empirical IO literature (the so-called ‘BLP’ models).
These theoretical tools will then be applied to specific issues involving
decision under uncertainty. While decision theory has made dramatic
progresses in the last decades, many (if not most) empirical studies still refer
to a standard framework that relies on expected utility, true probabilities
and a representative consumer. Our goal is to test and non-parametrically
estimate empirical models of decisions under uncertainty involving
non-expected utility, probability deformation (or ‘risk perception’) and
unobservable heterogeneity.
The second part is devoted to matching theory. Again, it will include
theoretical and empirical work. On the theory front, we plan to analyze
several extensions of standard matching theory, including multidimensional
matching, matching without transferable utility, matching within a unique
population (the so-called ‘roommates problem’), dynamics of matching and
others. On the empirical front, we shall first carefully reconsider issues linked
to the empirical estimation of matching models; in particular, how can a
(reasonable) stochastic structure be introduced within a matching model.
We then plan to apply these models to empirical issues, with a particular
emphasis on two topics: risk sharing and matching on the marriage market.
While some outcomes of the project will be fairly technical, the stakes
are clearly general. The first part is ultimately aimed at improving our
understanding of decision-making under uncertainty. Modern decision
theory has emphasized several patterns that had been previously neglected.
One is the importance of risk perception (which, formally, translates into
what is often called probability deformation). Standard theory used to
assume a fully transparent perception process - i.e., people simply use ‘true’
probabilities, at least when they are known. In reality, matters are much
more complex, and risk assessment is a sophisticated and (partly or largely)
subjective operation that may reflect the decision-maker’s idiosyncrasies.
While the corresponding theory is by now well developed, empirical analysis
of these issues has largely concentrated on laboratory experiments. Our goal
is to go beyond experiments, which unavoidably come with their limitations
(selected populations, small stakes, experimental conditions ...), and try to
apply these notions to ‘real life’ situations. The first requirement to achieve
this goal is a serious reconsideration of empirical methods, which we plan to
undertake in the coming years.
Matching models, on the other hand, are more and more widely used to
study many topics. Our own investigation is fundamentally motivated by
one basic belief - namely, that the intrahousehold distribution of power
matters for household decision making. We believe, for instance, that
a given benefit may not have the same behavioral outcomes (in terms of,
say, investment on children) when paid to the wife instead of the husband.
Obvious as this claim may sound - and supported as it may be by a number
of empirical results - it is worth noting that standard consumer theory, at
least as it existed until the 90s, was simply assuming away such a differential
impact. Indeed, the dominant model, based on the maximization under
budget constraint of a unique, household utility, implied an income pooling
property, whereby only aggregate income, not its different component, may
matter. Past research, funded in part by previous NSF grants, has provided
both theoretical foundations and empirical support for a more general
conceptual framework, in which the spouses’ respective decision powers do
influence outcomes. Our current topic is to better understand the generation
of such powers. In particular, we plan to investigate how the legal and
demographic conditions on the marriage market influence the allocation of
decision power within the household - and, ultimately, household behavior.
These conditions include laws governing divorce and alimony, but also the
sex ratio and the distribution of earnings and education among men and
among women. Two examples can be mentioned:
–T he spectacular discrepancy between male and female demand for
higher education over the last decades can be explained by the changing
impact of education on marriage markets. Specifically, Chiappori,
Iyigun and Weiss (AER 2009, NSF-funded) have calibrated a model
showing that both the sign and the magnitude of the observed outcomes
could be explained by a model of this type. We plan to take this theory
to data on marital patterns in the US over the last 50 years, to see
whether observed empirical patterns support or falsify our approach.
–A striking feature of some marriage markets, particularly in China and
India, is the recent emergence of hugely imbalanced sex ratios (up to
125 men for 100 women in some states). Such disequilibria will have
strong effects on intrahousehold allocation of resources; we plan to
model and quantify these effects. More importantly, we shall investigate
how the resulting reallocations will alter individual incentives to acquire
and maintain human capital; in particular, whether one can expect a
significant increase in female demand for human capital, which could
further exacerbate the disequilibrium.
Finally, a topic lies at the intersection of the previous two themes, namely risk
sharing. We plan to better understand how households and communities
in general cope with income shocks, especially the respective roles of and
the interactions between risk-compensating transfers and labor supply
adjustments. Again, emphasis will be put on gender issues (do variations
in male and female respective decision powers influence the household’s
reactions to shocks?) and on matching (how are risk sharing networks
formed to start with?).
VOL. 5/ISSUE 3
PAGE 8
Sponsored Research Currents continued from page 7
Michael Woodford – Robustness of Policy Analysis to Departures
from Model-Consistent Expectations (Institute for New Economic
Thinking)
researchers to trace how problems in financial institutions were transmitted
to firms.
This project seeks to illustrate practical difficulties that can arise from
injudicious use of the conventional method of perfect foresight (or RE)
policy analysis, in the context of a policy debate that has recently arisen
within the Federal Reserve System. Since December 2008, the federal funds
rate has remained nearly constant at an unprecedentedly low level. (The
FOMC’s official target has been a band between zero and 25 basis points.)
Each successive meeting of the FOMC in this period has concluded with the
statement assuring the public that the funds rate is expected to remain at this
low level for “an extended period”. However, the question of how long the
rate should remain so low, and whether it is desirable to continue signaling
that it will remain low, is much disputed within the Committee, with at least
a few members clearly nervous about maintaining such an atypical policy
stance for too long, even if unemployment remains high.
In the case that the linkages between the real and financial sector can be
demonstrated, the project will go a long way towards providing an empirical
underpinning for new approaches to macroeconomic policy.
The project will seek to reconstruct Federal Reserve officials’ reasoning,
and show that it is indeed an implication of standard models of the
relationship between interest rates and inflation dynamics, if one analyzes
the consequences of a contemplated policy change by assuming that
the outcome must be a perfect foresight equilibrium consistent with the
announced policy. It is indeed true that many plausible models imply that
the only kind of equilibrium in which nominal interest rates can be forever
low is one in which prices are falling. But it does not follow that a belief that
the Fed intends to keep nominal interest rates low implies that one should
expect deflation, except under the postulate that the economy must be in a
perfect foresight equilibrium consistent with that intended interest-rate path.
The project will argue that more plausible forecasts would assume instead
either (i) that the Fed will not be expected to maintain low interest rates
indefinitely, even if it only talks about the fact that interest-rate increases are
not yet envisioned, or (ii) that the outcome of the policy will be inflation
dynamics under which people’s expectations are not fulfilled (contrary to the
postulate of perfect foresight).
The perspective suggested here will be one in which it is only possible to
describe how a set of possible outcomes is expected to be different under
alternative policies. Here will be a comparison of alternative ways of seeking
to define such a set, in the context of this specific policy problem.
David E. Weinstein – In Search of the Financial Accelerator
(Institute for New Economic Thinking)
This project aims to research how the output of firms outside of the financial
sector is affected by the health of the banks and other financial institutions.
Presently, our understanding of the real effects of financial crises has largely
been based on evidence arising from industry studies or has been limited to
evidence of how financial health affects the providers of credit.
The project seeks to provide the first empirical assessment of how the output
of firms outside of the financial sector is affected by the health of the banks
and other financial institutions. It will attempt to bridge the gap between the
financial crises and the output declines by providing the first direct evident
on the linkage through the use of Japanese data that provides information
the sources and values of all loans received by firms. This will enable the
David E. Weinstein – Internet Prices and Price Indexes
(Google Research Award)
The vast amount of price and click-through data available on Google
Product Search has the potential to dramatically improve our understanding
of aggregate pricing and also provide new ways to measure the quality of
goods online. One of the challenges of measuring aggregate prices is how to
deal with vast number of new and disappearing goods that arise as producers
retire old products and replace them with new and improved ones. In Broda
and Weinstein (2010), we showed how one can calculate such an aggregate
price index using only price and quantity data. One of the limitations of this
approach was that the AC Nielsen data used in that study covered only a
limited set of products and was only available at a quarterly frequency.
In this proposal, we aim to go beyond the original Broda and Weinstein
(2010) and Feenstra and Weinstein (2010) papers in a number of dimensions.
First, we aim to use daily price and click-through information to develop
variety-adjusted daily price indexes that will be superior to those used by
Bureau of Labor Statistics (BLS). Second, we will develop methods of
measuring “revealed quality” of products on Google Product search. Third,
by merging data available on Google Product Search with data available from
AC Nielsen both here and in foreign countries, we aim to obtain a better
understanding of how integrated online markets are with brick-and-morter
markets as well as understand the trade costs that exist between countries.
While many price indexes try to benchmark themselves against the
Consumer Price Index (CPI), it is important to realize that the CPI is
an ad hoc index that is constructed without a firm theoretical basis. The
absence of a theoretical underpinning for the CPI creates a conundrum
for policy makers who want it to reflect the cost of living but have
adopted a methodology – the Laspeyres Index, developed in the 1870s –
that cannot be sensibly linked to the cost of living of any consumer with a
well-defined set of preferences. As a result, statistical agencies in the U.S.
and elsewhere have taken their ad hoc Laspeyres index and tried to make
it track a meaningful one: a “superlative” index.
We will begin our inquiry by first examining price differences across
markets. While this has been done for certain narrowly defined markets
– e.g., books and contact lenses – our study will be the first to examine
whether Internet prices are lower than offline prices in general. We will
do this by comparing GPI data with AC Nielsen data that contains price
information on 750,000 different UPC’s available in mass-merchandising
stores like Wal-Mart for a variety of different countries. One of the added
benefits of this comparison is that we will be able to verify the validity of
click-through data as a measure of market share.
Second, we will examine how rapidly price differences dissipate across
different classes of merchants. We will initially examine this across online
merchants (controlling for their relevance using click-through data).
This will be useful for determining how much market power online
VOL. 5/ISSUE 3
PAGE 9
Sponsored Research Currents continued from page 8
merchants have. We will then conduct a similar analysis comparing price
dynamics of goods available online with those available in brick-andmortar establishments that sell goods available in AC Nielsen data. This
will enable us to answer the question of whether online pricing behavior
differs systematically from retail prices. This is a very important question
for understanding not only market interactions but also for understanding
how closely online prices are linked to offline prices. To the extent that
these prices are closely linked, it will provide further validation that one
can use online prices as a substitute for offline prices. Finally, it will
enable us to obtain estimates for how the development of online stores
affects offline marketing.
Lastly, we plan to use these data to understand international market
segmentation. In particular, by comparing prices of online goods in
different countries we will be able to estimate precisely how international
cost shocks are transmitted across countries (what economists term
“pass-through”). These types of estimates are extremely important for
understanding how exchange rate movements affect prices and propagate
international macroeconomic shocks.
Recent discussion papers
Learning From a Piece of Pie, 1011-05
—Pierre-André Chiappori, Olivier Donni and Ivana Komunjer
We investigate the empirical content of the Nash solution to twoplayer bargaining games. The bargaining environment is described by
a set of variables that may affect agents’ preferences over the agreement
sharing, the status quo outcome, or both. The outcomes (i.e., whether
an agreement is reached, and if so the individual shares) and the
environment (including the size of the pie) are known, but neither are the
agents’ utilities nor their threat points. We consider both a deterministic
version of the model in which the econometrician observes the shares
as deterministic functions of the variables under consideration, and a
stochastic one in which because of latent disturbances only the joint
distribution of incomes and outcomes is recorded. We show that in the
most general framework any outcome can be rationalized as a Nash
solution. However, even mild exclusion restrictions generate strong
implications that can be used to test the Nash bargaining assumption.
Stronger conditions further allow to recover the underlying structure
of the bargaining, and in particular, the cardinal representation of
individual preferences in the absence of uncertainty. An implication of
this finding is that empirical works entailing Nash bargaining could (and
should) use much more general and robust versions than they usually do.
Fatter Attraction: Anthropometric and Socioeconomic Matching on
the Marriage Market, 1011-06
—Pierre-André Chiappori, Sonia Oreffice and Climent QuintanaDomeque
We construct a matching model on the marriage market along more
than one characteristic, where individuals have preferences over physical
attractiveness and socioeconomic characteristics that can be summarized
by a one-dimensional index combining these various attributes. We show
that under a (testable) separability assumption, the indices are ordinally
identified. We estimate the model using data from the PSID. Our
separability tests do not reject. We find that among men, a 10% increase
in BMI can be compensated by a higher wage of around 3%. Similarly,
for women, an additional year of education may compensate up to three
BMI units.
Matching with a Handicap: The Case of Smoking in the Marriage
Market, 1011-07
—Pierre-André Chiappori, Sonia Oreffice and Climent QuintanaDomeque
We develop a matching model on the marriage market, where individuals
have preferences over the smoking status of potential mates, and over their
socioeconomic quality. Spousal smoking is bad for non-smokers, but it is
neutral for smokers, while individuals always prefer high socioeconomic
quality. Furthermore, there is a gender difference in smoking prevalence,
there being more smoking men than smoking women for all education
levels, so that smoking women and non-smoking men are in short supply.
The model generates clear cut conditions regarding matching patterns.
Using CPS data and its Tobacco Use Supplements for the years 1996 to
2007, and proxing socioeconomic status by educational attainment, we
find that these conditions are satisfied. There are fewer “mixed” couples
where the wife smokes than vice-versa, and matching is assortative
on education within smoking types of couples. Among non-smoking
wives those with smoking husbands have on average 0.14 fewer years of
completed education than those with non-smoking husbands. Finally,
and somewhat counterintuitively, we find that, as theory predicts, among
smoking husbands those who marry smoking wives have on average 0.16
more years of completed education than those with non-smoking wives.
Individual Homelessness: Entries, Exits, and Policy, 1011-08
—Brendan O’Flaherty
Homelessness is part of the lives of many people. But almost no one is
homeless for all or most of his or her life. The median shelter homeless
spell is well under a month, and even “chronic homelessness” officially
entails spells of a year or so. I model homelessness as part of people’s lives
in a dynamic stochastic framework in continuous time. I can explain
many empirical regularities with a parsimonious model: for instance,
why the last addresses of homeless people are concentrated in a few
low-rent neighborhoods, why homeless entries are hard to predict, why
recidivism is common and past homelessness is a good predictor of future
homelessness, why some groups recidivate more often than others, why
the hazard rate for shelter exit is single-peaked, why effective homelessness
prevention programs do not alter the average length of homeless spells.
I also examine policy. The optimal homelessness prevention program
VOL. 5/ISSUE
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is Pigouvian and starkly simple. With an optimal prevention program
in place, optimal shelter quality maximizes a simple and intuitive
expression, and insurance programs always raise social welfare. Most of
the previous economics literature about homelessness has been static, but
most literature about homelessness outside economics has been dynamic.
This paper tries to bring the two strands of literature closer together.
Rental Housing Assistance for the 21st Century, 1011-09
—Brendan O’Flaherty
Current rental housing assistance programs are not designed to provide a
safety net for people whose lives are volatile, or to encourage poor people
to live in good locations. These failings can be corrected. HUD should
establish a program of rental insurance-like mortgage insurance, but for
renters. Low income housing assistance formulas should be revised to
reward good neighborhood features, and punish bad.
Targeted Transfers and the Fiscal Response to the Great Recession,
1011-10
—Ricardo Reis and Hyunseung Oh
Between 2007 and 2009, government expenditures increased rapidly
across the OECD countries. While economic research on the impact of
government purchases has flourished, in the data, about three quarters
of the increase in expenditures in the United States (and more in other
countries) was in government transfers. We document this fact, and show
that the increase in U.S. spending on retirement, disability, and medical
care has been as high as the increase in government purchases.We argue
that future research should focus on the positive impact of transfers.
Towards this, we present a model in which there is no representative
agent and Ricardian equivalence does not hold because of uncertainty,
imperfect credit markets, and nominal rigidities. Targeted lump-sum
transfers are expansionary both because of a neoclassical wealth effect
and because of a Keynesian aggregate demand effect.
Principled Policymaking in an Uncertain World, 1112-01
—Michael Woodford
This paper considers the consequences for the theory of economic
policy of allowing for the inevitability of non-routine change in the
environment in which policy is conducted. It addresses in particular
the modifications that must be made to standard discussions (based on
an assumption of “rational” or model-consistent expectations) of the
advantages of commitment to a policy rule over a purely discretionary
approach to policy. The paper argues that a certain naïve conception
of a policy rule — under which it should be possible to state in
advantage a fully explicit formula determining a specific policy action
as a function of publicly observable state variables — makes little sense
once one allows for the impossibility of listing in advance all possible
future states of knowledge about economic conditions, but argues that
purely discretionary policy is not the only coherent alternative. Instead,
the paper distinguishes between multiple levels at which a particular
systematic approach to policy may simultaneously be described, and
argues that a higher-level policy commitment remains both possible and
desirable, even if discretion will have to be allowed in the translation
PAGE
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Recent Faculty articles
“Killing Me Softly: The Fetal Origins Hypothesis”
by Douglas Almond and Janet Currie
Journal of Economic Perspectives, Vol. 25, No. 3, Summer 2011
“After Midnight: A Regression Discontinuity Design
in Length of Postpartum Hospital Stays”
by Douglas Almond and Joseph Doyle
American Economic Journal: Economic Policy,
Col. 3, No. 3, August 2011
“Fasting During Pregnancy and Children’s
Academic Performance”
by Douglas Almond, Bhashkar Mazumder, and Reyn Van Ewijk
Social Science Research Network, July 26, 2011
“Estimating High Dimensional Covariance Matrices
and its Applications”
by Jushan Bai and Shuzhong Shi
Columbia University Department of Economics
Discussion Paper Series, August 2011
“Markets and Mortality”
by Jagdish Bhagwati
American Economic Review, Vol. 101, No. 3, May 2011
“Water Quality Violations and Avoidance Behavior:
Evidence from Bottled Water Consumption”
by Wolfram Schlenker, Matthew Neidell, and Joshua Graff Zivin
American Economic Review, Vol. 101, No. 3, May 2011
“Trade Finance and the Great Trade Collapse”
by JaeBin Ahn, Mary Amiti, and David Weinstein
American Economic Review, Vol. 101, No. 3, May 2011
VOL. 5/ISSUE
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Visitors to the
Program for
Economic
Research
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Recent Discussion Papers continued from page 10
of the higher-level policy commitments into a more concrete (lower-level) description of the way that policy
should be conducted under the particular future circumstances that arise. Four distinct levels of description
are distinguished in the case of monetary policy, where the general idea is developed in greater detail, and
the paper concludes with a discussion of ways in which the conventional theory of monetary policy should
be modified in the light of the recent global financial crisis.
Fall 2011
Each week, researchers and scholars visit the Columbia Economics
Department under the auspices
of the Program for Economic
Research (PER). Interactions in
workshops and seminars advance the body of knowledge and
encourage collaboration between
economists at Columbia and
throughout the world.
Xavier Gabaix
(NYU)
September 26 - 30, 2011
Christine Valente
(Sheffield)
October 3 - 7, 2011
Alberto Abadie
(Harvard Kennedy School)
October 18 - 20, 2011
Liran Einav
(Stanford)
October 24 - 26, 2011
Luigi Guiso
(European University Institute)
October 31 – November 4. 2011
Konrad Mierendorff
(University of Zurich)
November 14 - 18, 2011
Patrick Rey
(Toulouse)
November 28 – December 2, 2011
Bruno Strulovici
(Northwestern)
December 5 – 9, 2011
Principal Components Estimation and Identication of the Factors, 1112-02
—Jushan Bai and Serena Ng
It is known that the principal component estimates of the factors and the loadings are rotations of the
underlying latent factors and loadings. We study conditions under which the latent factors can be estimated
asymptotically without rotation. We derive the limiting distributions for the factor estimates when N and
T are large and make precise how identification of the factors affects inference based on factor augmented
regressions. We also consider factor models with additive individual and time effects.
Estimating High Dimensional Covariance Matrices and Its Applications, 1112-03
—Jushan Bai and Shuzhong Shi
Estimating covariance matrices is an important part of portfolio selection, risk management, and asset
pricing. This paper reviews the recent development in estimating high dimensional covariance matrices,
where the number of variables can be greater than the number of observations. The limitations of the
sample covariance matrix are discussed. Several new approaches are presented, including the shrinkage
method, the observable and latent factor method, the Bayesian approach, and the random matrix theory
approach. For each method, the construction of covariance matrices is given. The relationships among these
methods are discussed.
The department sponsors a discussion paper series for faculty, co-authors, and visitors. Download the full text of
these papers at:
http://econ.columbia.edu/per
MacLeod Honored as
Sami Mnaymneh Professor
of Economics
W. Bentley MacLeod was recently announced as the Sami Mnaymneh Professor of Economics. Professor both
in Economics and International and Public Affairs at Columbia University, MacLeod has a distinguished
international reputation in labor economics and the economics of contracts and organizations. His seminal
work on employment contracts helped lay the foundations for modern contract theory, a key area of modern
applied economic theory. This work focused on how the optimal structure of employment contracts
helps select workers of different ability into appropriate jobs and provide incentives for on-the-job effort.
This line of research is important not only for understanding labor markets, but also for understanding
unemployment in macroeconomic models.
The importance of this highly influential work was recognized by MacLeod’s election as a Fellow of the
Econometric Society in 2005 as well as many other recognitions. MacLeod continues to specialize in law
and labor economics, and is an editor of the Journal of Law Economics and Organization. His current focus
is on how incentives are designed to take into account the complex interplay between reputation effects,
market competition, and social norms. MacLeod’s current research projects include incentives and school
choice, the economics of contract and tort law, and the economics of performance pay.
VOL. 5/ISSUE
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thE PricE of climAtE
chAngE – food Production
loss sincE 1980
Schlenker study finds measurable cost of global warming on food production
The discourse on global warming often
tends to be abstract. In policy debates
over whether environmental concerns
should take precedence over short-term
commercial interests, the more concrete
gains of today typically win out over
preventing abstract (and unmeasured
losses) in the future.
But a new study conducted by Columbia
Economics Assistant Professor Wolfram
Schlenker, along with Professors David
Lobell and Justin Costa-Roberts of
Stanford University, shows that in one area at least – food production –
these effects can already be seen today.
The study, titled “Climate Trends and Global Crop Production Since
1980,” published in Science on May 2011, examines the effects of
measurable climate change on global crop production. Schlenker et al.
find that, except in high-altitude countries where rice in particular gains
from warming, a one-degree Celsius rise in temperature is estimated
to lower crop yields by up to 10 percent. Far from arguing for some
distant potential impact of climate change, the authors’ findings suggest
that global warming already poses a measurable threat to economic
production today.
This study begins by observing that, with the exception of the United
States, temperature trends from 1980 to 2008 exceeded one standard
deviation of historic year-to-year variability, and for many regions it has
exceeded two standard deviations. This indicates that climate change
is occurring and can be contrasted with the pre-1980 era in which this
measured variation is not statistically different from historic year-to-year
variability. The study then utilizes pre-global warming levels of weather
and temperature variation to provide a counterfactual basis against
which to compare the actual yields observed over the past few decades.
Following this logic, the study finds that “Models that link yields of
the four largest commodity crops to weather indicate that global maize
and wheat production declined by 3.8 and 5.5%, respectively, relative
to [the] counterfactual without climate trends.” For a sense of the scale
of this effect, the authors point out that this output loss is roughly
equivalent to the annual production of maize in Mexico, and wheat in
France. The authors go on to estimate that this effect has resulted in
an approximately 20 percent increase in the price of maize and wheat
globally over the period observed.
The study by Schlenker et al. has received broad public interest, and
was reported on widely in the press. Its release has come at a time of
increasing importance of the issue, as the debate on climate change and
the role of policy to respond continues heatedly in the United States and
around the globe. As the world population has officially passed the seven
billion mark, and food shortages continue to be seen in many countries,
the question of making appropriate policy responses to climate change
becomes no longer an abstract discussion, but a measurable quantity of
lost production, as provided by the estimates in the study.
Moreover, the authors suggest, the stakes will only be raised as more
time passes. The study points out that while the average temperature rose
about .13° C per decade since 1950, this increase is expected to accelerate
to about .2° C per decade in the coming years. This suggests that the
effect of climate change on global food prices will only be amplified in
the future, and that a combination of policy responses to climate change
and changes in agricultural production practices will be needed to offset
these losses successfully.
“Without successful adaptation,” the study concludes, “and given the
persistent rise in demand for maize and wheat, the sizable yield setback
from climate change is likely incurring large economic and health costs.”
As the question of food security continues to become a dominant issue
in global politics, the insights of Schlenker et al.’s study will prove
increasingly important, and its implications increasingly urgent.
gsAs Economics rEcEPtion in chicAgo
You are warmly invited to join fellow faculty and Columbia alumni as our guest for a reception hosted by the Columbia University Department
of Economics and Program for Economic Research and the Columbia Business School Office of Alumni Relations at the 2012 ASSA Meetings
in Chicago:
Columbia University ASSA Reception
Friday, January 6, 2012
6PM-8PM
Columbus KL Room, Hyatt Regency Chicago
151 East Wacker Drive
Chicago, IL 60601
If you plan to attend, please RSVP to econ-rsvp@columbia.edu.
VOL. 5/ISSUE
X/ISSUE 3X
rEcEnt fAculty books
Sovereign Wealth Funds and Long-Term Investing
Joseph E. Stiglitz, Frederic Samama and Patrick Bolton
(Columbia University Press, November 2011)
Sovereign Wealth Funds (SWFs) are state-owned
investment funds with combined asset holdings that
are fast approaching four trillion dollars. Recently
emerging as a major force in global financial markets,
SWFs have other distinctive features besides their
state-owned status: they are mainly located in developing countries and
are intimately tied to energy and commodities exports, and they carry
virtually no liabilities and have little redemption risk, which allows them
to take a longer-term investment outlook than most other institutional
investors. This volume examines the specificities of SWFs in greater
detail and discusses the implications of their growing presence for the
world economy.
Storable Votes: Protecting the Minority Voice
Alessandra Casella
(Oxford University Press, December 2011)
Storable votes are a simple voting scheme that allows
the minority to win occasionally, while treating every
voter equally. Because the minority wins only when it
cares strongly about a decision while the majority does
not, minority victories occur without large costs and
indeed typically with gains for the community as a whole. This book
complements a theoretical discussion with several experiments, showing
that the promise of the idea is borne out by the data: the outcomes of the
experiments and the payoffs realized match very closely the predictions of
the theory. Because the intuition behind the voting scheme is so simple:
“vote more when you care more,” the results are robust across different
scenarios, even when more subtle strategic effects are not identified by
the subjects, suggesting that the voting scheme may have real potential
for practical applications.
The Price of Civilization: Reawakening American
Virtue and Prosperity
Jeffrey Sachs (Random House, October 2011)
As he has done in dozens of countries around the
world in the midst of economic crises, Sachs turns
his unique diagnostic skills to what ails the American
economy. He finds that both political parties—
and many leading economists—have missed the
big picture, offering shortsighted solutions such as
stimulus spending or tax cuts to address complex economic problems
that require deeper solutions. Sachs argues that we have profoundly
underestimated globalization’s long-term effects on our country, which
create deep and largely unmet challenges with regard to jobs, incomes,
poverty, and the environment. America’s single biggest economic
failure, Sachs argues, is its inability to come to grips with the new global
economic realities.
PAGE
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nbEr Working PAPErs
“The Role of Information in Competitive
Experimentation,”
Ufuk Akcigit, Qingmin Liu
NBER Working Paper no. 17602
“Should Derivatives be Privileged
in Bankruptcy?”
Patrick Bolton, Martin Oehmke
NBER Working Paper No. 17599
“Importing Skill-Biased Technology,”
Ariel Burstein, Javier Cravino, Jonathan Vogel
NBER Working Paper No. 17460
“Estimators for Persistent and Possibly
Non-Stationary Data with
Classical Properties,”
Yuriy Gorodnichenko, Anna Mikusheva, Serena Ng
NBER Working Paper No. 17424
“Fiscal Stimulus in a Monetary Union:
Evidence from U.S. Regions,”
Emi Nakamura, Jón Steinsson
NBER Working Paper No. 17391
“Is New Economic Geography Right?
Evidence from Price Data”
Jessie Handbury, David Weinstein
NBER Working Paper No. 17067
“Coercive Contract Enforcement:
Law and the Labor Market in
19th Century Industrial Britain”
Suresh Naidu, Noam Yuchtman
NBER Working Paper No. 17051
PROGRAM FOR ECONOMIC RESEARCH
EvEnts cAlEndAr – fAll 2011
sEPtEmbEr 14
Poor Economics: A Radical Rethinking of the Way
to Fight Global Poverty
Esther Duflo and Abhijit Banerjee (MIT) discussed their latest book,
“Poor Economics”, with Jeffrey Sachs.
Co-sponsored by the Columbia Business School Social
Enterprise Program
sEPtEmbEr 21
The Escalating European Debt Problem: Is There a Way Out?
Columbia Economics Professors Richard Clarida, Ricardo Reis and
Columbia Business School Professor Charles Calomiris
octobEr 20
“Unemployment, the Labor Market, and the Economy”
An Address by Board of Governors of the Federal Reserve System,
Daniel K. Tarullo
Co-sponsored by the World Leaders Forum
Columbia University
Department of Economics
1022 International Affairs
420 West 118th Street
New York, NY 10027
Phone: (212) 854-3680
Fax: (212) 854-8059
http://econ.columbia.edu
novEmbEr 19-20
Tenth Annual Columbia-Duke-Northwestern IO Theory Conference
Co-sponsored by Columbia Business School, Northwestern
University and Duke University
dEcEmbEr 5
Multilateralism in Trade at Risk: Should and Can we Rescue
the Doha Round?
Co-sponsored by the World Leaders Forum