Journal of Economic Perspectives, Summer 2014, Volume 28, Issue 3
Table of Contents
Symposium: Entrepreneurship
"The Role of Entrepreneurship in US Job Creation and Economic Dynamism," by Ryan Decker, John Haltiwanger, Ron Jarmin and Javier Miranda
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"Entrepreneurship as Experimentation," by William R. Kerr, Ramana Nanda and Matthew Rhodes-Kropf
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"Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics," by Thomas Astebro, Holger Herz, Ramana Nanda and Roberto A. Weber
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Symposium: Classic Ideas in Development
"The Lewis Model: A 60-Year Retrospective," by Douglas Gollin
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"The Missing "Missing Middle"," by Chang-Tai Hsieh and Benjamin A. Olken
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"Informality and Development," by Rafael La Porta and Andrei Shleifer
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"Do Poverty Traps Exist? Assessing the Evidence," by Aart Kraay and David McKenzie
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Symposium: Academic Production
"Page Limits on Economics Articles: Evidence from Two Journals," by David Card and Stefano DellaVigna
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"What Policies Increase Prosocial Behavior? An Experiment with Referees at the Journal of Public Economics," by Raj Chetty, Emmanuel Saez and Laszlo Sandor
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"The Effects of an Anti-Grade-Inflation Policy at Wellesley College," by Kristin F. Butcher, Patrick J. McEwan and Akila Weerapana
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"The Research Productivity of New PhDs in Economics: The Surprisingly High Non-success of the Successful," by John P. Conley and Ali Sina Onder
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Articles and Features
"The Economics of Fair Trade," by Raluca Dragusanu, Daniele Giovannucci and Nathan Nunn
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"Evaluating Counterterrorism Spending," by John Mueller and Mark G. Stewart
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"Recommendations for Further Reading," by Timothy Taylor
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Abstracts
Symposium: Entrepreneurship
Ryan Decker, John Haltiwanger, Ron Jarmin and Javier Miranda
An optimal pace of business dynamics—encompassing the processes of entry, exit, expansion, and contraction—would balance the benefits of productivity and economic growth against the costs to firms and workers associated with reallocation of productive resources. It is difficult to prescribe what the optimal pace should be, but evidence accumulating from multiple datasets and methodologies suggests that the rate of business startups and the pace of employment dynamism in the US economy has fallen over recent decades and that this downward trend accelerated after 2000. A critical factor in accounting for the decline in business dynamics is a lower rate of business startups and the related decreasing role of dynamic young businesses in the economy. For example, the share of US employment accounted for by young firms has declined by almost 30 percent over the last 30 years. These trends suggest that incentives for entrepreneurs to start new firms in the United States have diminished over time. We do not identify all the factors underlying these trends in this paper but offer some clues based on the empirical patterns for specific sectors and geographic regions.
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"Entrepreneurship as Experimentation"
William R. Kerr, Ramana Nanda and Matthew Rhodes-Kropf
Entrepreneurship research is on the rise but many questions about the fundamental nature of entrepreneurship still exist. We argue that entrepreneurship is about experimentation; the probabilities of success are low, extremely skewed, and unknowable until an investment is made. At a macro level, experimentation by new firms underlies the Schumpeterian notion of creative destruction. However, at a micro level, investment and continuation decisions are not always made in a competitive Darwinian contest. Instead, a few investors make decisions that are impacted by incentive, agency, and coordination problems, often before a new idea even has a chance to compete in a market. We contend that costs and constraints on the ability to experiment alter the type of organizational form surrounding innovation and influence whe n innovation is more likely to occur. These factors not only govern how much experimentation is undertaken in the economy, but also the trajectory of experimentation, with potentially very deep economic consequences.
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"Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics"
Thomas Astebro, Holger Herz, Ramana Nanda and Roberto A. Weber
There is a growing body of evidence that many entrepreneurs seem to enter and persist in entrepreneurship despite earning low risk-adjusted returns. This has lead to attempts to provide explanations—using both standard economic theory and behavioral economics—for why certain individuals may be attracted to such an apparently unprofitable activity. Drawing on research in behavioral economics, in the sections that follow, we review three sets of possible interpretations for understanding the empirical facts related to the entry into, and persistence in, entrepreneurship. Differences in risk aversion provide a plausible and intuitive interpretation of entrepreneurial activity. In addition, a growing literature has begun to highlight the potential importance of overconfidence in driving entrepreneurial outcomes. Such a mechanism may appear at face value to work like a lower level of risk aversion, but there are clear conceptual differences—in particular, overconfidence likely arises from behavioral biases and misperceptions of probability distributions. Finally, nonpecuniary taste-based factors may be important in motivating both the decisions to enter into and to persist in entrepreneurship.
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Symposium: Classic Ideas in Development
"The Lewis Model: A 60-Year Retrospective"
Douglas Gollin
The Lewis model has remained, for more than half a century, one of the dominant theories of development economics. This paper argues that the power of the model lies in the simplicity of its central insight: that poor countries contain enclaves of economic activity just as rich countries contain enclaves of poverty; and that a proximate explanation for the difference in income per capita across countries is that there are large differences in the relative sizes of their "modern" and "traditional" sectors. But while the Lewis model contains a powerful and compelling macro narrative, its details have proved somewhat elusive to scholars and students who have followed, and its policy implications are unclear. This paper identifies several key insights of the Lewis model, discusses several different interpretations of the model, and then reviews modern evidence for the central propositions of the model. In closing, we consider the relevance of Lewis for current thinking about development strategies and policies.
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"The Missing "Missing Middle""
Chang-Tai Hsieh and Benjamin A. Olken
Although a large literature seeks to explain the "missing middle" of mid-sized firms in developing countries, there is surprisingly little empirical backing for existence of the missing middle. Using microdata on the full distribution of both formal and informal sector manufacturing firms in India, Indonesia, and Mexico, we document three facts. First, while there are a very large number of small firms, there is no "missing middle" in the sense of a bimodal distribution: mid-sized firms are missing, but large firms are missing too, and the fraction of firms of a given size is smoothly declining in firm size. Second, we show that the distribution of average products of capital and labor is unimodal, and that large firms, not small firms, have higher average products. This is inconsistent with many models explaining "the missing middle" in which small firms with high returns are constrained from expanding. Third, we examine regulatory and tax notches in India, Indonesia, and Mexico of the sort often thought to discourage firm growth and find no economically meaningful bunching of firms near the notch points. We show that existing beliefs about the missing middle are largely due to arbitrary transformations that were made to the data in previous studies.
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"Informality and Development"
Rafael La Porta and Andrei Shleifer
In developing countries, informal firms account for up to half of economic activity. They provide livelihood for billions of people. Yet their role in economic development remains controversial with some viewing informality as pent-up potential and others viewing informality as a parasitic organizational form that hinders economic growth. In this paper, we assess these perspectives. We argue that the evidence is most consistent with dual models, in which informality arises out of poverty and the informal and formal sectors are very different. It seems that informal firms have low productivity and produce low- quality products; and, consequently, they do not pose a threat to the formal firms. Economic growth comes from the formal sector, that is, from firms run by educated entrepreneurs and exhibiting much higher levels of productivity. The expansion of the formal sector leads to the decline of the informal sector in relative and eventually absolute terms. A few informal firms convert to formality, but more generally they disappear because they cannot compete with the much more-productive formal firms.
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"Do Poverty Traps Exist? Assessing the Evidence"
Aart Kraay and David McKenzie
A "poverty trap" can be understood as a set of self-reinforcing mechanisms whereby countries start poor and remain poor: poverty begets poverty, so that current poverty is itself a direct cause of poverty in the future. The idea of a poverty trap has this striking implication for policy: much poverty is needless, in the sense that a different equilibrium is possible and one-time policy efforts to break the poverty trap may have lasting effects. But what does the modern evidence suggest about the extent to which poverty traps exist in practice and the underlying mechanisms that may be involved? The main mechanisms we examine include S-shaped savings functions at the country level; "big-push" theories of development based on coordination failures; hunger-based traps which rely on physical work capacity rising nonlinearly with foo d intake at low levels; and occupational poverty traps whereby poor individuals who start businesses that are too small will be trapped earning subsistence returns. We conclude that these types of poverty traps are rare and largely limited to remote or otherwise disadvantaged areas. We discuss behavioral poverty traps as a recent area of research, and geographic poverty traps as the most likely form of a trap. The resulting policy prescriptions are quite different from the calls for a big push in aid or an expansion of microfinance. The more-likely poverty traps call for action in less-traditional policy areas such as promoting more migration.
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Symposium: Academic Production
"Page Limits on Economics Articles: Evidence from Two Journals"
David Card and Stefano DellaVigna
Over the past four decades the median length of the papers published in the "top five" economic journals has grown by nearly 300 percent. We study the effects of a page limit policy introduced by the American Economic Review (AER) in mid-2008 and subsequently adopted by the Journal of the European Economic Association (JEEA) in 2009. We find that the imposition of a 40-page limit on submissions led to no change in the flow of new papers to the AER. Instead, authors responded by shortening and reformatting their papers. For JEEA, in contrast, we conclude that the page-limit policy led authors of longer papers to submit to other journals. These results imply that the AER has substantial monopoly power over submissions, while JEEA faces a very competitive market. Evidence from both journals, and from citations t o published papers in the top journals, suggests that longer papers are of higher quality than shorter papers, so the loss of longer submissions at JEEA may have led to a drop in quality. Despite a modest impact of the AER's policy on the average length of submissions, the policy had little or no effect on the length of final accepted manuscripts.
Full-Text Access | Supplementary Materials
"What Policies Increase Prosocial Behavior? An Experiment with Referees at the Journal of Public Economics"
Raj Chetty, Emmanuel Saez and Laszlo Sandor
We evaluate policies to increase prosocial behavior using a field experiment with 1,500 referees at the Journal of Public Economics. We randomly assign referees to four groups: a control group with a six-week deadline to submit a referee report; a group with a four-week deadline; a cash incentive group rewarded with $100 for meeting the four-week deadline; and a social incentive group in which referees were told that their turnaround times would be publicly posted. We obtain four sets of results. First, shorter deadlines reduce the time referees take to submit reports substantially. Second, cash incentives significantly improve speed, especially in the week before the deadline. Cash payments do not crowd out intrinsic motivation: after the cash treatment ends, referees who received cash incentives are no slower than those in the four-week deadline group. Third, social incentives have smaller but significant effects on review times and are especially effective among tenured professors, who are less sensitive to deadlines and cash incentives. Fourth, all the treatments have little or no effect on rates of agreement to review, quality of reports, or review times at other journals. We conclude that small changes in journals' policies could substantially expedite peer review at little cost. More generally, price incentives, nudges, and social pressure are effective and complementary methods of increasing prosocial behavior.
Full-Text Access | Supplementary Materials
"The Effects of an Anti-grade-Inflation Policy at Wellesley College"
Kristin F. Butcher, Patrick J. McEwan and Akila Weerapana
Average grades in colleges and universities have risen markedly since the 1960s. Critics express concern that grade inflation erodes incentives for students to learn; gives students, employers, and graduate schools poor information on absolute and relative abilities; and reflects the quid pro quo of grades for better student evaluations of professors. This paper evaluates an anti-grade-inflation policy that capped most course averages at a B+. The cap was biding for high-grading departments (in the humanities and social sciences) and was not binding for low-grading departments (in economics and sciences), facilitating a difference-in-differences analysis. Professors complied with the policy by reducing compression at the top of the grade distribution. It had little effect on rece ipt of top honors, but affected receipt of magna cum laude. In departments affected by the cap, the policy expanded racial gaps in grades, reduced enrollments and majors, and lowered student ratings of professors.
Full-Text Access | Supplementary Materials
"The Research Productivity of New PhDs in Economics: The Surprisingly High Non-success of the Successful"
John P. Conley and Ali Sina Onder
We study the research productivity of new graduates from North American PhD programs in economics from 1986 to 2000. We find that research productivity drops off very quickly with class rank at all departments, and that the rank of the graduate departments themselves provides a surprisingly poor prediction of future research success. For example, at the top ten departments as a group, the median graduate has fewer than 0.03 American Economic Review (AER)-equivalent publications at year six after graduation, an untenurable record almost anywhere. We also find that PhD graduates of equal percentile rank from certain lower-ranked departments have stronger publication records than their counterparts at higher-ranked departments. In our data, for example, Carnegie Mellon' s graduates at the 85th percentile of year-six research productivity outperform 85th percentile graduates of the University of Chicago, the University of Pennsylvania, Stanford, and Berkeley. These results suggest that even the top departments are not doing a very good job of training the great majority of their students to be successful research economists. Hiring committees may find these results helpful when trying to balance class rank and place of graduate in evaluating job candidates, and current graduate students may wish to re-evaluate their academic strategies in light of these findings.
Full-Text Access | Supplementary Materials
Articles and Features
David Card and Stefano DellaVigna
Over the past four decades the median length of the papers published in the "top five" economic journals has grown by nearly 300 percent. We study the effects of a page limit policy introduced by the American Economic Review (AER) in mid-2008 and subsequently adopted by the Journal of the European Economic Association (JEEA) in 2009. We find that the imposition of a 40-page limit on submissions led to no change in the flow of new papers to the AER. Instead, authors responded by shortening and reformatting their papers. For JEEA, in contrast, we conclude that the page-limit policy led authors of longer papers to submit to other journals. These results imply that the AER has substantial monopoly power over submissions, while JEEA faces a very competitive market. Evidence from both journals, and from citations t o published papers in the top journals, suggests that longer papers are of higher quality than shorter papers, so the loss of longer submissions at JEEA may have led to a drop in quality. Despite a modest impact of the AER's policy on the average length of submissions, the policy had little or no effect on the length of final accepted manuscripts.
Full-Text Access | Supplementary Materials
"What Policies Increase Prosocial Behavior? An Experiment with Referees at the Journal of Public Economics"
Raj Chetty, Emmanuel Saez and Laszlo Sandor
We evaluate policies to increase prosocial behavior using a field experiment with 1,500 referees at the Journal of Public Economics. We randomly assign referees to four groups: a control group with a six-week deadline to submit a referee report; a group with a four-week deadline; a cash incentive group rewarded with $100 for meeting the four-week deadline; and a social incentive group in which referees were told that their turnaround times would be publicly posted. We obtain four sets of results. First, shorter deadlines reduce the time referees take to submit reports substantially. Second, cash incentives significantly improve speed, especially in the week before the deadline. Cash payments do not crowd out intrinsic motivation: after the cash treatment ends, referees who received cash incentives are no slower than those in the four-week deadline group. Third, social incentives have smaller but significant effects on review times and are especially effective among tenured professors, who are less sensitive to deadlines and cash incentives. Fourth, all the treatments have little or no effect on rates of agreement to review, quality of reports, or review times at other journals. We conclude that small changes in journals' policies could substantially expedite peer review at little cost. More generally, price incentives, nudges, and social pressure are effective and complementary methods of increasing prosocial behavior.
Full-Text Access | Supplementary Materials
"The Effects of an Anti-grade-Inflation Policy at Wellesley College"
Kristin F. Butcher, Patrick J. McEwan and Akila Weerapana
Average grades in colleges and universities have risen markedly since the 1960s. Critics express concern that grade inflation erodes incentives for students to learn; gives students, employers, and graduate schools poor information on absolute and relative abilities; and reflects the quid pro quo of grades for better student evaluations of professors. This paper evaluates an anti-grade-inflation policy that capped most course averages at a B+. The cap was biding for high-grading departments (in the humanities and social sciences) and was not binding for low-grading departments (in economics and sciences), facilitating a difference-in-differences analysis. Professors complied with the policy by reducing compression at the top of the grade distribution. It had little effect on rece ipt of top honors, but affected receipt of magna cum laude. In departments affected by the cap, the policy expanded racial gaps in grades, reduced enrollments and majors, and lowered student ratings of professors.
Full-Text Access | Supplementary Materials
"The Research Productivity of New PhDs in Economics: The Surprisingly High Non-success of the Successful"
John P. Conley and Ali Sina Onder
We study the research productivity of new graduates from North American PhD programs in economics from 1986 to 2000. We find that research productivity drops off very quickly with class rank at all departments, and that the rank of the graduate departments themselves provides a surprisingly poor prediction of future research success. For example, at the top ten departments as a group, the median graduate has fewer than 0.03 American Economic Review (AER)-equivalent publications at year six after graduation, an untenurable record almost anywhere. We also find that PhD graduates of equal percentile rank from certain lower-ranked departments have stronger publication records than their counterparts at higher-ranked departments. In our data, for example, Carnegie Mellon' s graduates at the 85th percentile of year-six research productivity outperform 85th percentile graduates of the University of Chicago, the University of Pennsylvania, Stanford, and Berkeley. These results suggest that even the top departments are not doing a very good job of training the great majority of their students to be successful research economists. Hiring committees may find these results helpful when trying to balance class rank and place of graduate in evaluating job candidates, and current graduate students may wish to re-evaluate their academic strategies in light of these findings.
Full-Text Access | Supplementary Materials
Articles and Features
"The Economics of Fair Trade"
Raluca Dragusanu, Daniele Giovannucci and Nathan Nunn
Fair Trade is a labeling initiative aimed at improving the lives of the poor in developing countries by offering better terms to producers and helping them to organize. Although Fair Trade-certified products still comprise a small share of the market--for example, Fair Trade-certified coffee exports were 1.8 percent of global coffee exports in 2009--growth has been very rapid over the past decade. Whether Fair Trade can achieve its intended goals has been hotly debated in academic and policy circles. In particular, debates have been waged about whether Fair Trade makes "economic sense" and is sustainable in the long run. The aim of this article is to provide a critical overview of the economic theory behind Fair Trade, describing the potential benefits and potential pitfalls. We also provide an assessment of the empirical evidence of the impacts of Fair Trade to date. Because coffee is the largest single product in the Fair Trade market, our discussion here focuses on the specifics of this industry, although we will also point out some important differences with other commodities as they arise.
Full-Text Access | Supplementary Materials
"Evaluating Counterterrorism Spending"
John Mueller and Mark G. Stewart
In this article, we present a simple back-of-the-envelope approach for evaluating whether counterterrorism security measures reduce risk sufficiently to justify their costs. The approach uses only four variables: the consequences of a successful attack, the likelihood of a successful attack, the degree to which the security measure reduces risk, and the cost of the security measure. After measuring the cost of a counterterrorism measure, we explore a range of outcomes for the costs of terrorist attacks and a range of possible estimates for how much risk might be reduced by the measure. Then working from this mix of information and assumptions, we can calculate how many terrorist attacks (and of what size) would need to be averted to justify the cost of the counterterrorism measure in narrow cost-benefit terms. To illustrate this appr oach, we first apply it to the overall increases in domestic counterterrorism expenditures that have taken place since the terrorist attacks of September 11, 2001, and alternatively we apply it to just the FBI's counterterrorism efforts. We then evaluate evidence on the number and size of terrorist attacks that have actually been averted or might have been averted since 9/11.
Full-Text Access | Supplementary Materials
"Recommendations for Further Reading"
Timothy Taylor
Full-Text Access | Supplementary Materials
Raluca Dragusanu, Daniele Giovannucci and Nathan Nunn
Fair Trade is a labeling initiative aimed at improving the lives of the poor in developing countries by offering better terms to producers and helping them to organize. Although Fair Trade-certified products still comprise a small share of the market--for example, Fair Trade-certified coffee exports were 1.8 percent of global coffee exports in 2009--growth has been very rapid over the past decade. Whether Fair Trade can achieve its intended goals has been hotly debated in academic and policy circles. In particular, debates have been waged about whether Fair Trade makes "economic sense" and is sustainable in the long run. The aim of this article is to provide a critical overview of the economic theory behind Fair Trade, describing the potential benefits and potential pitfalls. We also provide an assessment of the empirical evidence of the impacts of Fair Trade to date. Because coffee is the largest single product in the Fair Trade market, our discussion here focuses on the specifics of this industry, although we will also point out some important differences with other commodities as they arise.
Full-Text Access | Supplementary Materials
"Evaluating Counterterrorism Spending"
John Mueller and Mark G. Stewart
In this article, we present a simple back-of-the-envelope approach for evaluating whether counterterrorism security measures reduce risk sufficiently to justify their costs. The approach uses only four variables: the consequences of a successful attack, the likelihood of a successful attack, the degree to which the security measure reduces risk, and the cost of the security measure. After measuring the cost of a counterterrorism measure, we explore a range of outcomes for the costs of terrorist attacks and a range of possible estimates for how much risk might be reduced by the measure. Then working from this mix of information and assumptions, we can calculate how many terrorist attacks (and of what size) would need to be averted to justify the cost of the counterterrorism measure in narrow cost-benefit terms. To illustrate this appr oach, we first apply it to the overall increases in domestic counterterrorism expenditures that have taken place since the terrorist attacks of September 11, 2001, and alternatively we apply it to just the FBI's counterterrorism efforts. We then evaluate evidence on the number and size of terrorist attacks that have actually been averted or might have been averted since 9/11.
Full-Text Access | Supplementary Materials
"Recommendations for Further Reading"
Timothy Taylor
Full-Text Access | Supplementary Materials