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Economic Network

Journal of Economic Perspectives

Vol. 32, Issue 2

Spring 2018

On the Relationship between Cognitive Ability and Risk Preference (#7)
Thomas Dohmen, Armin Falk, David Huffman and Uwe Sunde
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Are Risk Preferences Stable? (#8)
Hannah Schildberg-Hörisch
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Risk Preference: A View from Psychology (#9)
Rui Mata, Renato Frey, David Richter, Jürgen Schupp and Ralph Hertwig
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Articles


Space, the Final Economic Frontier (#10)
Matthew Weinzierl
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Dave Donaldson: Winner of the 2017 Clark Medal (#11)
Daron Acemoglu
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Features


Retrospectives: Adam Smith’s Discovery of Trade Gravity (#12)
Bruce Elmslie
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Recommendations for Further Reading (#13)
Timothy Taylor
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Do You Use JEP Articles in Your Classroom? One More Chance to Share! (#14)
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(1) Front Matter
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(2) The US Gains from Trade: Valuation Using the Demand for Foreign Factor Services
Arnaud Costinot and Andrés Rodríguez-Clare
About eight cents out of every dollar spent in the United States is spent on imports. What if, because of a wall or some other extreme policy intervention, imports were to remain on the other side of the US border? How much would US consumers be willing to pay to prevent this hypothetical policy change from taking place? The answer to this question represents the welfare cost from autarky or, equivalently, the welfare gains from trade. In this article, we discuss how to evaluate these gains using estimates of the demand for foreign factor services.
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(3) Alternative Sources of the Gains from International Trade: Variety, Creative Destruction, and Markups
Robert C. Feenstra
The modern theory of international trade identifies several additional sources of the gains from international trade beyond the gains from traditional comparative advantage. These are the gains from importing new product varieties; the gains from „creative destruction“ as the relatively most productive firms expand their output by exporting while the less-productive firms exit; and the gains from competition between firms in different countries, which can lead to reduced markups. Estimates of these various gains are provided for the United States and other countries.
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(4) New Perspectives on the Decline of US Manufacturing Employment
Teresa C. Fort, Justin R. Pierce and Peter K. Schott
We use relatively unexplored dimensions of US microdata to examine how US manufacturing employment has evolved across industries, firms, establishments, and regions. These data provide support for both trade- and technology-based explanations of the overall decline of employment over this period, while also highlighting the difficulties of estimating an overall contribution for each mechanism. Toward that end, we discuss how more careful analysis of these trends might yield sharper insights.
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(5) What Do Trade Agreements Really Do?
Dani Rodrik
Economists have a tendency to associate „free trade agreements“ all too closely with „free trade.“ They may be unaware of some of the new (and often problematic) beyond-the-border features of current trade agreements. As trade agreements have evolved and gone beyond import tariffs and quotas into regulatory rules and harmonization�intellectual property, health and safety rules, labor standards, investment measures, investor-state dispute settlement procedures, and others�they have become harder to fit into received economic theory. It is possible that rather than neutralizing the protectionists, trade agreements may empower a different set of rent-seeking interests and politically well-connected firms�international banks, pharmaceutical companies, and multinational firms. Trade agreements could still result in freer, mutually beneficial trade, through exchange of market access. They could result in the global upgrading of regulations and standards, for labor, say, or the environment. But they could also produce purely redistributive outcomes under the guise of „freer trade.“ As trade agreements become less about tariffs and nontariff barriers at the border and more about domestic rules and regulations, economists might do well to worry more about the latter possibility.
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(6) Modeling Risk Aversion in Economics
Ted O’Donoghue and Jason Somerville
To capture the risk-aversion intuition, the standard approach in economics has been to utilize the model of expected utility, in which risk aversion derives from diminishing marginal utility for wealth (or diminishing marginal utility for aggregate consumption). The expected utility model for risk aversion has been used to derive many important insights. But over the years, economists and psychologists have identified various problematic issues with expected utility as a descriptive model of choice. In this article, we urge economists to take seriously the research agenda of developing and assessing different ways to model risk aversion. We proceed in three main steps. First, we highlight that the basic intuition of risk aversion that drives many results in economics is not intimately tied to expected utility. Second, we describe a few alternative models that can also capture the basic intuition of risk aversion. Finally, we discuss that, while expected utility and the alternative models might all capture the basic intuition of risk aversion, the alternative models can generate additional, more nuanced implications not shared with expected utility, that in some cases seem to be borne out by data. We emphasize that these alternative models also are not perfect, and further research is needed to identify even better approaches.
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(7) On the Relationship between Cognitive Ability and Risk Preference
Thomas Dohmen, Armin Falk, David Huffman and Uwe Sunde
This paper will focus on the relationship between cognitive ability and decision-making under risk and uncertainty. Taken as a whole, this research indicates that cognitive ability is associated with risk-taking behavior in various contexts and life domains, including incentivized choices between lotteries in controlled environments, behavior in nonexperimental settings, and self-reported tendency to take risks. One pattern that emerges frequently in these studies is that cognitive ability tends to be positively correlated with avoidance of harmful risky situations, but it tends to be negatively correlated with risk aversion in advantageous situations. We conclude by discussing perspectives for future research, in particular the scope for the development of richer sets of elicitation instruments and measurement across a wider range of concepts.
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(8) Are Risk Preferences Stable?
Hannah Schildberg-Hörisch
It is ultimately an empirical question whether risk preferences are stable over time. The evidence comes from diverse strands of literature, covering the stability of risk preferences in panel data over shorter periods of time, life-cycle dynamics in risk preferences, the possibly long-lasting effects of exogenous shocks on risk preferences as well as temporary variations in risk preferences. Individual risk preferences appear to be persistent and moderately stable over time, but their degree of stability is too low to be reconciled with the assumption of perfect stability in neoclassical economic theory. We offer an alternative conceptual framework for preference stability that builds on research regarding the stability of personality traits in psychology. The definition of stability used in psychology implies high levels of rank-order stability across individuals and not that the individual will maintain the same level of a trait over time. Preference parameters are considered as distributions with a mean that is significantly but less than perfectly stable, plus some systematic variance. This framework accommodates evidence on systematic changes in risk preferences over the life cycle, due to exogenous shocks such as economic crises or natural catastrophes, and due to temporary changes in self-control resources, emotions, or stress. We note that research on the stability of (risk) preferences is conceptually at the heart of microeconomics and systematic changes in risk preferences have vital real-world consequences.
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(9) Risk Preference: A View from Psychology
Rui Mata, Renato Frey, David Richter, Jürgen Schupp and Ralph Hertwig
Psychology offers conceptual and analytic tools that can advance the discussion on the nature of risk preference and its measurement in the behavioral sciences. We discuss the revealed and stated preference measurement traditions, which have coexisted in both psychology and economics in the study of risk preferences, and explore issues of temporal stability, convergent validity, and predictive validity with regard to measurement of risk preferences. As for temporal stability, do risk preference as a psychological trait show a degree of stability over time that approximates what has been established for other major traits, such as intelligence, or, alternatively, are they more similar in stability to transitory psychological states, such as emotional states? Convergent validity refers to the degree to which different measures of a psychological construct capture a common underlying characteristic or trait. Do measures of risk preference all capture a unitary psychological trait that is indicative of risky behavior across various domains, or do they capture various traits that independently contribute to risky behavior in specific areas of life, such as financial, health, and recreational domains? Predictive validity refers to the extent to which a psychological trait has power in forecasting behavior. Intelligence and major personality traits have been shown to predict important life outcomes, such as academic and professional achievement, which suggests there could be studies of the short- and long-term outcomes of risk preference�something lacking in current psychological (and economic) research. We discuss the current empirical knowledge on risk preferences in light of these considerations.
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(10) Space, the Final Economic Frontier
Matthew Weinzierl
After decades of centralized control of economic activity in space, NASA and US policymakers have begun to cede the direction of human activities in space to commercial companies. NASA garnered more than 0.7 percent of GDP in the mid-1960s, but is only around 0.1 percent of GDP today. Meanwhile, space has become big business, with $300 billion in annual revenue. The shift from public to private priorities in space is especially significant because a widely shared goal among commercial space’s leaders is the achievement of a large-scale, largely self-sufficient, developed space economy. Jeff Bezos, has stated that the mission of his firm Blue Origin is „millions of people living and working in space.“ Elon Musk, founder of SpaceX, has laid out plans to build a city of a million people on Mars within the next century. Both Neil deGrasse Tyson and Peter Diamandis have been given credit for stating that Earth’s first trillionaire will be an asteroid-miner. Such visions are clearly not going to become reality in the near future. But detailed roadmaps to them are being produced and recent progress in the required technologies has been dramatic. If such space-economy visions are even partially realized, the implications for society will be enormous. Though economists should treat the prospect of a developed space economy with healthy skepticism, it would be irresponsible to treat it as science fiction. In this article, I provide an analytical framework�based on classic economic analysis of the role of government in market economies�for understanding and managing the development of the space economy.
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(11) Dave Donaldson: Winner of the 2017 Clark Medal
Daron Acemoglu
The 2017 John Bates Clark Medal of the American Economic Association was awarded to Dave Donaldson for his path-breaking contributions in international trade. Donaldson’s work sheds light on some of the central questions of international economics, ranging from the economic and welfare implications of market integration within a country to testing the core empirical predictions of models of international trade based on comparative advantage. In these areas, empirical work faces the challenge of taking into account the broader equilibrium implications of changes in policies or economic conditions�that is, the possibility that bilateral relations between two regions or countries will affect others via trade diversion or their effects on equilibrium prices. Donaldson’s work has managed to address these challenges by combining careful theory with detailed and creative empirical work. Indeed, this research strategy has turned Dave into a leader in the revival of empirical work in international trade.
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(12) Retrospectives: Adam Smith’s Discovery of Trade Gravity
Bruce Elmslie
The gravity equation is a current workhorse of empirical trade theory. It is generally acknowledged that this theory, which relates the extent of trade between countries to their respective sizes, distances, and relative trade barriers, was first developed by Jan Tinbergen in 1962. Acceptance of the gravity model as part of the discipline’s core was limited by its scant theoretical foundation for the first 40 years of its existence. This paper finds that a theory of trade gravity was first developed by Adam Smith in The Wealth of Nations. Moreover, it is shown that Smith’s statement of a proportional relation between economic size and distance came about as an application of his general theory of differential capital productivity in different economic sectors, and his elaboration of a theory of the gains from trade originated by David Hume. It is further shown that Smith had an explanation of the size of border affects in trade volumes, and a gravity theory of trade restrictions.
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(13) Recommendations for Further Reading
Timothy Taylor
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(14) Do You Use JEP Articles in Your Classroom? One More Chance to Share!
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