ALBERT

Description: In this article, we review the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We review the growing evidence that negative policy rates are special because the pass-through to banks’ retail deposit rates is hindered by a zero lower bound. We summarize existing research on the impact of negative rates on banks’ lending and securities portfolios as well as their consequences for the real economy. Finally, we discuss the role of different initial conditions when the policy rate becomes negative, and potential interactions between negative policy rates and other unconventional monetary policies. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: State-owned investors (SOIs), including sovereign wealth funds and public pension funds, have $27 trillion in assets under management in 2020, making these funds the third largest group of asset owners globally. SOIs have become the largest and are among the most important private equity investors, and they are key investors in other alternative asset investments such as real estate, infrastructure, and hedge funds. SOIs are also leaders in promoting environmental, social, and governance policies and corporate social responsibility policies in investee companies. We document the rise of SOIs, assess their current investment policies, and describe how their state ownership both constrains and enhances their investment opportunity sets. We survey the most impactful recent academic research on sovereign wealth funds, public pension funds, and their closest financial analogs, private pension funds. We also introduce a new Governance-Sustainability-Resilience Scoreboard for SOIs and survey research examining their role in promoting good corporate governance. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: This review addresses, from a unified perspective, the important role of conflicts of interest in various facets of asset management and advising, including managing individual portfolios, institutional asset management, and order routing. I use an agency framework to highlight the sources of the underlying incentive conflicts, the nature of efficient solutions, the role of the structure of compensation in mitigating (or creating) the agency problem, and the use of benchmarks as a solution. I also highlight several contemporary contexts in which conflicts of interest are important. Expected final online publication date for the Annual Review of Financial Economics, Volume 12 is November 2, 2020. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: We review the literature on debt structure, which is a central element in a firm's capital structure. We first survey both theoretical and empirical research pertaining to debt characteristics—maturity and priority—and debt types—bank loans, corporate bonds, credit lines, commercial paper, and capital leases. We then present comprehensive empirical evidence on public US firms’ debt structure over the period 2002–2018, highlighting that more than three-quarters of US firms concentrate their borrowing in one debt type, and offer some suggestive explanations for the observed pattern. Finally, we discuss directions for future research, including a better understanding of debt structure choices by non-US firms and by private firms, the cross-sectional and temporal variations in debt structure, the corporate policy implications of firms’ debt structure choices, and the interaction between types of assets and debt structure. Expected final online publication date for the Annual Review of Financial Economics, Volume 12 is November 2, 2020. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: Global activities of banks are a core manifestation of broader patterns of globalization of production, trade, and finance. This article reviews the extensive recent empirical and theoretical literature on global banking, emphasizing the careful empirical analyses that incorporate key dimensions of heterogeneity among borrowers and lenders, and across activities. The actions of globally active banks are consequential, with cost and benefit trade-offs that differ during their lifetimes and at times of stress. Both research and policymaking around global banking benefit from improved infrastructures around collection of and access to granular data and repositories of evaluation studies. Although overall positive contributions from welfare perspectives arise from the activities of global banks, these organizations require appropriately targeted policy frameworks and oversight. Expected final online publication date for the Annual Review of Financial Economics, Volume 12 is November 2, 2020. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: The credit default swap (CDS) remains an important class of derivatives contract despite the declining activity in the single-name corporate market. I provide a quick introduction to the contracts, the pricing formula used to interpret the market premiums, the development in trading volumes, and some key insights that are important for understanding its role in markets. I then take a closer look at the CDS-bond basis and the role of trading and regulatory frictions. Finally, the European sovereign debt crisis brought back in focus the notion of a quanto spread, which I explain. Expected final online publication date for the Annual Review of Financial Economics, Volume 12 is November 2, 2020. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: We assess the complicated reality of monetary policy transmission through mortgage markets by synthesizing the existing literature on the role of refinancing in policy implementation. After briefly reviewing mortgage market institutions in the USA and documenting refinance activity over time, we summarize the links between refinancing and consumption and describe the frictions impeding the refinancing channel. The review draws heavily on research emerging from the experience of the financial crisis of 2008–2009, as it highlights a combination of market, institutional, and policy-making factors that dulled the transmission mechanism. We conclude with a discussion of potential mortgage market innovations and the applicability of lessons learned to the ongoing stresses induced by the COVID-19 pandemic. Expected final online publication date for the Annual Review of Financial Economics, Volume 12 is November 2, 2020. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: Real interest rates have been persistently below historical norms over the past decade, leading economists and policy makers to view the equilibrium real interest rate as likely to be low for some time. Various definitions and approaches to estimating the equilibrium real interest rate are examined, including approaches based on the term structure of interest rates and small macroeconomic models. The individual country approaches common in the literature are extended to allow for global trend and cyclical factors. The analysis finds that global factors dominate the downward trend in the equilibrium interest rate across 13 advanced economies. A corollary of this finding is that the U.S. equilibrium rate can be informed by global developments and is recently lower than estimated in U.S.-only studies. The analysis also highlights how the common global trend confounds empirical assessments of the determinants of movements in the equilibrium rate and the need to better integrate term-structure and macroeconomic approaches. Expected final online publication date for the Annual Review of Financial Economics, Volume 12 is Novembe 2, 2020. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: This is an edited version of a talk given at the Robert C. Merton 75th Birthday Celebration Conference held at MIT on August 5 and 6, 2019. A video of the talk is available at https://bit.ly/2nvITM6 . Expected final online publication date for the Annual Review of Financial Economics, Volume 12 is Novembe 2, 2020. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: We review recent research into how firms navigate four complex decisions in corporate takeovers: ( a) deal initiation, ( b) pre-offer toehold acquisition, ( c) the initial (public) offer price, and ( d) the payment method. We focus the evidence on public targets and the theory on first-price or English (ascending-price) auctions with two competing bidders and a single (pivotal) seller. The evidence shows that nearly half of bids are initiated by the target (not a bidder). Notwithstanding the large offer premiums, only a small fraction of bidders acquire a target toehold prior to bidding. The first bid rarely attracts rival bidders, suggesting effective competition deterrence. Bid jumps are high, as predicted when bidding costs are large. Pre-bid stock price run-ups reflect rational market deal anticipation and are understood as such by the deal negotiators. Bidders select stock payment when concerned with adverse selection on the target side of the deal.

Description: We provide a critical review of macroeconomic models used for monetary policy at central banks from a finance perspective. We review the history of monetary policy modeling, survey the core monetary models used by major central banks, and construct an illustrative model for those readers who are unfamiliar with the literature. Within this framework, we highlight several important limitations of current models and methods, including the fact that local-linearization approximations omit important nonlinear dynamics, yielding biased impulse-response analysis and parameter estimates. We also propose new features for the next generation of macrofinancial policy models, including a substantial role for the financial sector, the government balance sheet, and unconventional monetary policies; heterogeneity, reallocation, and redistribution effects;the macroeconomic impact of large nonlinear risk premium dynamics; time-varying uncertainty; financial sector and systemic risks; imperfect product market and markups; and further advances in solution, estimation, and evaluation methods for dynamic quantitative structural models.

Description: Starting with his 1970 doctoral dissertation and continuing to today, Robert C. Merton has revolutionized the theory and practice of finance. In 1997, Merton shared a Nobel Prize in Economics “for a new method to determine the value of derivatives.” His contributions to the science of finance, however, go far beyond that. In this article I describe Merton's main contributions. They include the following: 1.  The introduction of continuous-time stochastic models (the Ito calculus) to the theory of household consumption and investment decisions. Merton's technique of dynamic hedging in continuous time provided a bridge between the theoretical complete-markets equilibrium model of Kenneth Arrow and the real world of personal financial planning and management. 2.  The derivation of the multifactor Intertemporal Capital Asset Pricing Model (ICAPM). The ICAPM generalizes the single-factor CAPM and explains why that model might fail to properly account for observed market excess returns. It also provides a theory to identify potential forward-looking risk premia for use in factor-based investment strategies. It is therefore both a positive and normative theory. 3.  The invention of Contingent Claims Analysis (CCA) as a generalization of option pricing theory. CCA applies the technique of dynamic replication to the valuation and risk management of a wide range of corporate and government liabilities. Merton's CCA model for the valuation and analysis of risky debt is known among scholars and practitioners alike as the Merton Model. 4.  The development of financial engineering, which employs CCA to design and produce new financial products. Merton was the first to apply CCA to analyze government guaranty programs such as deposit insurance, and to suggest improvements in the way those programs are managed. He and his students have applied his insights at both the micro and macro policy levels. 5.  And finally, the development of a theory of financial intermediation that explains and predicts how financial systems differ across countries and change over time. Merton has applied that theory, called functional and structural finance, to guide the design and regulation of financial systems at the levels of the firm, the industry, and the nation. He has also used it to propose reforms in pensions, sovereign wealth funds, and macrostabilization policy. This article is one of a pair of articles published in this volume about Robert C. Merton's contributions to the science of financial economics. This article was originally published in Volume 11 of the Annual Review of Financial Economics. The other article in this pair is “ Robert C. Merton: The First Financial Engineer ” by Andrew W. Lo.

Description: Textual analysis, implemented at scale, has become an important addition to the methodological toolbox of finance. In this review, given the proliferation of papers now using this method, we first provide an updated survey of the literature while focusing on a few broad topics—social media, political bias, and detecting fraud. We do not attempt to survey the various statistical methods and instead initially focus on the construction and use of lexicons in finance. We then center the discussion on readability as an attribute frequently incorporated in contemporaneous research, arguing that its use begs the question of what we are measuring. Finally, we discuss how the literature might build on the intent of measuring readability to measure something more appropriate and more broadly relevant—complexity.

Description: Life-cycle portfolio choice models capture the role of human capital, housing, borrowing constraints, background risk, and several other crucial ingredients for determining the savings and investment decisions of households. Over the last two decades, this literature has provided us with multiple insights regarding the asset allocation decisions of individual investors. This article provides a critical survey of this research and suggests directions for future research, namely incorporating additional forms of household heterogeneity.

Description: There is sufficient evidence in the popular, legal, and financial literatures that informed options trading ahead of scheduled and unexpected corporate events is pervasive. In this review, we piece together the extant evidence on this topic into a cohesive picture, which includes abnormal activity ahead of announcements of earnings, mergers and acquisitions, as well as numerous other corporate events. We also discuss the more limited evidence on informed trading in other derivatives markets, such as credit default swaps. In addition, we characterize the impact and features of illegal insider trading and insider trading networks. We also provide a brief overview of the legal framework in the United States concerning legal and illegal insider trading to emphasize the challenges associated with identifying informed options trading. We end with our suggestions regarding future research opportunities in this broad topic.

Description: Short-term debt that can serve as a medium of exchange is designed to be information insensitive. No one should be tempted to acquire private information to gain an informational advantage in trading that could destabilize the value of the debt. Short-term debt minimizes the incentive to acquire information among all securities of equal value backed by the same underlying asset. Moreover, backing short-term debt with debt (i.e., using debt as collateral) minimizes information sensitivity across all types of collateral with equal value. These features are consistent with financial crises occurring periodically. In the information view adopted here, a financial crisis can occur when the collateral backing the short-term debt is thought to have lost enough value to raise doubts among the traders that some may acquire private information. In a crisis, there is a shift from information-insensitive to information-sensitive debt.

Description: Technological innovation is critical to a country's economic development and a firm's long-term success. This article reviews the recent literature that links institutions and innovation. Specifically, we focus on five aspects of the linkage. First, we discuss the literature that explores how the culture of a society or a corporation influences the process, features, and outcomes of innovation activities. Second, we review papers that focus on the role of demographic characteristics in innovation. Third, we describe studies examining the relation between market development and firms’ incentives as well as their ability to engage in innovative investments. Fourth, we discuss the literature on how innovation is shaped by a nation's laws and policies. Finally, we review the academic papers regarding the effects of government regulations and policies on innovation activities. Overall, this article aims to provide a synthetic and evaluative review of recent academic research that links various aspects of institutions and innovation. We also provide our views on potential directions for future research in this area.

Description: We provide an overview of the relationship between financial networks and systemic risk. We present a taxonomy of different types of systemic risk, differentiating between direct externalities between financial organizations (e.g., defaults, correlated portfolios, fire sales), and perceptions and feedback effects (e.g., bank runs, credit freezes). We also discuss optimal regulation and bailouts, measurements of systemic risk and financial centrality, choices by banks regarding their portfolios and partnerships, and the changing nature of financial networks. Expected final online publication date for the Annual Review of Economics, Volume 13 is August 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: There is compelling evidence that globalization shocks, often working through culture and identity, have played an important role in driving up support for populist movements, particularly of the right-wing kind. I start with an empirical analysis of the 2016 presidential election in the United States to show that globalization-related attitudinal variables were important correlates of the switch to Trump. I then provide a conceptual framework that identifies four distinct channels through which globalization can stimulate populism, two each on the demand and supply sides of politics. I evaluate the empirical literature with the help of this framework, discussing trade, financial globalization, and immigration separately. I conclude the review by discussing some apparently anomalous cases in which populists have been against, rather than in favor of, trade protection. Expected final online publication date for the Annual Review of Economics, Volume 13 is August 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: We review the current state of the estimation of dynamic stochastic general equilibrium (DSGE) models. After introducing a general framework for dealing with DSGE models, the state-space representation, we discuss how to evaluate moments or the likelihood function implied by such a structure. We discuss, in varying degrees of detail, recent advances in the field, such as the tempered particle filter, approximated Bayesian computation, Hamiltonian Monte Carlo, variational inference, and machine learning. These methods show much promise but have not been fully explored by the DSGE community yet. We conclude by outlining three future challenges for this line of research. Expected final online publication date for the Annual Review of Economics, Volume 13 is August 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: This review focuses on properties related to the robustness and stability of Nash equilibria in games with a large number of players. Somewhat surprisingly, these equilibria become substantially more robust and stable as the number of players increases. We illustrate the relevant phenomena through a binary-action game with strategic substitutes, framed as a game of social isolation in a pandemic environment. Expected final online publication date for the Annual Review of Economics, Volume 13 is August 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: In representative democracies, a variety of rules are employed to select and retain public officials to reflect public preferences over policies. We discuss the literature on selection and retention rules for government officials, focusing on low-information offices. First, we overview the historical origins and the scope of the variation in selection and retention rules. Second, we provide conceptual frameworks for assessing the advantages and disadvantages of direct elections and discuss various factors that influence the functioning of elections. Third, we present empirical regularities. We summarize the baseline effects of the institutional variation and their interaction with factors such as media and compensation. Finally, we discuss outstanding questions on theoretical and empirical fronts, and how the digitization of government information and advances in machine learning can open up new avenues for research. Expected final online publication date for the Annual Review of Economics, Volume 13 is August 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: This article reviews the literature on civil conflict and development with a focus on the socioeconomic consequences of violence and on promising policies for fostering peace. We make four main points. First, one of the reasons conflict is still often overlooked as key factor for development is that conflict costs are typically underestimated, in particular the shadow costs of deterrence. Second, there are several types of war traps that hold countries back, both economically and politically. Third, to break these traps, policies must be calibrated to address jointly both poverty and social tensions, as there is a strong macro complementarity between peace and development objectives. We document how single-minded policies that ignore this dual challenge can spectacularly fail, and we discuss in depth a series of particularly promising policies. Fourth, we highlight the increasing potential of novel data collection methodologies and the need for policy evaluation tools in violent contexts. Expected final online publication date for the Annual Review of Economics, Volume 13 is August 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: Stephen A. Ross was one of the most influential scholars in the field of financial economics in the late twentieth century. Ross's work was central to several novel domains of economic inquiry. His contributions included the arbitrage pricing theory (APT), the risk-neutral pricing of contingent claims, the binomial option pricing model, a theory of the term structure of interest rates, a seminal contribution to the economic theory of agency, and insights about conditioning biases in ex post performance measurement. In this article, we discuss his seminal papers and the broad scope of his curiosity within the arc of a remarkably productive and influential career that spanned five decades and yet ended sooner than most who knew him expected. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is March 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: Voters have strong incentives to increase their influence by trading votes, acquiring others’ votes when preferences are strong in exchange for giving votes away when preferences are weak. But is vote trading welfare improving or welfare decreasing? For a practice long believed to be central to collective decisions, the lack of a clear answer is surprising. We review the theoretical literature and, when available, its related experimental tests. We begin with the analysis of logrolling, the exchange of votes for votes. We then focus on vote markets, where votes can be traded against a numeraire. We conclude with procedures allowing voters to shift votes across decisions—that is, allowing one to trade votes with oneself only. We find that vote trading and vote markets are typically inefficient; more encouraging results are obtained by allowing voters to allocate votes across decisions. Expected final online publication date for the Annual Review of Economics, Volume 13 is August 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: Financial crises are a recurring feature of modern economies. This article summarizes the lessons learned from policy interventions and tools used to resolve banking crises from a practical, operational perspective and in light of the experiences and challenges faced during and since the 2008 global financial crisis. Managing a systemic banking crisis is a complex, multiyear process and requires a comprehensive framework for addressing systemic banking problems while minimizing taxpayers’ costs. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is March 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: Markets for consumer financial services are growing rapidly in low- and middle-income countries and are being transformed by digital technologies and platforms. With growth and change come concerns about protecting consumers from firm exploitation due to imperfect information and contracting as well as from their own decision-making limitations. We seek to bridge regulator and academic perspectives on these underlying sources of harm and five potential problems that can result: high and hidden prices, overindebtedness, postcontract exploitation, fraud, and discrimination. These potential problems span product markets old and new and could impact micro- and macroeconomies alike. Yet there is little consensus on how to define, diagnose, or treat such problems. Evidence-based consumer financial protection will require substantial advances in theory and especially empirics, and we outline key areas for future research. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Description: This article provides a selective review of the recent literature on econometric models of network formation. I start with a brief exposition on basic concepts and tools for the statistical description of networks; then I offer a review of dyadic models, focusing on statistical models on pairs of nodes, and I describe several developments of interest to the econometrics literature. I also present a discussion of nondyadic models in which link formation might be influenced by the presence or absence of additional links, which themselves are subject to similar influences. This argument is related to the statistical literature on conditionally specified models and the econometrics of game theoretical models. I close with a (nonexhaustive) discussion of potential areas for further development.

Description: This review describes interactions between monetary and fiscal policies that affect equilibrium price levels and interest rates by critically surveying theories about ( a) optimal anticipated inflation, ( b) optimal unanticipated inflation, and ( c) conditions that secure a nominal anchor in the sense of a unique price level path. We contrast incomplete theories whose inputs are budget-feasible sequences of government-issued bonds and money with complete theories whose inputs are bond/money strategies described as sequences of functions that map time t histories into time t government actions. We cite historical episodes that confirm the theoretical insight that lines of authority between a Treasury and a central bank can be ambiguous, obscure, and fragile.

Description: This article reviews the literature on aspirations in economics, with a particular focus on socially determined aspirations. The core theory builds on two fundamental principles: ( a) Aspirations can serve to inspire, but still higher aspirations can lead to frustration and resentment; and ( b) aspirations are largely determined by an individual's social environment. Using the structure of this core theory, we discuss the implications of our framework for the study of interpersonal inequality, social conflict, fertility choices, risk taking, and goal setting.

Description: Data sets that are terabytes in size are increasingly common, but computer bottlenecks often frustrate a complete analysis of the data, and diminishing returns suggest that we may not need terabytes of data to estimate a parameter or test a hypothesis. But which rows of data should we analyze, and might an arbitrary subset preserve the features of the original data? We review a line of work grounded in theoretical computer science and numerical linear algebra that finds that an algorithmically desirable sketch, which is a randomly chosen subset of the data, must preserve the eigenstructure of the data, a property known as subspace embedding. Building on this work, we study how prediction and inference can be affected by data sketching within a linear regression setup. We use statistical arguments to provide “inference-conscious” guides to the sketch size and show that an estimator that pools over different sketches can be nearly as efficient as the infeasible one using the full sample.

Description: The fast and often chaotic urbanization of the developing world generates both economic opportunity and challenges, like contagious disease and congestion, because proximity increases both positive and negative externalities. In this article, we review the expanding body of economic research on developing-world cities. One strand of this literature emphasizes the economic benefits of urban connection, typically finding that agglomeration benefits are at least as high in poor countries as they are in rich countries. Yet there remains an ongoing debate about whether slums provide a path to prosperity or an economic dead end. A second strand of research analyzes the negative externalities associated with urban density, and the challenges of building and maintaining infrastructure to moderate those harms. Researchers are just beginning to understand the links between institutions (such as public–private partnerships), incentives (such as congestion pricing), and the effectiveness of infrastructure spending in addressing urban problems. A third line of research addresses the spatial structure of cities directly with formal, structural models. These structural models seem particularly valuable when analyzing land-use and transportation systems in the far more fluid cities of the developing world.

Description: Alternative work arrangements, defined both by working conditions and by workers’ relationship to their employers, are heterogeneous and common in the United States. This article reviews the literature on workers’ preferences over these arrangements, inputs to firms’ decisions to offer them, and the impact of regulation. It also highlights several descriptive facts: The typical worker is in a job where almost none of the tasks can be performed from home, work arrangements have been relatively stable over the past 20 years, work conditions vary substantially with education, and jobs with schedule or location flexibility are less family friendly on average. This last fact explains why women are not more likely to have schedule or location flexibility and seem to largely reduce their working hours to get more family-friendly arrangements.

Description: This article surveys the literature on capital flows and leverage. We summarize results from the existing papers and document new facts. The empirical literature takes both a macro and a micro approach. The macro approach focuses on aggregate data both over time and in the cross-section of countries, and it documents a positive correlation between total capital flows, build-ups in terms of external and domestic debt to GDP ratio, and financial crises. The micro approach uses granular data and focuses on leverage at the firm and bank level and associates this leverage with country-level capital flows and related exchange rate movements. We document new facts from a hybrid approach that focuses on the relationship between sector-level capital flows and sectoral leverage. We highlight the interconnections between different approaches and argue that harmonization of the macro and micro approaches can yield a more complete understanding of the effect of capital flows on country-, sector-, and firm- and bank-level leverage associated with credit booms and busts.

Description: This conversation between Nobel Laureates Amartya Sen and Angus Deaton, moderated by Annual Review of Economics Editorial Committee Member Tim Besley, focuses on bringing ethical issues into economics, and the implications that this has for the practice and teaching of economics. A video of this interview is available online at https://www.annualreviews.org/r/EconMoralCompass .

Description: We review the discontinuous games literature, with a sharp focus on conditions that ensure the existence of pure and mixed strategy Nash equilibria in strategic form games and of Bayes-Nash equilibria in Bayesian games.

Description: World Bank estimates put absolute poverty in Asia and Africa at 50–60% of the population in 1980 and at negligible levels in the developed world. This review investigates whether Asia was always so poor, as well as the history of poverty in today's rich countries. Poverty measurement methodologies are reviewed, and it is argued that a basic needs approach is the best way to tackle poverty measurement in the past. This approach is related to recent advances in the measurement of historical real wages. Estimates of poverty rates in England between 1290 and 1867 are presented, as are estimates for preindustrial India. About one-quarter of the English population was in extreme poverty in the late Middle Ages, and the proportion had fallen below 10% by 1688. About one-quarter of the people in northern India lived in extreme poverty in the early nineteenth century, and the proportion was likely lower in 1600. The very high poverty rates in India in 1980 were a development of the colonial era.

Description: Substantial research in development economics has highlighted the presence of weak institutions, market failures, and distortions in developing countries. Yet much of the knowledge generated in international trade comes from workhorse models that abstract from these frictions. This review summarizes the recent literature that assesses how these characteristics interact (or may interact) with trade reforms, resulting in different impacts in developing countries relative to what we would expect in developed countries. We discuss understudied areas that warrant further research.

Description: This article reviews the economic literature on informality, its causes, and its consequences for development. It covers a comprehensive body of research that ranges from well-identified experimental studies to equilibrium macro models, and which more recently includes structural models that integrate both micro and macro effects. The results available in the literature indicate that lowering the costs of formality is not an effective policy to reduce informality but may generate positive aggregate effects, such as higher output and total factor productivity (TFP). The most effective formalization policy is to increase enforcement on the extensive margin but not on the intensive margin of informality. The former generates substantial gains in aggregate TFP and output, without necessarily increasing unemployment. However, the overall welfare impacts are likely to depend on the transitional dynamics between steady states, which remains an open area for future research.

Description: The issue of one's identity has loomed large recently and has unfortunately been used more and more as a wedge to separate subgroups. It is important to understand the ramifications of identity, both to limit the negative consequences (such as so-called identity politics) and to be able to use one's sense of identity as a positive force in the world. What are effective approaches to allow positive identities and pride about one's social identity to be reinforced for the greater good? Recent work suggests that some forms of team competition can induce greater effort, which can be applied to areas such as microlending, charitable giving, and organization of the gig economy. And yet many fascinating questions remain; for example, what is the interaction of salience, social norms, and preferences on the effects of social identity in our society?

Description: This article reviews the broad changes in US trade policy over the course of the nation's history. Import tariffs have been the main instrument of trade policy and have had three main purposes: to raise revenue for the government, to restrict imports and protect domestic producers from foreign competition, and to reach reciprocity agreements that reduce trade barriers. Each of these three objectives—revenue, restriction, and reciprocity—was predominant in one of three consecutive periods in history. The political economy of these tariffs has been driven by the location of trade-related economic interests in different regions and the political power of those regions in Congress. The review also addresses the impact of trade policies on the US economy, such as the welfare costs of tariffs, the role of protectionism in fostering US industrialization, and the relationship between the Smoot–Hawley Tariff Act and the Great Depression of the 1930s.

Description: This article critically assesses prevailing measures of global poverty. A welfarist interpretation of global poverty lines is augmented by the idea of normative functionings, the cost of which varies across countries. In this light, current absolute measures are seen to ignore important social effects on welfare, while popular, strongly relative measures ignore absolute levels of living. It is argued that a new hybrid measure is called for, combining absolute and weakly relative measures consistent with how national lines vary across countries. Illustrative calculations indicate that we are seeing a falling incidence of poverty globally over the past 30 years. This is mainly due to lower absolute poverty counts in the developing world. While fewer people are poor by the global absolute standard, more are poor by the country-specific relative standard. The vast bulk of poverty, both absolute and relative, is now found in the developing world.

Description: Traditional decision theory assumes that people respond to the exact features of the options available to them, but observed behavior seems much less precise. This review considers ways of introducing imprecision into models of economic decision making and stresses the usefulness of analogies with the way that imprecise perceptual judgments are modeled in psychophysics—the branch of experimental psychology concerned with the quantitative relationship between objective features of an observer's environment and elicited reports about their subjective appearance. It reviews key ideas from psychophysics, provides examples of the kinds of data that motivate them, and proposes lessons for economic modeling. Applications include stochastic choice, choice under risk, decoy effects in marketing, global game models of strategic interaction, and delayed adjustment of prices in response to monetary disturbances.

Description: I review evidence that individuals associate themselves—or identify—with groups in two fundamental ways: ingroup bias and conformity to group norms. The evidence spans many spheres of economic activity, including consumption, production, hiring, promotion, education, cooperation, financial investments, and law enforcement. Group identities are not fixed, even when it comes to ethnic and religious identities. I argue that the choice of identity can be captured by a simple trade-off between gains from group status and costs to distance from the group. I outline a simple conceptual framework that captures the main empirical regularities and illustrate how it can be used to study the two-way interaction between economic policy and social identity. The analysis implies, e.g., that inequality and immigration of low-skilled workers can strengthen nationalism and reduce redistribution, and that changes in the economic environment can produce shifts in identification patterns that feed into trade policy. Finally, I discuss open theoretical questions and domains where the interaction between identity and economic activity is not well understood. This includes the provision of public services, the evolution of gender norms, and the use of identity to motivate workers.

Description: How do the Internet and social media affect political outcomes? We review empirical evidence from the recent political economy literature, focusing primarily on work that considers traits that distinguish the Internet and social media from traditional off-line media, such as low barriers to entry and reliance on user-generated content. We discuss the main results about the effects of the Internet in general, and social media in particular, on voting, street protests, attitudes toward government, political polarization, xenophobia, and politicians’ behavior. We also review evidence on the role of social media in the dissemination of fake news, and we summarize results about the strategies employed by autocratic regimes to censor the Internet and to use social media for surveillance and propaganda. We conclude by highlighting open questions about how the Internet and social media shape politics in democracies and autocracies.

Description: The frictions that restrict migration are among the largest sources of inefficiency in the global economy. The first step in designing policies to address these frictions is to understand the fundamental forces that drive migration. However, the Roy model—the workhorse model of migration in economics—does a poor job of explaining many important features of this phenomenon. This limitation can be rectified by adding migrant networks to the Roy model. A rich qualitative literature in the social sciences has documented the role played by social networks in supporting migrants in their new locations. Economists have advanced this literature by identifying and quantifying the contribution of these networks to migration. Although much progress has been made over the past two decades, important gaps in the literature remain: Migrant assimilation has received little theoretical or empirical attention, and a richer characterization of the social interactions that support these networks is needed to tie research on migration to the economic literature on networks.

Description: This review uses the empirical analysis of portfolio choice to illustrate econometric issues that arise in decision problems. Subjective expected utility (SEU) can provide normative guidance to an investor making a portfolio choice. The investor, however, may have doubts on the specification of the distribution and may seek a decision theory that is less sensitive to the specification. I consider three such theories: maxmin expected utility, variational preferences (including multiplier and divergence preferences and the associated constraint preferences), and smooth ambiguity preferences. I use a simple two-period model to illustrate their application. Normative empirical work on portfolio choice is mainly in the SEU framework, and bringing in ideas from robust decision theory may be fruitful.

Description: We survey the recent, fast-growing literature on peer effects in networks. An important recurring theme is that the causal identification of peer effects depends on the structure of the network itself. In the absence of correlated effects, the reflection problem is generally solved by network interactions even in nonlinear, heterogeneous models. By contrast, microfoundations are generally not identified. We discuss and assess the various approaches developed by economists to account for correlated effects and network endogeneity in particular. We classify these approaches in four broad categories: random peers, random shocks, structural endogeneity, and panel data. We review an emerging literature relaxing the assumption that the network is perfectly known. Throughout, we provide a critical reading of the existing literature and identify important gaps and directions for future research.

Description: Preferences for schools are important determinants of equitable access to high-quality education, effects of expanded choice on school improvement, and school choice mechanism design. Standard methods for estimating consumer preferences are not applicable in education markets because students do not always get their first-choice school. This review describes recently developed methods for using rich data from a school choice mechanism to estimate student preferences. Our objectives are to present a unifying framework for these methods and to help applied researchers decide which techniques to use. After laying out methodological issues, we provide an overview of empirical results obtained using these models and discuss some open questions.

Description: I review the recent literature that applies search-and-matching theory to the study of over-the-counter financial markets. I formulate and solve a simple model to illustrate the typical assumptions and economic forces at play in existing work. I then offer thematic tours of the literature and, in the process, discuss avenues for future research.

Description: The analysis of dynamic economic models routinely leads to the mathematical problem of determining an unknown function for which no closed-form solution exists. Economists must then resort to methods of numerical approximation when analyzing such models. Among the computational methods that have been successfully applied in economics and finance, one set of techniques stands out due to its flexibility and robustness: projection methods. In this article, we describe the basic steps of these methods for several different applications, surveying many successful applications of projection methods to dynamic economic models. Importantly, we emphasize that the ever-increasing complexity and dimensionality of dynamic models have made the previously used simpler methods obsolete and the applications of projection methods all but mandatory. We closely examine the most recent endeavors in the literature on solving economic models with projection methods.

Description: This article reviews recent developments in revealed preference theory. It discusses the testable implications of theories of choice that are germane to specific economic environments. The focus is on expected utility in risky environments, subjected expected utility and maxmin expected utility in the presence of uncertainty, and exponentially discounted utility for intertemporal choice. The testable implications of these theories for data on choice from classical linear budget sets are described and shown to follow a common thread. The theories all imply an inverse relation between prices and quantities, with different qualifications depending on the functional forms in the theory under consideration.

Description: This article offers a review of the recent empirical literature on lobbying within political economy. In surveying extant research, we emphasize quid pro quo and informational issues in special interest politics and highlight crucial open questions in both. The two main unresolved methodological issues remain ( a) how to account for the impact of lobbying on which equilibrium policies are chosen and advanced and ( b) how distorted those equilibrium policies are relative to the social optimum. Of the principal open questions within political economy, a comprehensive, quantitative assessment of the welfare effects of lobbying remains one of the most elusive.

Description: This article reviews recent advances in the study of dynamic taxation, considering three main approaches: the dynamic Mirrlees, the parametric Ramsey, and the sufficient statistics approaches. In the first approach, agents’ heterogeneous abilities to earn income are private information and evolve stochastically over time. Dynamic taxes are not restricted ex ante and are set for redistribution and insurance considerations. Capital is taxed only in order to improve incentives to work. Human capital is optimally subsidized if it reduces posttax inequality and risk on balance. The Ramsey approach specifies ex ante restricted tax instruments and adopts quantitative methods, which allow it to consider more complex and realistic economies. Capital taxes are optimal when age-dependent labor income taxes are not possible. The newer and tractable sufficient statistics approach derives robust tax formulas that depend on estimable elasticities and features of the income distributions. It simplifies the transitional dynamics thanks to a newly defined criterion, the utility-based steady-state approach, which prevents the government from exploiting sluggish responses in the short run. Capital taxes are here based on the standard equity-efficiency trade-off.

Description: This article reviews the econometrics of static games, with a focus on discrete-choice cases. These models have been used to study a rich variety of empirical problems, ranging from labor force participation to entry decisions. We outline the components of a general game and describe the problem of doing robust inference in the presence of multiple solutions, as well as the different econometric approaches that have been applied to tackle this problem. We then describe the specific challenges that arise in different variations of these models depending on whether players are assumed to have complete or incomplete information, as well as whether or not nonequilibrium play is allowed. We describe the results in 2 × 2 games (the most widely studied games in econometrics), and we present extensions and recent results in games with richer action spaces. Areas for future research are also discussed.

Description: This article reviews recent developments in the literature on marriage markets. A particular emphasis is put on frameworks based either on frictionless matching models with transfers or on search models.

Description: This review presents an approach to modeling decision making under misspecified subjective models. The approach is based on the idea that decision makers impose subjective causal interpretations on observed correlations, and it borrows basic concepts and tools from the statistics and artificial intelligence literatures on Bayesian networks. While these background literatures used Bayesian networks as a platform for normative and computational analysis of probabilistic and causal inference, in the framework proposed here graphical models represent causal misperceptions and help analyze their behavioral implications. I show how this approach sheds light on earlier equilibrium models with nonrational expectations and demonstrate its scope of economic applications.

Description: This article addresses the modern optimal tax progressivity literature, which clarifies the key role of the behavioral response to taxation and accounts for the incomes of the superrich being qualitatively different from others. Some of the superrich may be “superstars” for whom small differences in talent are magnified into much larger earnings differences, while others may work in winner-take-all markets, such that their effort to climb the ladder of success reduces the returns to others. We stress that pivotal tax-rate elasticities are not structural parameters and will be smaller the broader and less plastic is the tax base and the more effective is the enforcement of tax evasion. For this reason, normative analysis of tax rates should be accompanied by attention to the tax base, with a special focus on capital gains, which comprise a large fraction of the taxable income of the superrich.

Description: Global agriculture consumes substantial resources and produces significant pollution. By shifting its production to new locations, and inducing changes in technology and input use, trade has a substantial impact on environmental sustainability of the world's food systems, but due to suboptimal environmental policy, the exact nature of these impacts is in dispute. We review the literature on agricultural trade and environmental sustainability, highlighting the different approaches taken in ecology versus economics. While useful in identifying environmental costs, much of the ecological literature does not compare these costs to a trade-free counterfactual and can therefore be misleading. Further, by moving production to places with more resources and increasing production efficiency, trade can reduce the environmental impact of food production. On the other hand, trade can also limit the effectiveness of domestic environmental policy because production can be shifted to countries with less stringent regulations. However, recently, consumers are leveraging trade policy to induce exporters to improve environmental sustainability. While such policies are gaining traction in wealthy countries, evidence suggests that such measures will not reach their potential without buy-in from decision makers in the countries where the environmental damages are occurring.

Description: The labor supply response to agricultural wages is critical to the viability of crop production in high-income countries, which hire a largely foreign farm work force, as well as in low-income countries, where domestic workers move off the farm as the agricultural transformation unfolds. Modeling agricultural labor supply is more challenging than modeling the supply of other agricultural inputs or of labor to other sectors of the economy owing to unique features of agricultural production and farm labor markets. Data and econometric challenges abound, and estimates of agricultural labor supply elasticities are sparse. This review explains the importance and challenges of modeling farm labor supply and describes researchers’ efforts to address these challenges. It summarizes estimates of agricultural labor supply elasticities over the last 80 years, provides insights into variation in these estimates, identifies priority areas for future research, and reviews the most influential empirical work related to this important topic.

Description: As of 2020, carbon taxes were in effect in 30 jurisdictions around the world. This article provides a theoretical overview of carbon taxes along with some empirical evidence on the macroeconomic impacts of existing taxes, including emission reductions. It compares and contrasts carbon taxes with other policy instruments to reduce emissions. It also highlights issues that have recently attracted the attention of researchers on which additional research would be beneficial. Those include ( a) the role of border adjustments in a unilaterally imposed carbon tax, ( b) hybrid carbon tax systems that increase the likelihood of hitting desired emission reduction targets, ( c) the optimal price path for a carbon tax, and ( d) the growing empirical literature on the economic impact of carbon taxes.

Description: We survey the rapidly growing economic literature on environmental catastrophes and the various approaches developed to address the hovering threats. Various theoretical descriptions of catastrophic occurrences are classified with respect to the uncertain conditions that trigger the events, the postoccurrence dynamic regime, and the form of the inflicted damage. We show that variations in each of these characteristics strongly affect the ensuing optimal response to the threats. The basic setup is then extended in several dimensions, allowing the modeler to consider more realistic formulations of catastrophic scenarios. Recent efforts to incorporate catastrophic events within large-scale numerical schemes to study the global climate change problem are reviewed. The number of publications in this vein increases in tandem with the growing number of disasters reported globally and their scale of damage, reflecting the growing concern that this phenomenon portends environmental collapse.

Description: We review recent developments in the analysis of price transmission in agricultural markets. Markets may be separated in time, form, and space (as well as in combinations of such factors). Transactions and storage costs as well as production and marketing factors delineate these markets. We show that much of the research on spatial market linkages has reflected methodological advances that have led to increasingly nonlinear time-series models. Advances in the theoretical and empirical literature over the last few decades have demonstrated that price relationships in the food chain are highly context specific. Improvements in marketing, information, and transportation technology have strengthened the links between prices in the food system, but at the same time links in the food chain are increasingly subject to vertical coordination and, thus, less visible to outside observers, including researchers.

Description: Despite the significant risks and uncertainties that farmers in developing and emerging countries face in their production process, efforts at encouraging them to adopt agricultural insurance to mitigate their production risks have mainly yielded little success. This article reviews the recent literature on the demand for agricultural insurance in developing and emerging countries, by presenting the state of uptake, drivers of the demand for it, and the potential welfare gains from it. Our review reveals that while risk aversion is necessary for the demand for agricultural insurance, liquidity constraints, rates of time preference, basis risk, and trust are equally relevant in explaining the demand for insurance in poor countries. An interesting observation is the increasing number of studies that employ randomized control trials to analyze farmers’ uptake of agricultural insurance in developing and emerging countries. Our comprehensive review finds some information gaps in the literature, and we propose some avenues for further research.

Description: From the perspective of sending countries, international migrants are positively selected in terms of schooling, particularly in low-income countries. While emigration affects human capital accumulation, it also induces positive spin-offs in the form of remittances, incentives to acquire education, and diffusion of technology and democratic ideas. The net income implications for those left behind are uncertain. This article reviews the main transmission channels investigated in the existing literature and uses a standard development accounting framework to provide estimates of their relative strength and of their combined effect. Although skill biased, emigration increases the disposable income of those left behind in no fewer than three-quarters of the countries of the world. This result is robust to variations in the set of parameter values within a reasonable spectrum established in the empirical literature.

Description: In the wake of 25 United Nations Climate Change Conferences of the Parties (and counting), international cooperation on mitigating greenhouse gas emissions to avoid substantial and potentially irreversible climate change remains an important challenge. The limited impact of the Kyoto Protocol on curbing emissions, and the gap between the ambitions of its successor and the Paris Agreement's lack of sanctioning mechanisms for addressing noncompliance, demonstrates both the difficulties in negotiating ambitious environmental agreements and the reluctance of countries to comply with their agreed emission targets once they have joined the treaty. Therefore, a better understanding of the obstacles and opportunities that the interactions between domestic and international policy pose for the design of successful international climate cooperation is of utmost importance. To shed light on the roots of the stalemate (and suggest possible ways out), this article reviews and draws lessons from a growing theoretical, experimental, and empirical literature that accounts for the hierarchical interplay between domestic political pressure and international climate policy.

Description: In 2010, the White House announced the goal of eradicating food deserts—low-income neighborhoods without nearby supermarkets—in seven years. The efficacy of this initiative is premised on the presumption, mostly untested in 2010, that food deserts significantly contribute to health disparities in low-resourced communities. We synthesize the post-2010 line of research that seeks to establish causality in the relationship between food access and nutrition/health. All things considered, there is so far little evidence that food deserts have a causal effect of meaningful magnitude on health and nutrition disparities. The causes of diet quality disparity lie more on the side of food demand than on supply. Therefore, from the public health perspective, policies that lower the relative price of healthy food or change the “deep parameters” of preferences in favor of healthy food would be more appealing than eliminating food deserts.

Description: The past decades have seen the development of a multitude of sustainability-related food labels aimed at reducing the existing information asymmetry between food practitioners and consumers regarding the sustainability impact on the food supply chain. Sustainability-related food labels can correct market failures and contribute to a more sustainable world. This review discusses the effectiveness of sustainability-related food labels in promoting more sustainable food consumption around the world. We start by discussing the sustainable development goals in the food area and the challenge of defining these labels. We then investigate the demand- and supply-side issues related to the effectiveness of such labels in promoting the sustainable development goals that the labels serve. Finally, we discuss the questions raised by the state of research and their implications for food practitioners, consumers, and policy makers. We then identify future research avenues.

Description: We appraise the current status of relational contract theory, along with associated empirical studies, with the goal of providing an orientation to the field to economists who may not have expertise in contract theory. We begin with a theoretical discussion focusing mainly on intuition and the usefulness of the theory for conceptualizing applied agricultural contracting problems. We also discuss current theoretical challenges and the current state of empirical research on relational contracts. We conclude by discussing potentially fruitful areas for future research.

Description: In this review, we attempt to describe the evolution of integrated assessment modeling research since the pioneering work of William Nordhaus in 1994, highlighting a number of challenges and suggestions for moving the field forward. The field has evolved from global aggregate models focused on cost-benefit analysis to detailed process models used to generate emissions scenarios and to coupled model frameworks for impact analyses. The increased demand for higher sectoral, temporal, and spatial resolution to conduct impact analyses has led to a number of challenges both computationally and conceptually. Overcoming these challenges and moving the field forward will require not only greater efforts in model coupling software and translational tools, the incorporation of empirical findings into integrated assessment models, and intermethod comparisons but also the expansion and better coordination of multidisciplinary researchers in this field through better training of the next generation of integrated assessment scholars and expanding the community of practice.

Description: The aim of this article is to review a number of issues related to uncertain population forecasts, with a focus on world population. Why are these forecasts uncertain? Population forecasters traditionally follow two approaches when dealing with this uncertainty, namely scenarios (forecast variants) and probabilistic forecasts. Early probabilistic population forecast models were based upon a frequentist approach, whereas current ones are of the Bayesian type. I evaluate the scenario approach versus the probabilistic approach and conclude that the latter is preferred. Finally, forecasts of resources need not only population input, but also input on future numbers of households. While methods for computing probabilistic country-specific household forecasts have been known for some time, how to compute such forecasts for the whole world is yet an unexplored issue.

Description: The financial system could help achieve the global climate targets by aligning investments to sustainability. However, investors are largely exposed to carbon-intensive assets that could become stranded, thus delaying the low-carbon transition and bringing new sources of risk for financial stability, i.e., climate-related financial risks. Here, we discuss climate-related financial risks, the challenges they pose to traditional economic and financial risk assessment, and the implications for the implementation and feasibility of climate policies. We then present science-based approaches that introduce forward-looking climate risks and their deep uncertainty in financial risk management (e.g., via the climate value at risk, climate spread, climate stress-test). Finally, we present results of applications aimed at pricing climate risks in investors’ portfolios and calculating the largest losses that could lead to systemic risk, in collaboration with leading financial institutions.

Description: Spillovers among jurisdictions are ubiquitous and likely to increase with increasing population and consumption, so the centralization or decentralization of environmental governance is of pressing concern in a world of tightly linked socio-ecological systems. Spillovers play a key role in federalism analysis because they tend to reduce benefits from decentralization. Laboratory federalism, a common rationale for decentralization, has not proven successful as a model of local policy innovation. Given a national policy toward a public good, differences in preferences across jurisdictions may push national policy toward a quantity instrument rather than a tax instrument. Finally, the lack of interaction between environmental federalism analysis and studies of adaptive governance and linked complex adaptive systems leaves both literatures incomplete. The increasing urgency of global sustainability issues argues for linking insights from environmental federalism with the literature on linked socio-ecological complex adaptive systems.

Description: The world's forests provide valuable contributions to people but continue to be threatened by agricultural expansion and other land uses. Counterfactual-based methods are increasingly used to evaluate forest conservation initiatives. This review synthesizes recent studies quantifying the impacts of such policies and programs. Extending past reviews focused on instrument choice, design, and implementation, our theory of change explicitly acknowledges context. Screening over 60,000 abstracts yielded 136 comparable normalized effect sizes (Cohen's d). Comparing across instrument categories, evaluation methods, and contexts suggests not only a lack of “silver bullets” in the conservation toolbox, but that effectiveness is also moderate on average. Yet context is critical. Many interventions in our sample were implemented in “bullet-proof” contexts of low pressure on natural resources. This greatly limits their potential impacts and suggests the need to invest further not only in understanding but also in better aligning conservation with local and global development goals.

Description: The Annual Review of Resource Economics presents Professor Sir Angus Deaton in conversation with economist Dr. Gordon Rausser. Dr. Deaton is Senior Scholar and the Dwight D. Eisenhower Professor of Economics and International Affairs Emeritus at the Woodrow Wilson School of Public and International Affairs and Department of Economics at Princeton University and Presidential Professor of Economics at University of Southern California. An applied economist, Deaton has made seminal contributions to the econometrics and estimation of demand systems, analysis of consumer behavior, understanding of commodity prices, the economics of health, nutrition and poverty, and most recently, deaths of despair and the future of capitalism, focusing on the United States. His work to improve welfare estimation in developing countries contributed to upgrading data collection efforts at the World Bank and other international agencies.

Description: Forests have become an important carbon sink in the last century, with management and carbon fertilization offsetting nearly all of the carbon emitted due to deforestation and conversion of land into agricultural uses. Society appears already to have decided that forests will play an equally ambitious role in the future. Given this, economists are needed to help better understand the efficiency of efforts society may undertake to expand forests, protect them from losses, manage them more intensively, or convert them into wood products, including biomass energy. A rich literature exists on this topic, but a number of critical information gaps persist, representing important opportunities for economists to advance knowledge in the future. This article reviews the literature on forests and climate change and provides some thoughts on potential future research directions.

Description: In urban areas around the world, increasing motorization and growing travel demand make the urban transportation sector an ever-greater contributor to local air pollution and greenhouse gas emissions. The situation is particularly acute in developing countries, where growing metropolitan regions suffer some of the world's highest levels of air pollution. Policies that seek to develop and manage this transportation sector—both to meet rising demand linked to economic growth and to safeguard the environment and human health—have had strikingly different results, with some inadvertently exacerbating the traffic and pollution they seek to mitigate. This review summarizes findings in the recent literature on the impacts of a host of urban transportation policies used in both developed- and developing-country settings. The article identifies research challenges and future areas of study regarding transportation policies, which can have important, long-lasting impacts on urban life and global climate change.

Description: Studies examining pricing outcomes in the food retail industry are complicated both by the multiproduct nature of transactions and by the presence of highly concentrated food processing and retailing industries that mediate between relatively competitive farm product markets and the consumer market. In this review, we examine theoretical and empirical evidence for retail pricing and the vertical relationships that have emerged among retailers, food manufacturers, and farmers. We first focus our analysis on consumer behavior in multiproduct retail markets, including consumer search, habit formation, and reference pricing, and then discuss retail market outcomes for price discrimination, price fairness, and price obfuscation. We then turn to relationships between retailers and food manufacturers through bargaining outcomes, market foreclosure, and slotting allowances, and discuss the resulting implications for retail-price pass-through.

Description: We develop a theory of change for payments for environmental services (PES) to review their imminent strengths and weaknesses in light of a growing body of impact evaluation studies. We show that PES are probably at least as environmentally additional as other conservation tools, based on the limited evidence. The original vision of PES as being direct, flexible, and potentially effective remains valid, but PES design and implementation have to be upgraded in their economic functioning to better realize this potential. Adverse self-selection, inadequate administrative targeting, and ill-enforced conditionality constitute three key obstacles that may considerably hamper PES success. Policies such as spatial targeting to service density, threat and cost levels, and payment differentiation can alleviate the design challenges. PES site selection needs to further move into high-threat areas. Making adequate PES design choices also requires the political will to boost environmental effects.

Description: The food-energy-water (FEW) nexus is facing grand challenges in meeting increasing demand resulting from global changes in climate, economy, and population. Emerging technologies are expected to play a critical role in responding to these challenges. Focusing on four types of prominent emerging technologies (namely precision agriculture coupled with big data and machine learning, gene editing, second-generation biofuels, and agrivoltaics), this article reviews existing studies regarding opportunities and challenges of these emerging technologies to address issues of the FEW nexus. Drivers of innovation and adoption of these emerging technologies as well as the role of public policies that interact with these drivers are reviewed. Finally, this review also discusses research gaps that need to be filled to harness the potential benefits of these emerging technologies.

Description: Despite growing policy commitment and decades of extensive research, nutritional deficiencies remain a key challenge for health systems worldwide. In addition to causing significant personal costs for those affected, indirect effects, such as reduced overall human capital accumulation or losses in labor productivity, can impose substantial obstacles for the achievement of economic development goals. This review provides an overview of the impact of key interventions aiming to improve nutritional intake in order to reach better physical health and cognitive outcomes among children in developing countries. We argue that, although promising interventions exist, malnutrition is a complex problem, likely requiring a stronger focus on multifactorial approaches. Moreover, more research is necessary to maximize compliance and sustainability if interventions are to successfully transform into large-scale policy programs. We further discuss the emerging double burden of malnutrition as a key challenge for policy makers in resource-poor settings.

Description: We review the recent theoretical and empirical literature on the capitalization of agricultural subsidies into land prices. The theoretical literature predicts that agricultural subsidies are capitalized into land prices when land supply is inelastic and land markets function well. The share of capitalized subsidies significantly depends on the implementation of farm subsidies, local land-market institutions, rural market imperfections, and spatial effects. Most empirical studies have shown that agricultural subsidies are only partially capitalized into land prices, estimating that decoupled payments and land-based subsidies exhibit higher capitalization than coupled payments and nonland-based subsidies, respectively. However, estimated capitalization rates vary widely across studies largely because of data availability and identification challenges.

Description: This article reviews recent endeavors to incorporate big data and machine learning techniques into energy and environmental economics research. We find that novel datasets, from high frequency smart meter data to satellite images and social media data, are already used by researchers. At the same time most of the analyses rely on traditional econometric techniques. Nevertheless, we find applications of machine learning models that address the high dimensionality of the data and seek out new and better strategies for estimating heterogenous treatment effects. We provide an introduction to the main themes in machine learning, which are likely to be of use to economists in energy and environmental economics, and illustrate them using a real data example derived from an energy efficiency program evaluation. We provide the data and code in order to stimulate further research in this area.

Description: Food systems are currently facing unprecedented challenges. More than 690 million people still suffer hunger while climate change, rapid depletion of natural resources, and loss of biodiversity further threaten future food systems. Influential global reports emphasize the need for fundamental transformations of food systems for human and planetary health, but few incorporate economic considerations. This review adopts an economic lens to assessing potential transitions to ideal food systems that are productive, sustainable, nutritious, resilient, and inclusive. Our findings show that new technologies, policies, institutions, and behavior changes can leverage synergies for achieving multiple food system targets, but rigorous economic analysis is needed to further analyze trade-offs and to overcome complex behavioral, institutional, and political barriers. This review also points to important knowledge gaps that economists and other social scientists must address to contribute to the radical transformation of food systems.

Description: Data sets providing repeated observations of land use at fine spatial scales have enabled a new generation of land-use studies. In the past decade, these analyses have put increasing emphasis on empirical research designs that provide more convincing causal estimates. I review the use of instrumental variables, matching, difference-in-differences, regression discontinuity design, and randomized controlled trials in the recent land-use economics literature, exploring how new data have made possible the use of these research designs. I show that these estimators have produced different results than were obtained with traditional approaches and have provided new insights into important land-use policy issues such as additionality and spillover effects.

Description: This article reviews the recent literature on the developmental effects of resource abundance, assessing likely effects and channels with respect to key development outcomes. To date, this area has received less analysis, although it is relevant to the United Nations’ Sustainable Development Goals agenda, as a significant number of the world's poor live in African resource-rich economies. We argue that the presence of a natural resource sector per se does not necessarily translate into worse development outcomes. The natural resource experience varies to a significant extent. Countries with similar levels of resource rents can end up with significantly different achievements in terms of income inequality, poverty, education, and health. The challenge is to explain the different natural resource experiences. A pivotal mechanism behind the developmental effects of the natural resources sector is the type of states and political institutions that resource-abundant economies develop.

Description: The shale gas boom revolutionized the energy sector through hydraulic fracturing (fracking). High levels of energy production force communities, states, and nations to consider the externalities and potential risks associated with this unconventional oil and natural gas development (UOGD). In this review, we systematically outline the environmental, economic, and anthropogenic impacts of UOGD, while also considering the diverse methodological approaches to these topics. We summarize the current status and conclusions of the academic literature, in both economic and related fields, while also providing suggested avenues for future research. Causal inference will continue to be important for the evaluation of UOGD costs and benefits. We conclude that current economic, global, and health forces may require researchers to revisit outcomes in the face of a potential shale bust.

Description: Irrigation has been a key component of agricultural intensification and transformation in Asia and has the potential to take on the same role in Sub-Saharan Africa. Irrigation has contributed to increased food production, lower food prices, higher rural employment, and overall agricultural and economic growth. At the same time, irrigation—through its large consumptive water use—has accelerated water depletion, degradation, and pollution; moreover, it has benefitted richer farmers more than poorer farmers. This article reviews the contributions and challenges of irrigation and identifies a series of measures to increase the sustainability and equity of irrigation going forward.

Description: Many food crops rely on pollination by animals. Historically, wind and wild organisms provided pollination as an ecosystem service that varied across agroecological zones, cropping systems, and time. The value of these pollination services is likely substantial but has not been estimated reliably. More recently, pollination services in major crop-producing regions have been provided through organized markets, primarily the rental of honey bees. The sustainability of commercially provided pollination services is being challenged by parasites, diseases, pesticide exposures, poor nutrition, and Colony Collapse Disorder. Economic analyses indicate that honey bee rental markets have been able to adjust to those challenges, at least to date. Understanding the future sustainability of rental markets requires greater knowledge of the contributions of wild pollinators, optimal management of pollination services from wild and managed organisms, and the value of pollination services provided by wild and managed organisms.

Description: This survey distills recent work on the price elasticity of demand for urban and agricultural water and outlines how it can inform the design of market-based approaches to manage increasingly scarce water resources. We offer a brief description of the water sector, including the primary users, main water sources, and market failures in the allocation and use of surface water and groundwater. A review of recent empirical research on the price elasticities of agricultural and urban water demand shows the progress made in our understanding of user response to prices and reveals substantial heterogeneity in the price response. We apply what we have learned about elasticities to surface water markets and price-based groundwater management. Heterogeneity in price elasticities suggests that water transfers may lead to large efficiency gains, but that their magnitude is site specific. Groundwater pricing may cost-effectively manage groundwater and fund the development of alternative water supplies, but heterogeneity in elasticity estimates highlights that the conservation and revenue generated are basin specific.

Description: This review provides a description of common and distinct characteristics of economic and ecological systems; examples of the ways in which these characteristics can be incorporated into models adequately describing the coevolution of the two-component systems to produce a unified ecological-economic system in time, space, and appropriate scale; and a discussion of policy design when the policy maker takes into account this coevolution, along with potential biases when the coevolution is ignored. We propose the development of integrated assessment models of the coevolving systems that will embody the variety of common and distinct characteristics identified in this survey. We expect that such an approach will provide useful insights into the efficient management of coevolving ecological-economic systems.

Description: With new possibilities offered by information and communications technology (ICT), an abundance of products, services, and projects has emerged with the promise of revitalizing agricultural extension in developing countries. However, a growing body of evidence suggests that not all ICT-enabled extension approaches are equally effective in improving adoption, productivity, income, or welfare outcomes. In this review, we explore various conceptual and methodological threads in the literature on ICT-enabled extension in developing countries. We examine the role of multiple impact pathways, highlighting how ICTs influence behaviors and preferences,gender and intrahousehold dynamics, spillovers, and public worker incentives. We also explore the opportunities presented by ICT-enabled extension for increasing the methodological rigor with which extension outcomes are identified. These conceptual and methodological insights—coupled with empirical evidence from prior studies—offer direction for several lines of policy-relevant research on ICT-enabled extension.

Description: Agricultural economists have a long history of emphasizing and analyzing the spatial dimension of agricultural and food markets. Despite a rich body of literature and important contributions to agricultural and spatial economics, one aspect is frequently disregarded: the oligopsonistic nature of agricultural markets due to spatial competition of neighboring buyers of farm products. This review presents the theoretical foundations of spatial pricing, competition, and location in terms of buyer power and discusses concepts that are relevant for agricultural markets. By providing a comprehensive overview of prior work, we highlight the multifaceted areas of applications to agricultural markets. Additionally, we discuss future research avenues for and challenges of the analysis of spatial competition in agricultural economics.

Description: We survey the growing literature on fat-tailed distributions in environmental economics. We then examine the theoretical and statistical properties of such distributions, focusing especially on when these properties are likely to arise in environmental problems. We find that a number of variables are fat tailed in environmental economics, including the climate sensitivity, natural disaster impacts, spread of infectious diseases, and stated willingness to pay. We argue that different fat-tailed distributions arise from common pathways. Finally, we review the literature on the policy implications of fat-tailed distributions and controversies over their interpretation. We conclude that the literature has made great strides in demonstrating when fat tails matter for optimal environmental policy. Yet, much is less well understood, including how alternative policies affect fat-tailed distributions, the optimal policy in a computational economy with many fat-tailed problems, and how to account for imprecision in empirical tests for fat tails.

Description: The merger of Dow and DuPont, the acquisition of Syngenta by ChemChina, and the acquisition of Monsanto by Bayer have recently reshaped the global seed and biotech industry and caused concern about growing market concentration. This review documents market concentration in seed and agricultural biotech markets and discusses its causes and impacts. The available evidence suggests that concentration in seed markets varies strongly by crop and by country, while markets for biotech traits are considerably more concentrated. Complementarities between seed, biotech, and crop protection chemicals explain much of the observed structural changes in the industry, and new complementarities may be emerging with digital agriculture. Although growing concentration might in theory lead to higher prices and less innovation, evidence on this is currently limited; this tendency is also in part offset by the remedies imposed by competition authorities.

Description: Rising global demand for vegetable oil during the last few decades has led to a drastic increase in the land area under oil palm. Especially in Southeast Asia, the oil palm boom has contributed to economic growth, but it has also spurred criticism about negative environmental and social effects. Here, we discuss palm oil production and consumption trends and review environmental, economic, and social consequences in different parts of the world. The oil palm expansion has contributed to tropical deforestation and associated losses in biodiversity and ecosystem functions. Simultaneously, it has increased incomes, generated employment, and reduced poverty among farm and nonfarm households. Around 50% of the worldwide oil palm land is managed by smallholders. Sustainability trade-offs between preserving global public environmental goods and private economic benefits need to be reduced. We discuss policy implications related to productivity growth, rainforest protection, mosaic landscapes, land property rights, sustainability certification, and smallholder inclusion, among others.

Description: The theoretical literature analyzing eco-label programs has focused mainly on how intricate interactions between firms, eco-label certifiers, and regulators shape these programs’ economic and environmental outcomes. Far less attention has been paid to the consumer side, which has typically been modeled very simply. Meanwhile, empirical researchers in behavioral economics, social psychology, and market research have accumulated a large body of empirical evidence that paints a rich, complex picture of that consumer. In this review, I survey a range of these empirical findings, as well as attempts by theorists to incorporate them in their models. The survey is organized around three themes: ( a) varieties of consumer ignorance, ( b) context dependence of consumer motivations, and ( c) motivational spillover effects across time and people. I also touch on the relative importance of private and public benefits of eco-label programs and on the debate over whether the private benefits should even be counted in welfare.