Journal of Economic Literature

Using various methods, the size of the shadow economy in 76 developing, transition, and OECD countries is estimated. Average size varies from 12 percent of GDP for OECD countries, to 23 percent for transition countries and 39 percent for developing countries. Increasing taxation and social security contributions combined with rising state regulations are driving forces for the increase of the shadow economy, especially in OECD countries. According to some findings, corruption has a positive impact on the size of the shadow economy, and a growing shadow economy has a negative effect on official GDP growth.

Most applications of game theory assume equilibrium, justified by presuming either that learning will have converged to one, or that equilibrium approximates people's strategic thinking even when a learning justification is implausible. Yet several recent experimental and empirical studies suggest that people's initial responses to games often deviate systematically from equilibrium, and that structural nonequilibrium “level-k” or “cognitive hierarchy” models often out-predict equilibrium. Even when learning is possible and converges to equilibrium, such models allow better predictions of history-dependent limiting outcomes. This paper surveys recent theory and evidence on strategic thinking and illustrates the applications of level-k models in economics. (JEL C70, D03, D82, D83)

Large fluctuations in energy prices have been a distinguishing characteristic of the U.S. economy since the 1970s. Turmoil in the Middle East, rising energy prices in the United States, and evidence of global warming recently have reignited interest in the link between energy prices and economic performance. This paper addresses a number of the key issues in this debate: What are energy price shocks and where do they come from? How responsive is energy demand to changes in energy prices? How do consumer's expenditure patterns evolve in response to energy price shocks? How do energy price shocks affect U.S. real output, inflation, and stock prices? Why do energy price increases seem to cause recessions but energy price decreases do not seem to cause expansions? Why has there been a surge in the price of oil in recent years? Why has this new energy price shock not caused a recession so far? Have the effects of energy price shocks waned since the 1980s and, if so, why? As the paper demonstrates, it is critical to account for the endogeneity of energy prices and to differentiate between the effects of demand and supply shocks in energy markets when answering these questions.

Most nations have experienced an internal armed conflict since 1960. Yet while civil war is central to many nations' development, it has stood at the periphery of economics research and teaching. The past decade has witnessed a long overdue explosion of research into war's causes and consequences. We summarize progress, identify weaknesses, and chart a path forward. Why war? Existing theory is provocative but incomplete, omitting advances in behavioral economics and making little progress in key areas, like why armed groups form and cohere, or how more than two armed sides compete. Empirical work finds that low per capita incomes and slow economic growth are both robustly linked to civil war. Yet there is little consensus on the most effective policies to avert conflicts or promote postwar recovery. Cross-country analysis of war will benefit from more attention to causal identification and stronger links to theory. We argue that micro-level analysis and case studies are also crucial to decipher war's causes, conduct, and consequences. We bring a growth theoretic approach to the study of conflict consequences to highlight areas for research, most of all the study of war's impact on institutions. We conclude with a plea for new and better data. (JEL D72, D74, O17)

The recent financial crisis has generated many distinct perspectives from various quarters. In this article, I review a diverse set of twenty-one books on the crisis, eleven written by academics, and ten written by journalists and one former Treasury Secretary. No single narrative emerges from this broad and often contradictory collection of interpretations, but the sheer variety of conclusions is informative, and underscores the desperate need for the economics profession to establish a single set of facts from which more accurate inferences and narratives can be constructed. (JEL E32, E44, E52, G01, G21, G28)

This paper synthesizes the expanding corporate social responsibility (CSR) literature. We define CSR from an economic perspective and develop a CSR taxonomy that connects disparate approaches to the subject. We explore whether CSR should exist and investigate conditions when CSR may produce higher welfare than other public good provision channels. We also explore why CSR does exist. Here, we integrate theoretical predictions with empirical findings from economic and noneconomic sources. We find limited systematic empirical evidence in favor of CSR mechanisms related to induced innovation, moral hazard, shareholder preferences, or labor markets. In contrast, we uncover consistent empirical evidence in favor of CSR mechanisms related to consumer markets, private politics, and public politics. (JEL D21, L21, M14)

This paper is a selective survey of fiscal federalism. It begins with a brief review and some reflections on the traditional theory of fiscal federalism: the assignment of functions to levels of government, the welfare gains from fiscal decentralization, and the use of fiscal instruments. It then explores a series of important topics that are the subject of current research: laboratory federalism, interjurisdictional competition and environmental federalism, the political economy of fiscal federalism, market-preserving federalism, and fiscal decentralization in the developing and transitional economies.

This paper critically reviews the research on how collective bargaining systems influence macroeconomic performance in industrialized countries. The review considers effects of bargaining level, coordination, and corporatist institutional arrangements. Key empirical results turn out to be quite fragile, and much of the paper explores issues of measurement and specification that account for the fragility. The paper concludes that complementarities between key institutions and between institutions and the economic environment may be more important for macroeconomic performance than the effects of individual institutions, and it suggests research strategies.

Very little. A plethora of integrated assessment models (IAMs) have been constructed and used to estimate the social cost of carbon (SCC) and evaluate alternative abatement policies. These models have crucial flaws that make them close to useless as tools for policy analysis: certain inputs (e.g., the discount rate) are arbitrary, but have huge effects on the SCC estimates the models produce; the models' descriptions of the impact of climate change are completely ad hoc, with no theoretical or empirical foundation; and the models can tell us nothing about the most important driver of the SCC, the possibility of a catastrophic climate outcome. IAM-based analyses of climate policy create a perception of knowledge and precision, but that perception is illusory and misleading. (JEL C51, Q54, Q58)