AEAweb: JEL: Contents: March 1996

Journal of Economic Literature
Vol. 34, No. 1, March 1996

Contents

Understanding Economic Policy Reform
Dani Rodrik      9

The Equity Premium: It's Still a Puzzle
Narayana R. Kocherlakota      42

The Economics of Autocracy and Majority Rule: The Invisible Hand and the Use of Force
Martin C. McGuire and Mancur Olson, Jr.      72

The Standard Error of Regressions
Deirdre N. McCloskey and Stephen T. Ziliak      97

The Political Economy of Preference Falsification: Timur Kuran's Private Truths, Public Lies
Robert H. Frank      115

Money and the Invisible Hand: A Correction
George A. Selgin and Lawrence H. White      124

One of the eventual consequences of the global debt crisis was a wave of market-oriented economic reforms. This paper discusses the state of our knowledge on the political economy of this process. Why were inefficient, and often unsustainable policies maintained for so long? Why are so many governments reforming now, after decades of adherence to policies of an opposite kind? Have the reformers internalized the correct lessons from the East Asian experience? Finally, are there any helpful rules for reformers to follow in guiding their policies through complicated political terrain?

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The paper examines the literature that attempts to resolve the equity premium and risk free rate puzzles. It demonstrates that the puzzles will confront any model of asset prices that relies on three crucial assumptions: preferences have a particular parametric form, asset markets are complete, and asset trade is frictionless. A survey of the literature that relaxes these assumptions reveals that there are now several plausible explanations of the seemingly low risk free rate, but the large size of the equity premium remains a puzzle.

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If the leader of a bandit gang in an anarchy can hold a territory, he gains from becoming a public-good-providing autocrat. His monopoly over crime gives him an "encompassing" stake in the productivity of his domain that limits his tax-theft and makes him pay for public goods. We prove that a democracy run by an optimizing majority earning incomes in the market necessarily redistributes less than an autocrat and that a majority that earns a sufficient fraction of market income to be a "super-encompassing" interest redistributes no income and provides an ideal level of public goods.

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Statistical significance as used in economics has weak theoretical justification. In particular it merges statistical and substantive significance. The 182 papers using regression analysis in the American Economic Review in the 1980s were tested against 19 criteria for the accepted use of statistical significance. Most, some three-quarters of the papers, did poorly. Likewise, textbooks in econometrics do not distinguish statistical and economic significance. Statistical significance should not be the focus of empirical economics.

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Private Truths, Public Lies is a splendid book. It tackles a long list of interesting and important questions that have been discussed at length, and largely unsuccessfully, by scholars from each of the social sciences. Kuran blends the insights of economics, psychology, sociology, and political science into a behavioral model that moves the discussion forward on many fronts. His may not be the model that many traditional economists might have chosen, but it is one that most can live with.

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No abstract available.

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