## Translator’s Review of Radical Markets 一场波澜壮阔的思维实验——《激进市场》译者序

I just finished the final round revision of the book and submitted it to the publisher. Thank all who have helped me along the way. Really looking forward to Glen Weyl’s book tours in China and the RadicalxChange events in Beijing later this year!

## Review of Posner and Weyl’s Radical Markets 激进市场推荐序

《激进市场》主要涉及五个方面：产权、民主、移民、投资、和大数据。各章分别从不同维度解读当今社会的各种不平等的根源，并提出彻底的变革方案，尝试通过全新的市场和制度设计把经济和政治资源以更有效、更民主和更公平的方式分配给人们。其核心观点认为，当今社会包括贫富差距在内的诸多问题，并不是因为经济过度市场化造成。恰恰相反，它们往往是市场化不充分或者市场被错误利用的后果——在好的市场机制下，经济不仅能实现快速增长，社会也会变得更公平。作者向读者们展示了好的机制如何能够解放市场力量，以及它们如何能够重新唤醒沉睡在十九世纪亨利·乔治时代的自由改革精神，并带来更大的平等、繁荣与合作。

[1] 作者主页：http://ericposner.com/。因为其父亲是著名的大法官理査德·A·波斯纳（Richard A. Posner），埃里克·A·波斯纳又被人称为“小波斯纳”。

[2] 作者主页：http://glenweyl.com/

## GARP Consistency: Brief Literature Review in Experimental Economics

Yuqing Hu, Juvenn Woo

GARP, the generalized axiom of revealed preference, is a dichotomous notion. A dataset can either satisfy the theory of a rational consumer or violate it[1]. There are several challenges in testing GARP consistency in an experiment. One challenge comes from the nature of budget sets, as there are more individual-level variations in expenditure than variations in prices. This causes the overlap of two budget sets, upon which the test based could bias towards the satisfaction of GARP, with the extreme case that no violation would occur if the budget sets are nested. Another challenge stems from lack of identities of consumers such that individuals have to be treated as the same for revealed preference tests (Chambers & Echenique, 2016).

A few indices have been invented to measure the degree of GARP violations. One is Afriat’s efficiency index (AEI) (Afriat, 1967), which uses the degree of “deflation” of expenditure that is needed to make GARP consistent. Other variations of AEI are Varian’s efficiency index (VEI) (Varian, 1983), and the money pump index (MPI) (Echenique, Lee, & Shum, 2011).

There is a modest amount of literature in experimental economics that test GARP consistency, which is summarized below.

Battalio et al.(1973) pioneered applying GARP consistency in experimental study. They ran field experiments among psychotic patients to let them exchange tokens for different consumption goods. They induced a variety of different budget sets by changing the value of tokens, and they found that if small measurement errors were allowed, then almost all patients’ behavior was consistent with GARP.

Sippel (1997) ran lab experiments in which 42 students were asked to repeatedly choose a bundle of priced entertaining items under different standard budget constraints. Individuals were paid in consumption goods, and were required to actually consume the goods at the experiment. The experiment showed 63% of subjects made choices violating GARP, though the median number of violations over all subjects was only 1 of 45 choices. The number did not change even if the study perturbed demand close to actual demand. Even though the (remarkably) low number of violations for individual indicates the subjects were highly motivated when making choices, a majority of subjects could not be classified as rational in the sense of utility maximization.

Harbaugh, Krause and Berry (2001) examined the development of choice behavior for kids. The study conducted simple choice experiments over cohorts of second graders, sixth graders, and undergraduates. They measured and compared number of GARP violations. It found out that for the particular test, about 25% of 7-year-olds, and 60% of 11-year-olds were making choices consistent with GARP respectively, and there is no increase in consistency from 11 to 21-year old. They also found that violations of GARP are not significantly correlated with the results of a test that measures mathematical ability in children.

Andreoni and Miller (2002) ran dictator-game experiments to test whether the observed altruistic behavior is utility-maximizing. They found that 98% of subjects make choices that are consistent with utility maximization. Andreoni and Miller went further than most revealed-preference exercises in estimating a parametric function of a utility function accounting for subject’s choices (about half the subjects can be classified as using a linear, CES (constant elasticity of substitution), or Leontief utility).

Hammond and Traub (2012) designed a three-stage experiment, where participant advances to next stage of test only if he or she made GARP consistent choices at current one. It had been conducted over 41 (non-economics) undergraduates. The study found that, at the 10% significance level, only 22% of subjects (compared to 6.7% of simulated random choice-maker) passed second-stage tests, and 19.5% passed all three stage tests. The result reinforced Sippel’s study suggesting that human is generally not perfectly rational. It should be noted though conditional on passing second-stage rationality, 62.5% of subjects passed third-stage tests.

Choi, Kariv, Müller and Silverman (2014) conducted with CentERpanel survey a comprehensive study on rationality. Measuring GARP consistency by Afriat Critical Cost Efficiency Index (CCEI) and correlation with socio-economic factors, it found that: on average, younger subjects are more consistent than older, men more than women, high-education more than low-education, and high-income subjects more consistent than low-income.

Brocas, Carillo, Combs and Kodaverdian (2016) studied choice behaviors in cohorts of young and older adults, varying choice tasks from simple domain to complex domain. They showed that while both young and older adults are about equally well consistent in simple domain, older ones were observed being significantly more inconsistent in complex tasks. Beyond that, by performing working memory and fluid intelligence (IQ) test, further correlation examinations reveal that older adults’ inconsistency in complex domain can be attributed to decline in working memory and fluid intelligence.

[1] One can, however, evaluate the degree of violations.

Reference:

Afriat, S. N. (1967). The Construction of Utility Functions from Expenditure Data. International Economic Review, 8(1), 67–77.

Andreoni, J., & Miller, J. (2002). Giving According to GARP: An Experimental Test of the Consistency of Preferences for Altruism. Econometrica, 70(2), 737–753.

Battalio, R. C., Kagel, J. H., Winkler, R. C., Edwin B. Fisher, J., Basmann, R. L., & Krasner, L. (1973). A Test of Consumer Demand Theory Using Observations of Individual Consumer Purchases. Western Economic Journal, XI(4), 411–428.

Brocas, I., Carillo, J. D., Combs, T. D., & Kodaverdian, N. (2016). Consistency in Simple vs. Complex Choices over the Life Cycle.

Chambers, C. P., & Echenique, F. (2016). Revealed Preference Theory. Cambridge University Press.

Choi, S., Kariv, S., Müller, W., & Silverman, D. (2014). Who Is (More) Rational? The American Economic Review, 104(6), 1518–1550.

Echenique, F., Lee, S., & Shum, M. (2011). The Money Pump as a Measure of Revealed Preference Violations. Journal of Political Economy, 119(6), 1201–1223.

Grether, D. M., & Plott, C. R. (1979). Economic Theory of Choice and the Preference Reversal Phenomenon. The American Economic Review, 69(4), 623–638.

Hammond, P., & Traub, S. (2012). A Three-Stage Experimental Test of Revealed Preference.

Harbaugh, W. T., Krause, K., & Berry, T. R. (2001). GARP for Kids: On the Development of Rational Choice Behavior. American Economic Review, 91(5), 1539–1545. http://doi.org/10.1257/aer.91.5.1539

Sippel, R. (1997). An Experiment on the Pure Theory of Consumer’s Behaviour. The Economic Journal, 107(444), 1431–1444. http://doi.org/Doi 10.1111/1468-0297.00231

Varian, H. R. (1983). Non-Parametric Tests of Consumer Behaviour. The Review of Economic Studies, 50(1), 99–110. http://doi.org/10.1007/sl0869-007-9037-x

## Recap: More Detailed Proof of Blocking Lemma (Gale and Sotomayor, 1985)

Lemma: Let $\mu$ be any individually rational matching with respect to strict preferences $P$ and let $M'$ be all men who prefer $\mu$ to $\mu_M$. If $M'$ is nonempty, there is a pair $(m, w)$ that blocks $\mu$ such that $m$ is in $M-M'$ and $w$ is in $\mu(M')$.

Proof.

Case 1: $\mu(M')\not=\mu_M(M')$, i.e. the set of men who prefer $\mu$ to $\mu_M$ are matched to different sets of women under the matching rules $\mu$ and $\mu_M$.

Pick any $w\in\mu(M')-\mu_M(M')$. Note that $\mu(M')\not\subset\mu_M(M')$ in this case because it’s a one-to-one matching.

Denote $m'=\mu(w)$, and $m=\mu_M(w)$, so $m'\in M'$, and $m\not\in M'$. This implies that $w\succ \mu_M(m)$ and $w\succ_m\mu(m)$.

Note that $m\succ_w m'$, otherwise $(m', m)$ will block $\mu_M$, contradicting to that $\mu_M is stable$.

Therefore, $(m, w)$ blocks $\mu$ such that $w\in\mu(M')$ and $m\in M-M’$.

Case 2:$\mu(M')=\mu_M(M')$, i.e. the set of men who prefer $\mu$ to $\mu_M$ are matched to the same set of women under the matching rules $\mu$ and $\mu_M$.

Let $w$ be the last woman in $W'$ to receive a proposal from an acceptable member of $M'$ in the deferred acceptance. Denote this man by $m'$. So there are two possibilities: 1) $w$ has not been proposed before, and $\mu_M(m')=w$; 2) $w$ is already engaged with some other man $m$, and she rejects $m$ and accepts $m'$.

1) is not possible: If it were true, then since $w\in W'$, there must be some $m'\in M$ such that $\mu(m')=w\succ_{m'}\mu_M(m)$. That means when we run the deferred-acceptance algorithm to implement $\mu_M$, $m'$ has already proposed to $w$ and got rejected, contradicting that $w$ has not been proposed.

2) i. $m\not\in M'$, otherwise $m$ will propose to another woman, contradicting that $w$ is the last woman in $W'$ to receive a proposal. Therefore $w\succ_m\mu_M(m)$. And since $m\not\in M'$, that means $\mu_M(m)\succ_m\mu(m)$. This implies $w\succ_m\mu(m)$.

ii. Since $w$ is the last woman to receive the proposal, it must be that before $w$ rejects $m$, she must have rejected $\mu(w)$, i.e. her mate under $\mu$. That means $m\succ_w\mu(m)$.

Combine i. and ii., we conclude that $(m, w)$ blocks $\mu$.

Q.E.D.

Alternative proof:

Case 1: The same as above.

Case 2$\mu(M')=\mu_M(M')$.

Define the new market $(M', W', P')$. $P'(m)$ is the same as $P(m)$ restricted to $W'\cup\{m\}$, and $P'(w)$ is the same as $P(w)$ restricted to $M'\cup\{w\}$, $\forall m\in M'$, $w\in W'$.

Note that $\forall m\in M'$, $w\in W'$, we must have $\mu(m)\succ_m\mu_M(m)$ and $\mu_M(m)\succ_w\mu(w)$, otherwise $\mu_M$ would be blocked. We can write this as:

$\mu_M\succ_{W'}\succ\mu$

and

$\mu\succ_{M'}\succ\mu_M$.

So that means under $P'$, $w'$ is now ranked just below $\mu(w)$, and $m$ is now ranked just below $\mu_M(m)$.

In other words, the only men in $M'$ who are unacceptable to $w$ are those $m$ such that $m\succeq_w \mu(w)$, so $\mu_M(w)$ is acceptable to $w$ under $P'$ for all $w\in W'$.

Note that $\mu_M$ restricted to $M'\cup W'$ is still stable for $(M', W, P')$, because any pair that blocks $\mu_M$ under $P'$ would also block it under $P$.

Let $\mu_M'$ be the $M'$-optimal matching for $(M', W', P')$, then by Pareto-optimality Theorem, it must be that

(*) $\mu_M'\succ_{M'}$.

Otherwise, if $\mu_M=\mu_M'$, then it would be contradicting $\mu\succ_{M'}\succ\mu_{M'}$.

Furthermore, $\mu_{M'}\succeq_{W'}\mu$ by the construction of $P'$.

Define $\mu'$ on $M\cup W$ by $\mu'=\mu_{M'}$ on $M'\cup W'$, and $latex\mu’=\mu_M$ on $(M'-M)\cup (W'-W)$.

Combine it with (*), we have $\mu'\succ_M\mu_M$. $\mu'$ is not stable for $(M,W, P)$, so let $\{m, w\}$ be a blocking pair.

i). If $\{m, w\}$ in $M'\cup W'$, $m$ and $w$ would be mutually acceptable under $P'$, by construction of $P'$, and so $\{m, w\}$ would block $\mu_M'$. Also note that

then

$w=\mu'(m)=\mu_{M'}(m)\succ_m\succ\mu_M(m)$

and

$\mu_{M'}(w)=\mu'(w)=m\succ_w\mu(w)$.

So $\{m, w\}$ does not block $\mu'$.

ii). If $m\in M'$, and $m\in W-W'$, then

$w=\mu'(m)=\mu'_M(m)\succ_m\succ\mu_M(m)$

and

$\mu(w)\succ_w\mu_M(w)=\mu'(w)=m$.

$\{m, w\}$ blocks $\mu_M$, but it does not block $\mu'$.

iii). If $m\in M-M'$, $w\in W-W'$, then

$w=\mu'(m)=\mu_M(m)\succ_m\mu(m)$

and

$\mu(w)\succ_w\mu_M(w)=\mu'(w)=m$.

So $\{m, w\}$ does not block $\mu'$.

iv). If $m\in M-M'$, $w\in W'$, then

$w=\mu'(m)=\mu_M(m)\succ_m\mu(m)$

and

$\mu_{M'}(w)=\mu'(w)=m\succ_w\mu(w)$.

So $\{m, w\}$ does blocks $\mu'$. It’s the desired blocking pair.

Q.E.D.

References:

Gale, D., & Sotomayor, M. (1985). Some Remarks on the Stable Matching. Discrete Applied Mathematics, 11, 223–232.

Roth, A. E., & Sotomayor, M. (1990). Two-Sided Matching: A Study in Game-Theoretic Modeling and Analysis. Cambridge University Press.

## Elucidating Partially-Adaptive Models of Value in the Brain: Mechanisms, Features and Comparisons with Fully-Adaptive and Non-Adaptive Models

by Calvin Leather, Yuqing Hu

Recent literature in reinforcement learning has demonstrated that the context in which a decision is made influences subject reports and neural correlates of perceived reward. For example, consider visiting a restaurant where have previously had many excellent meals. Expecting another excellent meal, when you receive a merely satisfactory meal, your subjective experience is negative. Had you received this objectively decent meal elsewhere, without the positive expectations, your experience would have been better. This intuition is captured in adaptive models of value, where a stimuli’s reward (i.e. Q-value) is expressed as being relative to the expected reward in a situation, and it has been found that this accurately models activation in value regions (Palminteri et al 2015). Such a model also can be beneficial as it allows reinforcement learning models to learn to avoid punishment, as avoiding a contextually-expected negative payoff results in a positive reward. This had previously been challenging to express within the same framework as reinforcement learning models (Kim et al, 2006).

The partially-adaptive model is interesting, as it has the same advantages as the fully-adaptive model (reflecting subjective experience and neural data well, allowing for avoidance learning), while potentially avoiding the confusion outlined above. Here, we seek to investigate the implications and benefits of Burke et. al.’s partially-adaptive model more thoroughly. In particular, we will consider the confusion situation’s ecological validity and potential resolution, whether it is reasonable that partially-adaptive representations might extend beyond decision (to learning and memory), and the implications of the theory for future work. Before we do this we would like to briefly present an alternative interpretation of their findings.

The finding that the fMRI signal is best classified by a partially-adaptive model does not necessarily entail the brain utilizing a partially-adaptive encoding as the value over which decisions occur. All neurons within a voxel can influence the fMRI signal, so it is possible that the signal may reflect a combination of multiple activity patterns present within a voxel. This mixing phenomenon has been used to explain the success of decoding early visual cortex, where the overall fMRI signal in a voxel reflects the specific distribution of orientation-specific columns within a voxel (Swisher, 2010). Similarly, the partially-adaptive model’s fit might be explained by the average contribution of some cells with a full-adaptive encoding, and other cells with absolute encodings of value (within biological constraints). This concern is supported by the co-occurrence of adaptive and non-adaptive cells in macaque OFC (Kobayashi, 2010). Therefore, more work is needed to understand the local circuitry and encoding heterogeneity of regions supporting value-based decision making.

Returning to the theory presented by the authors, we would like to consider whether a fully-adaptive encoding of value is truly suboptimal. The type of confusing situation presented above was shown to be problematic for real decision makers in Pompilio and Kacelnik (2010), where starlings became indifferent between two options with different objective values, due to the contexts those options appeared in during training. However, this type of choice context might not be ecologically valid. If two stimuli are exclusively evaluated within different contexts, as in Pompilio and Kacelnik, it is not relevant whether they are confusable, as the decision maker would never need to compare them.

Separate from the confusion problem’s ecological validity is the inquiry into its solution. Burke et. al. suggest partially-adaptive encoding avoids confusion, and therefore should be preferred to a fully-adaptive encoding. However, this might only be true for the particular payoffs used in the experiment. Consider a decision maker who makes choices in two contexts. One, the loss context, has two outcomes, L0 (worth 0), and Lneg (worth less than 0), while the other, the gain context, has two outcomes, G0 (worth 0), and Gpos (worth more than 0). If L0-Lneg = Gpos– G0, as in Burke et. al., a fully-adaptive agent would be indifferent between G0 and Lneg (and between Gpos and L0). A partially-adaptive agent, however, would not be indifferent, as the value of G0 would be higher than Lneg.   Now consider what happens if we raise the value the value of Gpos. By doing this, we can raise the average value of the gain context by any amount. Now consider what this does the experienced value (Q-value) of G0. As we increase the average reward of the context, G0 becomes a poorer option in terms of its Q-value. Note that since the only reward we are changing is Gpos, the Q-values for the loss context do not change. Therefore, we can decrease the Q-value for G0 until it is equal to that of Lneg. This is exactly the confusion that we had hoped the partially-adaptive model would avoid. Furthermore, this argument will work for any partially-adaptive model: we are unable to defeat this concern by parameterizing the influence of context in the update equations, and manipulating this parameter.

In sum, while partial adaption is an exciting theory that may provide novel motivations for empirical work, more effort is needed to understand when and where it is optimal. If we can overcome these concerns, the new theory opens up potential investigation into the nature of contextual influence: if we allow a range of contextual influence (via a parameter) in the partially-adaptive model, do certain individuals have more contextual influence, and does this heterogeneity correlate with learning performance? Do different environments (e.g. noise in signals conveying the context) alter the parameter? Do different cells or regions respond with different amounts of contextual influence? As such, the theory opens up new experimental hypotheses that might allow us to better understand how the brain incorporates context in the learning and decision-making processes.

References

Burke, C. J., Baddeley, X. M., Tobler, X. P. N., & Schultz, X. W. (2016). Partial Adaptation of Obtained and Observed Value Signals Preserves Information about Gains and Losses. Journal of Neuroscience, 36(39), 10016–10025. doi:10.1523/JNEUROSCI.0487-16.2016

Kim, H., Shimojo, S., & Doherty, J. P. O. (2006). Is Avoiding an Aversive Outcome Rewarding ? Neural Substrates of Avoidance Learning in the Human Brain. PLoS Biology, 4(8), 1453–1461. doi:10.1371/journal.pbio.0040233

Kobayashi, S., Carvalho, O. P. De, & Schultz, W. (2010). Adaptation of Reward Sensitivity in Orbitofrontal Neurons. Journal of Neuroscience, 30(2), 534–544. doi:10.1523/JNEUROSCI.4009-09.2010

Palminteri, S., Khamassi, M., Joffily, M., & Coricelli, G. (2015). Contextual modulation of value signals in reward and punishment learning. Nature Communications, 6, 1–14. doi:10.1038/ncomms9096

Pompilio, L., & Kacelnik, A. (2010). Context-dependent utility overrides absolute memory as a determinant of choice. PNAS, 107(1), 508–512. doi:10.1073/pnas.0907250107

Swisher, J. D., Gatenby, J. C., Gore, J. C., Wolfe, B. A., Moon, H., Kim, S., & Tong, F. (2010). Multiscale pattern analysis of orientation-selective activity in the primary visual cortex. Journal of Neuroscience, 30(1), 325–330. doi:10.1523/JNEUROSCI.4811-09.2010.Multiscale

## Summary of F.A. Hayek “The Use of Knowledge in Society”, 1945 AER

Summary for each part:

I: The mathematical solution to constructing a rational economic order is to achieve the same marginal rates of substitution between any two goods. This is not realistic, because it relies on the assumption of complete command of knowledge in a central single mind, while in the real society the knowledge is dispersed among separate individuals. This causes misconception about the nature of economic problem, which is essentially how to efficiently allocate resources by utilizing individual knowledge, rather than utilizing it in its integrated form.

II: Utilizing knowledge, which involves communicating it to the planner and among different individuals, is important in designing an efficient economic system, which can be in the form of central planning, completion and monopoly. Which kind of the economic systems is more efficient depends on whether the existing knowledge can be fuller used.

III: Different kinds of knowledge define different positions of the economic systems. The prominent position of central planning in public imagination is due to the exaggeration of the importance of scientific knowledge. Selecting a group of experts to command such knowledge is actually only a fraction of the wider problem. The knowledge of the particular circumstances, which is not always available, is equivalently socially useful, although it is sometimes regarded as disreputable if one gains advantage by using this knowledge.

IV: Economic problems arise as a result of change of circumstances, making the knowledge of the particular place and time important in making economic decisions. This sort of knowledge, however, cannot be statistically calculated therefore cannot be conveyed to the central authority who make plans based on statistical information.

V: Decentralization is necessary in solving economic problems, because adaptions to changes in economic systems require the knowledge of the particular circumstances to be promptly used. A price system helps coordinate separate actions for individuals whose visions in their own fields sufficiently overlap through intermediaries, thus brings about the outcome that might have been achieved by central planning with complete information.

VI: The price system acts as a mechanism that communicates only the most essential information for individuals to take the right action, and it extends the span of resources utilization beyond the control of any single mind. Like language, this is one of the formations upon which the foundation of civilization is built.

VII: The dispute about the indispensability of price system is not purely a political dissent, but also intellectual and methodological differences. Schumpeter’s argument that valuation of factors of production is implied in the valuation of consumers’ goods is untrue, because it also depends on the supply of the factors. His argument disregards the essential fact of imperfection of knowledge in the real world. Thus the solution to the economic problem has to be processed by interactions of people who possess their partial knowledge.

In sum, the key take-away ideas are:

In the real world, knowledge is spread throughout the society. The knowledge of particular circumstances of place and time is not always public available, but it is useful in making economic decisions. This is an essential feature of the real world’s economic problem, which makes central planning inefficient and infeasible. That’s because central planning requires a single mind processing all the knowledge. Decentralization overcomes this problem via a price system in which individuals with their own partial knowledge coordinate with each other and utilize resources that are beyond the control of any one person.

## 家长，你们选对学校了吗？Parents, Have You Chosen the Right Schools?

I wrote this article to introduce the contributions of Alvin Roth, Atila Abdulkadiroglu, Parag Pathak and Tayfun Sönmez to public school choice in the U.S.

​那么​所有学生都被录取，学校再考虑第二志愿的申请人。这种录取结果将是最终结果：已被录取的学生不再进入下一轮录取，也就是说没有机会再被调到其他学校了。学生在一所学校的优先权由各种因素决定，主要因素包括学业成绩、家庭住址所在的学区和是否有兄弟姐妹在同一所学校就读。

2003年，纽约率先对公立学校的录取机制进行了改革，随后波士顿、华盛顿、芝加哥等城市也进行了类似的改革。新的录取机制实现了最优的匹配结果，学生们不必担心志愿填报方法不当而不被录取，学校也不必担心无法录取到和他们层次和质量相匹配的学生了。改良后的录取步骤是这样的：

Abdulkadiroglu, A., & Sonmez, T. (2003). School Choice: A Mechanism Design Approach. American Economic Review, 93(3), 729–747. Retrieved from http://www.jstor.org/stable/10.2307/3132114

Abdulkadiroglu, A., Pathak, P. A., & Roth, A. E. (2005). The New York city high school match. American Economic Review, 95(2), 364–367. Retrieved from http://www.jstor.org/stable/10.2307/4132848

Tullis. T. (2014) How Game Theory Helped Improve New York City’s High School Application Process. Retrieved fromhttp://www.nytimes.com/2014/12/07/nyregion/how-game-theory-helped-improve-new-york-city-high-school-application-process.html?_r=0

## Derek Neal and Diane W. Schanzenbach, 2010 “Left Behind by Design: Proficiency Counts and Test-based Accountability”

In this review report, I will summarize Neal and Schanzenbach’s paper based on my presentation on April 18, and I will highlight some points that we discussed in class. My review proceeds according to the following outline:

1. Research Question and Main Results
2. Literature and Contribution of this Paper
3. Theoretical Model
4. Research Context and Data
5. Empirical Strategy
6. Result Summary
7. Policy Implications

Slides: Left Behind by Design

## Notes on “Class Size Reduction and Student Achievement: The Potential Tradeoff between Teacher Quality and Class Size” by Jepsen and Rivikin

In this review report, I will summarize Jepsen and Rivikin’s paper based on my presentation on February 7, and I will highlight some of the points based on the comments made in our discussion. My review proceeds according to the following outline:

1. Background and motivation
2. Research question and main results
3. Relation with literature
4. Empirical model
5. Data and descriptive results
6. Analytical results
7. Conclusion and policy implications

## Notes on Akerlof 1970 The Market for “Lemons”: Quality Uncertainty and the Market Mechanism

Our group’s presentation on Wednesday for Econ 206.

Background:

Akerlof explains his motivation for writing “The Market for Lemons” by arguing that microeconomic theory models in the 1960s were characterized by their generic nature{they dealt with perfect competition and general equilibrium. Situational and speci c considerations were left out (such as information asymmetries). By the 1990s more speci c theory models be came important. Now, economic models are custom, describing important features of observed situations. Since “lemons” exempli ed this new style, it was an integral part in the transformation of how theory was presented and discussed.

Akerlof notes that investigations of the car market were driven by his interest in macroeconmic issues such as the business cycle and unemployment. He wanted to know what caused the business cycle{noting that at the time this was related to the signi cant variation in new automobile sales. He wondered why this uctuation existed for new cars, and attempted to understand why people bought new cars, rather than renting or buying used ones. Akerlof noticed that the presence of information asymmetries served as an explanation as to why people preferred to purchase new cars rather than used cars” noting “their suspicion of the motives of the sellers of used cars.”

Extensions of this paper can be made to virtually any situation in which asymmetric information exists. This can happen in any market where the true quality of goods is dicult to perceive. This paper uses the auto mobile market as an explanatory example. But the explanatory capacity of the Lemon Principle are enormous.

Ironically, this theory was rejected on multiple accounts. According to Akerlof himself: “By June of 1967 the paper was ready and I sent it to the American Economic Review for publication…Fairly shortly…I received my first rejection letter from the American Economic Review. The editor explained that the Review did not publish papers on subjects of such triviality….Michael Farrell, an editor of the Review of Economic Studies, … had urged me to submit Lemons to the Review, but he had also been quite explicit in giving no guarantees. I submitted Lemons there, which was again rejected on the grounds that the Review did not publish papers on topics of such triviality. The next rejection was more interesting. I sent Lemons to the Journal of Political Economy, which sent me two referee reports, carefully argued as to why I was incorrect. After all, eggs of di fferent grades were sorted and sold (I do not believe that this is just my memory confusing it with my original perception of the egg-grader model), as were other agricultural commodities. If this paper was correct, then no goods could be traded (an exaggeration of the claims of the paper). Besides – and this was the killer – if this paper was correct, economics would be di fferent.”