Robert J. Shiller
robert.shiller@yale.edu
30 Hillhouse Ave., Room 11a, 432-3708
http://www.econ.yale.edu/~shiller

Administrative Assistant: carol.copeland@yale.edu, 432-3726, 30 Hillhouse Ave., Room 10

Behavioral economics incorporates insights from other social sciences, such as psychology and sociology, into economic models, and attempts to explain anomalies that defy standard economic analysis. Institutional economics is the study of the evolution of economic organizations, laws, contracts, and customs as part of the historical and continuing process of economic development. Behavioral economics and institutional economics are naturally treated together, since so much of the logic and design of economic institutions has to do with complexities of human behavior. Topics include economic fluctuations and speculation, herd behavior, attitudes towards risk, money illusion, involuntary unemployment, saving, investment, poverty, identity, religion, trust, risk management, social welfare institutions, private risk management institutions, institutions to foster economic development.

Course Requirements: midterm exam, take-home final exam of short essay form.

Dates shown are subject to change. There are three items to purchase:

* Indicates emphasized reading

1. Introduction and Methodology (Wednesday September 5)

*Shiller, Robert J., "Behavioral Economics and Institutional Innovation", Southern Economic Journal, 72(2):269-83, 2005.

*Akerlof and Shiller Manuscript, Introduction

*Rodrik, Introduction, Chapter 1 (Fifty Years of Growth (and Lack Thereof):An Interpretation, Chapter 5. (Institutions and High-Quality Growth).

Barberis, Nicholas, and Richard C. Thaler, "A Survey of Behavioral Finance," NBER Working Paper No. w9222, 2002.

Joskow, Paul A. "The New Institutional Economics: A Report Card," International Society for the New Institutional Economics Presidential Address, 2004.

Williamson, Oliver, The New Institutional Economics: Taking Stock, Looking Ahead,” Journal of Economic Literature, 38: 595-613, September 2000.

Mitchell, Wesley C., "Commons on Institutional Economics," The American Economic Review, 25(4):635-52, December 1935.

Jolls, Christine, Cass R. Sunstein and Richard Thaler, "A Behavioral Approach to Law and Economics" Stanford Law Review 50(5):1471, 1998.

Thaler, Richard, Quasi-Rational Economics New York: Russell Sage, 1994. RESERVE

Wilson, E. O. Consilience: The Unity of Knowledge Knopf, 1998 RESERVE

Douglas C. North, Institutions, Institutional Change and Economic Performance, Cambridge University Press, 1990, RESERVE

Schmid, A. Allan, Conflict and Cooperation: Institutional and Behavioral Economics, Blackwell, 2004.

Koopmans, Tjalling " Measurement without Theory," Review of Economics and Statistics 29:161-72, August 1947.

Sims, Christopher A. " Macroeconomics and Reality,," Econometrica 48:148, January 1980.

Popper, Karl R. The Logic of Scientific Discovery Section 1 and Section 20, New York, Science Editions, 1961. RESERVE

Caldwell, Bruce J., " Clarifying Popper," Journal of Economic Literature 29(1):1-33, 1991.

Friedman, Milton, "The Methodology of Positive Economics," in M. Friedman Essays in Positive Economics Chicago: University of Chicago Press, 1956. RESERVE

Green, Donald and Ian Shapiro, Pathologies of Rational Choice Theory: A Critique of Applications in Political Science, New Haven: Yale University Press, 1996.

Part I: Theory of Behavioral Economics

2. Confidence (Monday September 10)

*Akerlof and Shiller Manuscript, Chapter 1 "Confidence", Chapter 2 "Corruption and Bankruptcy"

*Glaeser, Edward L., David Laibson, Jose A. Scheinkman and Christine L. Soutter, What is Social Capital? The Determinants of Trust and Trustworthiness" NBER Working Paper, 1999.

*Fehr, Ernst, Urs Fischbacher and Michael Kosfeld, " Neuroeconomic Foundations of Trust and Social Preferences," Institute for Empirical Research in Economics, University of Zurich, Working Paper No. 221, June 2005.

Khurana, Rakesh, Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs Princeton University Press, 2004. RESERVE

Caballero, Ricardo, Kevin Cowan, and Jonathan Kearns, "Fear of Sudden Stops: Lessons from Australia and Chile" NBER Working Paper No. 10519, May 2004.

Franklin, Benjamin, " Information to Those who Would Remove to America," The Boston Magazine, October 1784.

Katona, George, "On the Origin of Changes in Attitudes," Chapter 5 in George Katona, The Powerful Consumer: Psychological Studies of the American Economy, 1960, McGraw-Hill Book Company, Inc., pp. 68-79.

3. Fairness (Wednesday September 12)

*Akerlof and Shiller Manuscript, Chapter 3 "Fairness"

*Kahneman, Daniel, Jack Knetsch and Richard H. Thaler, " Fairness as a Constraint on Profit-Seeking: Entitlements in the Market," American Economic Review September 76:4 (September 1986) pp. 728-41.

Sen, Amartya, Poverty and Famines: An Essay on Entitlement and Deprivation, Oxford University Press, 1983, Chapter 6 "The Great Bengal Famine" and Chapter 10 "Food and Entitlements." Also on RESERVE

Arrow, Kenneth J., Why People Go Hungry" (Review of Sen's Poverty and Famines) 1982.

"Post-Mortem on the Bengal Famine Far Eastern Survey 14(25):373-4, December 19, 1945.

4. Epidemics (Monday September 17)

*Bikhchandani, D., David Hirshleifer and Ivo Welch, " A Theory of Fashion, Social Custom and Cultural Change," Journal of Political Economy 81:637-54, 1992.

Shiller, Irrational Exuberance 2nd Edition, Chapter 5, "Amplification Mechanisms: Naturally-Occurring Ponzi Processes"

Bartholomew, Stochastic Models for Social Processes, 3rd Edition, Chichester, New York: Wiley 1982. RESERVE

Avery, Christopher, and Peter Zemsky, " Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review 88(4):724-48, 1998.

Banerjee, Abhijit, " A Simple Model of Herd Behavior," Quarterly Journal of Economics107(3):979-817, 1992.

Barberis, Nicholas, and Andrei Shelifer, Style Investing NBER Working Paper No. w8039, December 2000.

Barberis, Nicholas, Andrei Shleifer, and Robert Vishny, "A Model of Investor Sentiment," Journal of Financial Economics, 49 (1998): 30743.

Allen, Franklin, Stephen Morris, and Hyun Song Shin, " Beauty Contests and Iterated Expectations in Asset Markets," unpublished paper, University of Pennsylvania, 2005.

5. Near-Rationality (Monday September 19)

*Mankiw, N. Gregory. " Small Menu Costs and Large Business Cycles: A Macroeconomic Model," Quarterly Journal of Economics, May 1985, 110(2), pp. 529-38.

Akerlof, George A., and Janet L. Yellen, " A Near-Rational Model of the Business Cycle with Wage and Price Inertia." Quarterly Journal of Economics, 100:823-38, 1985.

6. Prospect Theory (Wednesday September 24)

*Kahneman, Daniel, and Amos Tversky, " Prospect Theory," Econometrica 1989.

*Tversky, Amos, and Daniel Kahneman, "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty 5:297-323, 1992, also in Kahneman, Daniel, and Amos Tversky, Choices, Values and Frames, Cambridge University Press, 2000, pp. 44-65. RESERVE

Rabin, Matthew, " Risk Aversion and Expected Utility: A Calibration Theorem," Econometrica 68:1281-92, September 2000.

Barberis, Nicholas, Ming Huang and Tano Santos, "Prospect Theory and Asset Prices," Quarterly Journal of Economics 116(1):1 2001.

Thaler, Richard and E. J. Johnston, " Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science 36:643-60.

7. Religion (Wednesday, September 26)

*Barro, Robert J. and Rachel McCleary "Religion and Economic Growth," NBER Working Paper No. w9682, May 2003.

Weber, Max, The Protestant Ethic and the 'Spirit' of Capitalism Chapter I (Religious Affiliation and Social Stratification) and II (The Spirit of Capitalism) translated by Talcott Parsons, Routledge 2002 [1904-5, 1930] RESERVE

Fogel,Robert W. The Fourth Great Awakening and the Future of Egalitarianism, University of Chicago Press 2000.

Geertz, Clifford, The Interpretation of Cultures: Selected Essays, Chapter 4, "Religion as a Cultural System," Basic Books, 1973.

Boyer, Pascal, Religion Explained: The Evolutionary Origins of Religious Thought Basic Books, 2001.

Levine, Aaron, Case Studies in Jewish Business Ethics, New York: Yeshiva University Press, 2000.

Brown, Donald E., Human Universals, New York: McGraw-Hill Humanities, 1991.

Part II Applications of the Theory: Answering Some Basic Questions

8. Why Do Economies Overheat and then Fall into Recession? (Monday October 1)

*Akerlof and Shiller Manuscript, Chapter 5, "Why Do Economies Fall into Recession?"

*George A. Akerlof and Paul M. Romer, "Looting: The Economic Underworld of Bankruptcy for Profit,", Brookings Papers on Economic Activity, 2, 1-74, 1993.

*Lamont, Owen, and Jeremy Stein, "Investor Sentiment and Corporate Investment: Micro and Macro," American Economic Review Papers and Proceedings, May 2006.

Bond, Stephen R. and Jason G. Cummins, "The Stock Market and Investment in the New Economy: Some Tangible Facts and Intangible Fictions,", Brookings Papers on Economic Activity, 2000:1, pp. 61-108.

Lamont, Owen, " Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance, 52:1 (March 1997) pp. 83-109.

9. Why Are Some People Unable to Find a Job? (Wednesday October 3)

*Akerlof and Shiller Manuscript, Chapter 6 "Why Are Some People Unable to Find a Job?"

*Rodrik, Chapter 6 (Getting Institutions Right) and Chapter 7 (Governance of Economic Globalization)

*Bewley, Truman, "A Depressed Labor Market as Explained by Participants," American Economic Review, 85:250-54, 1995.

*Yellen, Janet L. " Efficiency Wage Models of Unemployment." American Economic Review, (Papers and Proceedings), 74(2), pp. 200-5, May, 1984.

Louis Uchitelle, The Disposable American: Layoffs and their Consequences

Krueger, Alan B., and Lawrence H. Summers, " Efficiency Wages and the Interindustry Wage Structure," Econometrica, 56(2) (March 1988), pp. 259-93.

Fehr, Ernst, Georg Kirchsteiger and Arno Riedl. " Does Fairness Prevent Market Clearing? An Experimental Investigation." Quarterly Journal of Economics, May 1993, 108(2), pp. 437-59.

Blanchard, Olivier, and Lawrence Summers, "Hysteresis in Unemployment European Economic Review, 31:1/2 (February-March 1987), pp. 288-95, NBER Working Paper No. 1950

Paola Giuliano "The Determinants of Living Arrangements" Presented at Macroeconomics and Individual Decision Making Conference, NBER, 2004.

10. Why Do Central Bankers Have Power over the Economy? (Monday October 8)

*Akerlof and Shiller Manuscript, Chapter 4, "Money Illusion," Chapter 7 "Why Do Central Bankers Have Power over the Economy?"

*Eldar Shafir, Diamond, Peter, and Tversky, Amos. " Money Illusion." Quarterly Journal of Economics, May 1997, 112(2), pp. 341-74.

Fisher, Irving, The Money Illusion, Adelphi Company Publishers, New York, 1928, Ch. I, "A Glance at the Money Illusion," pp. 3-18.

Zeckhauser "Schmeduling," unpublished paper, Kennedy School, 2004.

Heidhues, Paul, and Botond Koszegi, "The Impact of Consumer Loss Aversion on Pricing," Heidhues-Koszegi-Pricing.pdf

Howitt, Peter and Robert Clower. "The Emergence of Economic Organization." Journal of Economic Behavior and Organization, January 2000, 41(1), pp. 55-84.

Fehr, Ernst, and Jean Robert Tyran, " Does Money Illusion Matter?" American Economic Review, December, 2001, 91(5), pp. 1239-62.

Shiller, Robert J. "New Units of Measurement and Electronic Money," in The New Financial Order Princeton, 2003, Chapter 15 RESERVE

Guest Lecture (Wednesday October 10)

Midterm Exam Monday October 15

11. Why Does Inflation Bring Down Unemployment? (Wednesday October 17)

*Akerlof and Shiller Manuscript, Chapter 8 "Why Does Inflation Bring Down Unemployment?"

*Akerlof, George A., William T. Dickens and George L. Perry. "Near-Rational Wage and Price Setting and the Long-Run Phillips Curve." Brookings Papers on Economic Activity; 2000:1, pp. 1-44.

*Fuhrer, Jeffrey C., "The Phillips Curve is Alive and Well," New England Economic Review, March/April 1995, pp. 41-56.

Fauvel, Yvon, Alain Guay, and Alain Paquet, "What Has the U.S. Phillips Curve Been Up To?" unpublished paper, University of Quebec at Montreal, 2004.

Bewley, Truman, Why Wages Don't Fall During a Recession Cambridge, MA: Harvard University Press, 1999. Chapter 11, "Resistance to Pay Reduction," pp. 170-198. RESERVE

Mankiw, N. Gregory and Ricardo Reis. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Quarterly Journal of Economics, 117:4 (November 2002) pp.1295-1328.

Mankiw, N. Gregory and Ricardo Reis. "Pervasive Stickiness" NBER Working Paper No. 12024, February 2006.

12. Why Do People Undersave? (Wednesday October 22)

*Akerlof and Shiller Manuscript, Chapter 9 "Why Is Saving for the Future so Erratic?"

*Shefrin, Hersh M., and Richard Thaler, " The Behavioral Life-Cycle Hypothesis," Economic Inquiry, 26:4 (October, 1988), pp. 609-43.

Angeletos, George-Marios, David Laibson, Andrea Repetto, Jeremy Tobacman, and Stephen Weinberg, " The Hyperbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, 15:3 (Summer 2001), pp. 47-68.

Bernheim, B. Douglas, Jonathan Skinner, and Steven Weinberg. "What Accounts for the Variation in Retirement Wealth Among U.S. Households?" American Economic Review, September 2001, 91(4), pp. 832-55.

13. Why Do Financial Markets Boom and Crash? (Monday October 24)

*Akerlof and Shiller Manuscript, Chapter 10 "Why Do Financial Markets Boom and Crash?"

Campbell, John Y., "Household Finance", National Bureau of Economic Research Working Paper No. w12149, April 2006.

Romer, Christina, "The Great Crash and the Onset of the Great Depression," Quarterly Journal of Economics, 105(3) (August 1990), pp. 597-624.

Sachs, Jeffrey, and Stephen Radelet, "The Onset of the East Asian Financial Crisis," NBER Working Paper No. w6680, August 1998 Brookings Papers on Economic Activity 28-1, pp. 1-74, 1998.

Calvo, Guillermo, Alejandro Izquierdo, and Ernesto Talvi, " Phoenix Miracles: Recovering from Systemic Financial Crises in Emerging Markets," Inter-American Development Bank, 2005.

Lee, In Ho, " Market Crashes and Informational Avalanches," The Review of Economic Studies 65(4):741-60, 1998.

14. Efficient Markets, Transactions Costs, Limits of Arbitrage (Monday October 29)

*Shleifer, Andrei, and Robert Vishny, "The Limits of Arbitrage," National Bureau of Economics Working Paper No. W5167, 1995, Published: Journal of Finance, Vol. 52, no. 1 (1997): 35-55.

Siegel, Jeremy J. and Thaler, Richard H. " Anomalies: The Equity Premium Puzzle." Journal of Economic Perspectives, Winter, 1997, 11(1), pp. 191-200.

Williamson, Oliver, Markets and Hierarchies : Analysis and Antitrust Implications , Free Press, 1983. RESERVE

North, Chapters 9, 10 and 11. RESERVE

Podolny, Joel, and Karen Page. 1998. “Network Forms of Organization,” Annual Review of Sociology, 24: 57-76, 1998.

Benkler, Yochai, The Wealth of Networks: How Social Production Transforms Markets and Freedom, New Haven: Yale University Press, 2006.

15. Why Do Real Estate Markets Go through Cycles? (Wednesday October 31)

*Akerlof and Shiller Manuscript, Chapter 11 "Why Do Real Estate Markets Go through Cycles?"

Sinai, Todd, and Nicholas Souleles, "Owner Occupied Housing as Insurance Against Rent Risk," unpublished paper, Wharton School, University of Pennsylvania, May 2001.

Case, Bradford, William Goetzmann, and Geert Rouwenhorst, "Global Real Estate Markets: Cycles and Fundamentals," Yale University, March 1999.

16. Why Does Poverty Persist amidst Economic Growth? (Monday November 5)

*Akerlof and Shiller Manuscript, Chapter 12, "Why Does Poverty Persist amidst Economic Growth?"

Rodrik, Chapter 8 (The Global Governance of Trade As If Development Really Mattered) and Chapter 9 (Globalization for Whom?)

*Akerlof, George A., and Rachel E. Kranton, "Economics and Identity." Quarterly Journal of Economics, August 2000, 115(3), pp. 715-53.

George, Henry, Progress and Poverty, "Introductory: The Problem." 1879.

Sachs, Jeffrey, The End of Poverty, Penguin, 2005, Excerpt (Chapter one). RESERVE

Part III: Institutional Design

17. Making Government Social Insurance Work to Reduce Inequality (Wednesday November 7)

*Burman, Leonard, Jeffrey Rohaly and Robert J. Shiller, "The Rising Tide Tax System", Hamilton Project, 2006.

*Sinn, Hans-Werner, "The threat to the German welfare state Atlantic Economic Journal 28(3):279-294, September 2000.

Moss, David, When All Else Fails: Government as the Ultimate Risk Manager Harvard University Press, 2004. RESERVE

Adema, Willem and Maxime Ladique, "Net Social Expenditure, 2005 Edition: More Comprehensive Measures of Social Support" OECD, 2006.

Carnegie, Andrew, "Wealth," North American Review, 391, June 1889.

Salamon, Lester et al. Global Civil Society: Dimensions of the Nonprofit Sector Johns Hopkins Center for Civil Society Studies, 2004.

Hacker, Jacob S.The Great Risk Shift: Why American Jobs, Families, Health Care and Retirement Aren't Secure and How We Can Fight Back Oxford University Press, 2006. RESERVE

18. Encouraging Saving and Planning for Retirement (Monday November 12)

*Thaler, Richard H. and Shlomo Benartzi Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy) 112 (2004), pages S164–S187, 2004.

*Beshears, John, James J. Choi, David Laibson, Brigitte C. Madrian, The Importance of Default Options for Retirement Savings Outcomes: Evidence from the United States NBER Working Paper No. 12009.

Office of the Press Secretary, the White House, Strengthening Social Security for the Twenty-First Century, Washington: The White House, 2005.

Shiller, Robert J., "Life Cycle Portfolios as Government Policy,", Economists' Voice 2(1) 2005

19. Democratizing and Extending Private Insurance (Wednesday November 14)

*Gosselin, Peter, "How Bedrock Promises of Security Have Fractured across America" Los Angeles Times December 30, 2005, "On Their Own in New Orleans", Los Angeles Times December 5, 2005, "The Safety Net She Believed In Was Pulled Away When She Fell" Los Angeles Times August 21, 2005

*Johnson, Eric, John Hershey, Jacqueline Meszaros and Howard Kunreuther, "Framing, probability distortions, and insurance decisions" Journal of Risk and Uncertainty 7(1):35-71, August 1993.

Froot, Kenneth, "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Paper No. 8110, 2001.

Caplin, Andrew, Sewin Chan, Charles Freeman, and Joseph Tracy, Housing Partnerships: A New Approach to a Market at a Crossroads, MIT Press, 1997.

Shiller, Robert J., and Allan N. Weiss, "Home Equity Insurance" Journal of Real Estate Finance and Economics, 1999.

Shiller, Robert J., "Livelihood Insurance," in New Financial Order: Risk in the 21st Century, RESERVE

Fall Recess

20. Creating Private Markets for Large Risks and Social Risks (Monday November 26)

*Shiller, Robert J. Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks, Oxford: Oxford University Press, 1993, 1 Introduction, 4. National Income and Labour Income Markets, 5. Real Estate and Other Markets

*Backus, David, Patrick Kehoe, and Finn Kydland, " International Real Business Cycles," Journal of Political Economy, 1992, 100: 745-775.

Baxter, Marianne, and Urban Jermann, " The International Diversification Puzzle is Worse Than You Think American Economic Review, March 1997, 87:170-80.

Bottazzi, Laura, Paulo Pesenti, and Eric van Wincoop, " Wages, Profits, and the International Portfolio Puzzle," European Economic Review, 1996, 40: 219–254.

Brainard, William, and F.T. Dolbear, "Social Risk in Financial Markets," American Economic Review, 1971, 61: 360–370.

Davis, Steven, Jeremy Nalewaik and Paul Willen, "On the Gains to International Trade in Risky Financial Assets,"; NBER Working Paper No. 7796, 2000.

Baxter, Marianne, Urban J. Jermann, and Robert G. King, " Synthetic Returns on NIPA Assets: An International Comparison." European Economic Review, 1998, 42:150-172.

Caballero, Ricardo J., and Arvind Krishnamurthy, "Smoothing Sudden Stops," NBER Working Paper #8427, 2001,

Athanasoulis, Stefano, and Robert J. Shiller "World Income Components: Measuring and Exploiting International Risk-Sharing Opportunities," American Economic Review, September 2001, Cowles Foundation Discussion Paper No. 1239.

21. Institutional Failures in Development Economics (Wednesday November 28)

*Easterly, William, The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics MIT Press, 2002. RESERVE, Preface, Chapter 1 "To Help the Poor," and Chapter 14, "Conclusion."

Rodrik, Chapter 2 (Growth Diagnostics) and Chapter 3 (Synthesis: A Practical Approach to Growth Strategies)

Stiglitz, Joseph Globalization and Its Discontents W.W. Norton, 2003. RESERVE

De Soto, Hernando, Mystery of Capital: Why Capitalism Succeeds in the West and Fails Everywhere Else Basic Books, 2003. RESERVE

22. Institutions and Dynamism (Monday, December 3)

*Gordon, Robert J., "Why Was Europe Left at the Station when America's Productivity Locomotive Departed?" Discussion Paper No. 4416, Centre for Economic Policy Research, 2004.

*Clark, Gregory, " Why Isn't the Whole World Developed? Lessons from the Cotton Mills," The Journal of Economic History 47(1):141-73, March 1987.

*Rodrik, Chapter 4 (Industrial Policy for the Twenty-First Century)

Clark, Gregory, A Farewell to Alms, Princeton: Princeton University Press, 2007 RESERVE

Phelps, Edmund, "Economic Underperformance in Continental Europe: A Prospering Economy Runs on the Dynamism from its Economic Institutions"

Baumol, William J. The Free Market Innovation Machine: Analyzing the Growth Miracle of Capitalism Princeton, 2002. RESERVE

Hirschman, Albert O. The Passions and the Interests: Political Arguments for Capitalism before its Triumph Princeton University Press, 1977.

Schumpeter, Joseph, Capitalism, Socialism and Democracy Perennial 1962. [1942]

Lamoreaux, Naomi R. and Kenneth Sokoloff, "Inventive Activity and the Market for Technology in the United States, 1840-1920 NBER Working Paper No. 7107, 1999.

Gordon, Robert J., "Issues in the Comparison of Welfare between Europe and the United States," paper presented to the Venice Summer Institute Organized by Columbia University's Center on Capitalism and Society and by CESifo, Isola San Servolo, Vennice, July 2006.

Sinn, Hans-Werner, "The Welfare State and the Forces of Globalization," paper presented to the Venice Summer Institute Organized by Columbia University's Center on Capitalism and Society and by CESifo, Isola San Servolo, Vennice, July 2006.

23. Concluding Lecture: Overview (Monday December 5)