What are the most influential papers in economics? It isn’t easy to rank the most influential papers or economists. Probably Adam Smith, Karl Marx, and John Maynard Keynes are the most influential economists of all time. Unfortunately they lived in a period when there weren’t many academic articles published. RePec ranks economic papers based on citations and you won’t see any of these economists in the top 10.
Another weakness of RePec’s methodology is that econometric methodology papers rank higher and over represented. This doesn’t mean that they have made big contributions to our understanding of the economics science. Arabs invented algebra but nobody cites them in their articles. In our rankings we will exclude papers that are published in econometrics journals.
A third weakness of RePec’s rankings is that macroeconomics is overrepresented because microeconomic research is more advanced and more fragmented. In my opinion one of the most influential papers in economics over the past 50 years is written by Eugene Fama. Efficient Markets Hypothesis directly influenced how trillions of dollars are allocated. Index funds have been gaining popularity partly because of Fama’s ideas. This doesn’t mean that we think the markets are efficient. I did my PhD in financial economics and my research indicated that insiders can outperform the market by large margins. My recent research on hedge funds indicate that certain hedge fund stock picks outperform the market by a mind blowing 18 percentage points per year. We have been sharing the stock picks of this strategy in real time since August 2012. The stocks outperformed the S&P 500 index by more than 52 percentage points in 2 years (see the details here). So, “influential” doesn’t necessarily mean “correct” or “beneficial”.
Another influential paper that didn’t make RePec’s list is Robert Lucas’ 1976 paper that criticized the way economic analysis was done. This is known as “Lucas critique”. This paper basically put an end to large scale econometric model papers that weren’t based on dynamic economic theory. Naturally this paper wasn’t cited in those large scale econometric articles that aren’t done anymore!!
Finally three years ago American Economic Review published a list of top 20 most influential AER articles. The list was compiled by the following economists: Kenneth J. Arrow, B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba, and Robert M. Solow. This list is also very heavy with macroeconomics articles. Our top 2 picks from this list are (taken from the paper):
1. Grossman, Sanford J., and Joseph E. Stiglitz. 1980. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70(3): 393–408.
As pointed out by a number of scholars, in a world of dispersed information, the equilibrium price will itself in general be a source of information to participants, since it incorporates whatever information other participants have. Grossman and Stiglitz examine the implication for the case where information can be acquired at a cost. If there is an equilibrium, some will choose to get informed and others not; the two courses of action must be indifferent. (Very special assumptions are made about the risk aversion characteristics of the population and about its heterogeneity.) In particular, if some individuals can acquire perfect information at a finite cost, then no equilibrium exists, since, if information is acquired by some, it will be reflected in the price and so can be acquired costlessly by others, while if no one acquires information, it will pay any individual to acquire it.
2. Ross, Stephen A. 1973. “The Economic Theory of Agency: The Principal’s Problem.” American Economic Review, 63(2): 134–39.
This paper was the first to describe and analyze the canonical principal-agent problem with moral hazard, which has since become a cornerstone of microeconomic theory. It solved for the optimal compensation scheme using the first-order approach, and compared the solution to the first-best arrangement, noting that the two generally diverge due to the principal’s need to motivate the agent. It characterized the class of utility functions for which the principal’s solution is first-best optimal regardless of the payoff structure, as well as the class of payoff structures for which the solution is first-best optimal regardless of the utility functions. In only a handful of terse pages, it anticipated many of the central issues with which the subsequent literature was concerned.
These are our favorite most influential economics papers. However, according to RePec, here are the 10 most influential papers in economics (this list excludes econometrics paper as well as working papers):
2. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. “Law and Finance,” Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
4. Calvo, Guillermo A., 1983. “Staggered prices in a utility-maximizing framework,” Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
5. Kahneman, Daniel & Tversky, Amos, 1979. “Prospect Theory: An Analysis of Decision under Risk,” Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
6. Jensen, Michael C. & Meckling, William H., 1976. “Theory of the firm: Managerial behavior, agency costs and ownership structure,” Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
7. Dixit, Avinash K & Stiglitz, Joseph E, 1977. “Monopolistic Competition and Optimum Product Diversity,” American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
9. Jensen, Michael C, 1986. “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers,” American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.