Wow - your neighbors are a nice lot, aren't they? We have some ideas that might help though, and while 'move' is top of the list, if that isn't an option, we have a few others, below.
The emptier the room is, the more sound will echo and travel, so if your nursery is somewhat bare, now might be the time to ditch the minimalist look and get some 'stuff' between the baby and the walls.
The most obvious idea is to move the crib away from a shared wall to an interior wall. Friends of ours also bought large, blank, mounted pieces of canvas from an art supply store and hung them on the wall their nursery shared with the apartment next door, to muffle the noise. The canvases were not left blank - they bought some acrylic paints and had a great time painting their own modern art. Neither are artistic, but the results were still pretty good.
If you really wanted to go all out, you could always blow a popcorn ceiling up - they work as an acoustic baffle, for your neighbors upstairs benefit - but they are very ugly, a pain to get down later, and if you rent, may require a landlord's approval.
AT Nursery readers, how did you handle this situation? We know some of you must have experienced this - what should Dave and his wife do?