AEAweb: AER: Contents: June 1999

American Economic Review
Vol. 89, No. 3, June 1999

Contents

The Possibility of Social Choice
Amartya Sen      349-378

Does Trade Cause Growth?
Jeffrey A. Frankel and David Romer      379-399

Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy
Steven Berry, James Levinsohn and Ariel Pakes      400-430

Aid, Nontraded Goods, and the Transfer Paradox in Small Countries
Makoto Yano and Jeffrey B. Nugent      431-449

A Schumpeterian Model of Protection and Relative Wages
Elias Dinopoulos and Paul Segerstrom      450-472

The Twin Crises: The Causes of Banking and Balance-of-Payments Problems
Graciela L. Kaminsky and Carmen M. Reinhart      473-500

Competing for Endorsements
Gene M. Grossman and Elhanan Helpman      501-524

Follow the Leader: Theory and Evidence on Political Participation
Ron Shachar and Barry Nalebuff      525-547

What's in a Name? Reputation as a Tradeable Asset
Steven Tadelis      548-563

The Market for Evaluations
Christopher Avery, Paul Resnick and Richard Zeckhauser      564-584

Unequal Treatment of Identical Agents in Cournot Equilibrium
Stephen W. Salant and Greg Shaffer      585-604

Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela
Brian J. Aitken and Ann E. Harrison      605-618

Roads to Prosperity? Assessing the Link between Public Capital and Productivity
John G. Fernald      619-638

International Stock Market Equilibrium with Heterogenous Tastes
James A. Bennett and Leslie Young      639-648

Unbiased Value Estimates for Environmental Goods: A Cheap Talk Design for the Contingent Valuation Method
Ronald G. Cummings and Laura O. Taylor      649-665

State Taxes and Interstate Hazardous Waste Shipments
Arik Levinson      666-677

Anomalous Behavior in a Traveler's Dilemma?
C. Monica Capra et al.      678-690

Strategic Behavior in Contests: Comment
Michael R. Baye and Onsong Shin      691-693

Strategic Behavior in Contests: Reply
Avinash Dixit      694

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Examining the correlation between trade and income cannot identify the direction of causation between the two. Countries' geographic characteristics, however, have important effects on trade and are plausibly uncorrelated with other determinants of income. This paper, therefore, constructs measures of the geographic component of countries' trade and uses those measures to obtain instrumental variables estimates of the effect of trade on income. The results provide no evidence that ordinary least-squares estimates overstate the effects of trade. Further, they suggest that trade has a quantitatively large and robust, though only moderately statistically significant, positive effect on income.

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The authors evaluate the voluntary export restraint that was initially placed on exports of automobiles from Japan in 1981. They evaluate the impact this policy had on U.S. consumer welfare, firm profits, and foregone tariff revenue from its initiation through 1990.

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This paper constructs a model of the transfer paradox for a small open economy with nontraded goods. It demonstrates that increased production of nontraded goods can change their domestic price so as to offset the otherwise beneficial effect of aid and, under certain conditions, to create a transfer paradox even in a small country. The model is estimated with time-series data for 44 aid-dependent countries for the period 1970-90. The results support the model and show that the nontraded goods expansion effect is more likely to cause immiserization than Harry G. Johnson's (1967) tariff-distorting export-displacement effect.

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This paper presents a dynamic general equilibrium model of R&D-based trade between two structurally identical countries in which both innovation and skill acquisition rates are endogenously determined. Trade liberalization increases R&D investment and the rate of technological change. It also reduces the relative wage of unskilled workers and results in skill upgrading within each industry when R&D is the skilled-labor intensive activity relative to manufacturing of final products. Time-series evidence from the United States and simulation analysis support the empirical relevance of the model, which offers a North-North trade explanation for increasing wage inequality.

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In the wake of the Mexican and Asian currency turmoil, the subject of financial crises have come to the forefront of academic and policy discussions. This paper analyzes the links between banking and currency crises. The authors find that problems in the banking sector typically precede a currency crisis--the currency crisis deepens the banking crisis, activating a vicious spiral; financial liberalization often precedes banking crises. The anatomy of these episodes suggests that crises occur as the economy enters a recession, following a prolonged boom in economic activity that was fueled by credit, capital inflows, and accompanied by an overvalued currency.

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Endorsements are a simple language for communication between interest group leaders and group members. The members, who share policy concerns, may not perfectly understand where their interests lie on certain issues. If their leaders cannot fully explain the issues, they can convey some information by endorsing a candidate or party. When interest groups endorse legislative contenders, the candidates may compete for backing. Policies may favor special interests at the expense of the general public. The authors examine the conditions under which parties compete for endorsements, the extent to which policy outcomes are skewed, and the normative properties of the political equilibria.

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Using state-by-state voting data for U.S. presidential elections, the authors observe that voter turnout is a positive function of predicted closeness. To explain the strategic component of political participation, they develop a follow-the-leader model. Political leaders expend effort according to their chance of being pivotal, which depends on the expected closeness of the race (at both state and national levels) and how voters respond to their effort. Structural estimation supports this model. For example, a 1 percent increase in the predicted closeness at the state level stimulates leaders' efforts, which increases turnout by 0.34 percent.

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The author develops a model in which a firm's only asset is its name, which summarizes its reputation, and studies the forces that cause names to be valuable, tradable assets. An adverse selection model in which shifts of ownership are not observable guarantees an active market for names with either finite or infinite horizons. No equilibrium exists in which only good types buy good names. The reputational dynamics that emerge from the model are more realistic than those in standard game-theoretic reputation models and suggest that adverse selection plays a crucial role in understanding firm reputation.

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Recent developments in computer networks have driven the cost of distributing information virtually to zero, creating extraordinary opportunities for sharing product evaluations. The authors present pricing and subsidy mechanisms that operate through a computerized market and induce the efficient provision of evaluations. The mechanisms overcome three major challenges: first, evaluations, which are public goods, are likely to be underprovided; second, an inefficient ordering of evaluators may arise; and third, the optimal quantity of evaluations depends on what is learned from the initial evaluations.

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Oligopoly models where prior actions by firms affect subsequent marginal costs have been useful in illuminating policy debates in areas such as antitrust regulation, environmental protection, and international competition. The authors discuss properties of such models when a Cournot equilibrium occurs at the second stage. Aggregate production costs strictly decline with no change in gross revenue or gross consumer surplus if the prior actions strictly increase the variance of marginal costs without changing the marginal-cost sum. Therefore, unless the cost of inducing second-stage asymmetry more than offsets this reduction in production costs, the private and social optima are asymmetric.

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Governments often promote inward foreign investment to encourage technology 'spillovers' from foreign to domestic firms. Using panel data on Venezuelan plants, the authors find that foreign equity participation is positively correlated with plant productivity (the 'own-plant' effect), but this relationship is only robust for small enterprises. They then test for spillovers from joint ventures to plants with no foreign investment. Foreign investment negatively affects the productivity of domestically owned plants. The net impact of foreign investment, taking into account these two offsetting effects, is quite small. The gains from foreign investment appear to be entirely captured by joint ventures.

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Does the positive correlation between infrastructure and productivity reflect causation? If so, in which direction? The author finds that, when growth in roads (the largest component of infrastructure) changes, productivity growth changes disproportionately in U.S. industries with more vehicles. That vehicle-intensive industries benefit more from road-building suggests that roads are productive. At the margin, however, road investments do not appear unusually productive. Intuitively, the interstate system was highly productive, but a second one would not be. Road-building thus explains much of the productivity slowdown through a one-time, unrepeatable productivity boost in the 1950s and 1960s.

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