AEAweb: AER: Contents: March 2000

American Economic Review
Vol. 90, No. 1, March 2000

Contents

Population, Food, and Knowledge
D. Gale Johnson      1-14

Optimal Adoption of Complementary Technologies
Boyan Jovanovic and Dmitriy Stolyarov      15-29

Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States
Joe Peek and Eric S. Rosengren      30-45

Endogenous Inequality in Integrated Labor Markets with Two-Sided Search
George J. Mailath, Larry Samuelson and Avner Shaked      46-72

Labor-Market Integration, Investment in Risky Human Capital, and Fiscal Competition
David E. Wildasin      73-95

Unequal Societies: Income Distribution and the Social Contract
Roland Benabou      96-129

Mobility, Targeting, and Private-School Vouchers
Thomas J. Nechyba      130-146

Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?
Thomas F. Hellman, Kevin C. Murdock and Joseph E. Stiglitz      147-165

ERC: A Theory of Equity, Reciprocity, and Competition
Gary E. Bolton and Axel Ockenfels      166-193

The Choice between Market Failures and Corruption
Daron Acemoglu and Thierry Verdier      194-211

Elephants
Michael Kremer and Charles Morcom      212-234

Credit Rationing?
Dan Bernhardt      235-239

Third-Degree Price Discrimination in Input Markets: Output and Welfare
Yoshihiro Yoshida      240-246

A Simple Mechanism for the Efficient Provision of Public Goods: Experimental Evidence
Josef Falkinger, et al.      247-264

Limiting Buyer Discretion: Effects on Performance and Price in Long-Term Contracts
Lisa J. Cameron      265-281

Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions
Rainer Klump and Olivier de La Grandville      282-291

Economies of Scale and Constant Returns to Capital: A Neglected Early Contribution to the Theory of Economic Growth
Edmund S. Cannon      292-295

Naked Exclusion: Comment
Ilya R. Segal and Michael D. Whinston      296-309

Naked Exclusion: Reply
Eric B. Rasmusen, J. Mark Ramseyer and John Shepard Wiley, Jr.      310-311

The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes: Comment
Clemens J. M. Kool and Alex Lammertsma      312-315

Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks: Comment
Frank Heinemann      316-318

The Deadweight Loss of Christmas: Comment
Bradley J. Ruffle and Orit Tykocinski      319-324

The Deadweight Loss of Christmas: Reply
Sara J. Solnick and David Hemenway      325

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When a production process requires two extremely complementary inputs, conventional wisdom holds that a firm would always upgrade them simultaneously. We show, however, that if upgrading each input involves a fixed cost, the firm may upgrade them at different dates, "asynchronously." This insight helps us understand why productivity rises with the age of a plant, why investment in structures is more spiked than equipment investment, and why plants have spare capacity. The bigger point of the paper is that complementarity does not necessarily imply comovement--not even for a single decision maker.

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The Japanese banking crisis provides a natural experiment to test whether a loan supply shock can affect real economic activity. Because the shock was external to U.S. credit markets, yet connected through the Japanese bank penetration of U.S. markets, this event allows us to identify an exogenous loan supply shock and ultimately link that shock to construction activity in U.S. commercial real estate markets. We exploit the variation across geographically distinct commercial real estate markets to establish conclusively that loan supply shocks emanating from Japan had real effects on economic activity in the United States.

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We consider a market with "red" and "green" workers, where labels are payoff irrelevant. Workers may acquire skills. Skilled workers search for vacancies, while firms search for workers. A unique symmetric equilibrium exists in which color is irrelevant. There are also asymmetric equilibria in which firms search only for green workers, more green than red workers acquire skills, skilled green workers receive higher wages, and the unemployment rate is higher among skilled red workers. Discrimination between ex ante identical individuals arises in equilibrium, and yet firms have perfect information about their workers, and strictly prefer to hire minority workers.

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This paper presents a general-equilibrium model where human capital investment increases specialization and exposes skilled workers to region-specific earnings risk Interjurisdictional mobility of skilled labor mitigates these risks; state-contingent migration of skilled labor also improves efficiency. With perfect capital markets, labor-market integration raises welfare and reduces ex post earnings inequality. If instead human capital investment can only be financed through local taxes, labor-market integration leads to interjurisdictional fiscal competition, shifting the burden of taxation to low-skilled immobile workers. Decentralized public provision of human capital investment creates earnings inequalities and is inefficient.

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This paper develops a theory of inequality and the social contract aiming to explain how countries with similar economic and political "fundamentals" can sustain such different systems of social insurance, fiscal redistribution, and education finance as those, of the United States and Western Europe. With imperfect credit and insurance markets some redistributive policies can improve ex ante welfare, and this implies that their political support tends to decrease with inequality. Conversely, with credit constraints, lower redistribution translates into more persistent inequality; hence the potential for multiple steady states, with mutually reinforcing high inequality and low redistribution, or vice versa.

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This paper uses general-equilibrium simulations to explore the role of residential mobility in shaping the impact of different private-school voucher policies. The simulations are derived from a three-district model of low-, middle-, and high-income school districts (calibrated to New York data) with housing stocks that vary within and across districts. In this model, it is demonstrated that school-district targeted vouchers are similar in their impact to non targeted vouchers but vastly different from vouchers targeted to low-income households. Furthermore, strong migration effects are shown to significantly improve the likely equity consequences of voucher programs.

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In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also have a perverse effect of harming banks' franchise values, thus encouraging gambling. Pareto-efficient outcomes can be achieved by adding deposit-rate controls as a regulatory instrument, since they facilitate prudent investment by increasing franchise values. Even if deposit-rate ceilings are not binding on the equilibrium path, they may be useful in deterring gambling off the equilibrium path.

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We demonstrate that a simple model, constructed on the premise that people are motivated by both their pecuniary payoff and their relative payoff standing, organizes a large and seemingly disparate set of laboratory observations as one consistent pattern. The model is incomplete information but nevertheless posed entirely in terms of directly observable variables. The model explains observations from games where equity is thought to be a factor, such as ultimatum and dictator, games where reciprocity is thought to play a role, such as the prisoner's dilemma and gift exchange, and games where competitive behavior is observed, such as Bertrand markets.

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Because government intervention transfers resources from one party to another, it creates room for corruption. As corruption often undermines the purpose of the intervention, governments will try to prevent it. They may create rents for bureaucrats, induce a misallocation of resources, and increase the size of the bureaucracy. Since preventing all corruption is excessively costly, second-best intervention may involve a certain fraction of bureaucrats accepting bribes. When corruption is harder to prevent, there may be both more bureaucrats and higher public-sector wages. Also, the optimal degree of government intervention may be nonmonotonic in the level of income.

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Many open-access resources, such as elephants, are used to produce storable goods. Anticipated future scarcity of these resources will increase current prices and poaching. This implies that, for given initial conditions, there may be rational expectations equilibria leading to both extinction and survival. The cheapest way for governments to eliminate extinction equilibria may be to commit to tough antipoaching measures if the population falls below a threshold. For governments without credibility, the cheapest way to eliminate extinction equilibria may be to accumulate a sufficient stockpile of the storable good and threaten to sell it should the population fall.

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