AEAweb: AER: Contents: March 2001

The American Economic Review
Vol. 91, No. 1, March 2001

Contents

Information Technology and the U.S. Economy
Dale W. Jorgenson      1-32

The Personal Discount Rate: Evidence from Military Downsizing Programs
John T. Warner and Saul Pleeter      33-53

Dividends and Expropriation
Mara Faccio, Larry H. P. Lang, and Leslie Young      54-78

Naive Diversification Strategies in Defined Contribution Saving Plans
Shlomo Benartzi and Richard H. Thaler      79-98

Who Should Buy Long-Term Bonds?
John Y. Campbell and Luis M. Viceira      99-127

The Effects of Investing Social Security Funds in the Stock Market When Fixed Costs Prevent Some Households from Holding Stocks
Andrew B. Abel      128-148

Habit Persistence, Asset Returns, and the Business Cycle
Michele Boldrin, Lawrence J. Christiano, and Jonas D. M. Fisher      149-166

Monetary Policy and Multiple Equilibria
Jess Benhabib, Stephanie Schmitt-Grohé, and Martín Uribe      167-186

What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets
Olivier Blanchard and Pedro Portugal    187-207

Local Discouragement and Global Collapse: A Theory of Coordination Avalanches
Thomas D. Jeitschko and Curtis R. Taylor       208-224

The Provision of Public Goods Under Alternative Electoral Incentives
Alessandro Lizzeri and Nicola Persico      225-245

Proofs and Prototypes for Sale: The Licensing of University Inventions
Richard Jensen and Marie Thursby     240-259

Gamma Discounting
Martin L. Weitzman      260-271

Race, Roosevelt, and Wartime Production: Fair Employment in World War II Labor Markets
William Collins      272-286

Tallest in the World: Native Americans of the Great Plains in the Nineteenth Century
Richard Steckel and Joseph M. Prince      287-294

The Market Evaluation of Criminality: Evidence from the Auction of British Convict Labor in America, 1767-1775
Farley Grubb      295-304

Household Debt and the Tax Reform Act of 1986
Dean M. Maki      305-319

State-Owned and Privately Owned Firms: An Empirical Analysis of Profitability, Leverage, and Labor Intensity
Kathryn L. Dewenter and Paul H. Malatesta      320-334

Preferences Over Inflation and Unemployment: Evidence from Surveys of Happiness
Rafael De Tella, Robert J. MacCulloch, and Andrew J. Oswald      335-341

Firm-Specific Human Capital as a Shared Investment: Comment
Edwin Leuven and Hessel Oosterbeek      342-347

Firm-Specific Human Capitol as a Shared Investment: Reply
Masanori Hashimoto      348-349

No abstract available.

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The military drawdown program of the early 1990’s provides an opportunity to obtain estimates of personal discount rates based on large numbers of people making real choices involving large sums. The program offered over 65,000 separatees the choice between an annuity and a lump-sum payment. Despite break-even discount rates exceeding 17 percent, most of the separatees selected the lump sum—saving taxpayers $1.7 billion in separation costs. Estimates of discount rates range from 0 to over 30 percent and vary with education, age, race, sex, number of dependents, ability test score, and the size of payment.

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Whereas most U.S. corporations are widely held, the predominant form of ownership in East Asia is control by a family, which often supplies a top manager. These features of “crony capitalism” are actually more pronounced in Western Europe. In both regions, the salient agency problem is expropriation of outside shareholders by controlling shareholders. Dividends provide evidence on this. Group-affiliated corporations in Europe pay higher dividends than in Asia, dampening insider expropriation. Dividend rates are higher in Europe, but lower in Asia, when there are multiple large shareholders, suggesting that they dampen expropriation in Europe, but exacerbate it in Asia.

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There is a worldwide trend toward defined contribution saving plans and growing interest in privatized Social Security plans. In both environments, individuals are given some responsibility to make their own asset-allocation decisions, raising concerns about how well they do at this task. This paper investigates one aspect of the task, namely diversification. We show that some investors follow the “1/n strategy”: they divide their contributions evenly across the funds offered in the plan. Consistent with this naive notion of diversification, we find that the proportion invested in stocks depends strongly on the proportion of stock funds in the plan.

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According to conventional wisdom, long-term bonds are appropriate for conservative long-term investors. This paper develops a model of optimal consumption and portfolio choice for infinite-lived investors with recursive utility who face stochastic interest rates, solves the model using an approximate analytical method, and evaluates conventional wisdom. As risk aversion increases, the myopic component of risky asset demand disappears but the intertemporal hedging component does not. Conservative investors hold assets to hedge the risk that real interest rates will decline. Long-term inflation-indexed bonds are most suitable for this purpose, but nominal bonds may also be used if inflation risk is low.

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With fixed costs of participating in the stock market, consumers with high income will participate in the stock market, but consumers with lower income will not participate. If a fully funded defined-contribution Social Security system tries to exploit the equity premium by selling a dollar of bonds per capita and buying a dollar of equity per capita, consumers who save but do not participate in the stock market will increase their consumption, thereby reducing saving and capital accumulation. Calibration of a general-equilibrium model indicates that this policy could reduce the aggregate capital stock substantially, by about 50 cents per capita.

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Two modifications are introduced into the standard real-business-cycle model: habit preferences and a two-sector technology with limited intersectoral factor mobility. The model is consistent with the observed mean risk-free rate, equity premium, and Sharpe ratio on equity. In addition, its business-cycle implications represent a substantial improvement over the standard model. It accounts for persistence in output, comovement of employment across different sectors over the business cycle, the evidence of “excess sensitivity” of consumption growth to output growth, and the “inverted leading-indicator property of interest rates,” that interest rates are negatively correlated with future output.

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This paper characterizes conditions under which interest-rate feedback rules that set the nominal interest rate as an increasing function of the inflation rate induce aggregate instability by generating multiple equilibria. It shows that these conditions depend not only on the monetary-fiscal regime (as emphasized in the fiscal theory of the price level) but also on the way in which money is assumed to enter preferences and technology. It provides a number of examples in which, contrary to what is commonly believed, active monetary policy gives rise to multiple equilibria and passive monetary policy renders the equilibrium unique.

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Behind similar unemployment rates in the United States and Portugal hide two very different labor markets. Unemployment duration is three times longer in Portugal than in the United States. Symmetrically, flows of workers into unemployment are three times lower in Portugal. These lower flows come in roughly equal proportions from lower job creation and destruction, and from lower worker flows given job creation and destruction. A plausible explanation is high employment protection in Portugal. High employment protection makes economies more sclerotic; but because it affects unemployment duration and worker flows in opposite directions, the effect on unemployment is ambiguous.

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We study a dynamic game in which all players initially possess the same information and coordinate on a high level of activity. Eventually, players with a long string of bad experiences become inactive. This prospect can cause a coordination avalanche in which all activity in the population stops. Coordination avalanches are part of Pareto-efficient equilibria; they can occur at any point in the game; their occurrence does not depend on the true state of nature; and allowing players to exchange information may merely hasten their onset. We present applications to search markets, organizational meltdown, and inefficient computer upgrades.

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Politicians who care about the spoils of office may underprovide a public good because its benefits cannot be targeted to voters as easily as pork-barrel spending. We compare a winner-take-all system—where all the spoils go to the winner—to a proportional system—where the spoils of office are split among candidates proportionally to their share of the vote. In a winner-take-all system the public good is provided less often than in a proportional system when the public good is particularly desirable. We then consider the electoral college system and show that it is particularly subject to this inefficiency.

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Proponents of the Bayh-Dole Act argue that industrial use of federally funded research would be reduced without university patent licensing. Our survey of U.S. universities supports this view, emphasizing the embryonic state of most technologies licensed and the need for inventor cooperation in commercialization. Thus, for most university inventions, there is a moral-hazard problem with inventor effort. For such inventions, development does not occur unless the inventor’s income is tied to the licensee’s output by payments such as royalties or equity. Sponsored research from the licensee cannot by itself solve this problem.

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By incorporating the probability distribution directly into the analysis, this paper proposes a new theoretical approach to resolving the perennial dilemma of being uncertain about what discount rate to use in cost-benefit analysis. A numerical example is constructed from the results of a survey based on the opinions of 2,160 economists. The main finding is that even if every individual believes in a constant discount rate, the wide spread of opinion on what it should be makes the effective social discount rate decline significantly over time. Implications and ramifications of this proposed “gamma-discounting” approach are discussed.

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Firm-Specific Human Capital as a Shared Investment: Comment
Edwin Leuven and Hessel Oosterbeek      

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