AEAweb: AER: Contents: September 1999

American Economic Review
Vol. 89, No. 4, September 1999

Contents

Does Where You Stand Depend on Where You Sit? Tithing Donations and Self-Serving Beliefs
Gordon B. Dahl and Michael R. Ransom      703-727

Do Workplace Smoking Bans Reduce Smoking?
William N. Evans, Matthew C. Farrelly and Edward Montgomery      728-747

The Redesign of the Matching Market for American Physicians: Some Engineering Aspects of Economic Design
Alvin E. Roth and Elliott Peranson      748-780

Gaming against Managers in Incentive Systems: Experimental Results with Chinese Students and Chinese Managers
David J. Cooper, et al.      781-804

Measuring Duopoly Power in the British Electricity Spot Market
Catherine D. Wolfram      805-826

An Empirical Examination of Information Barriers to Trade in Insurance
John Cawley and Tomas Philipson      827-846

Emergence of Money as a Medium of Exchange: An Experimental Study
John Duffy and Jack Ochs      847-877

A Dynamic Economy with Costly Price Adjustments
Leif Danziger      878-901

Household Production and the Excess Sensitivity of Consumption to Current Income
Marianne Baxter and Urban J. Jermann      902-920

Machine Replacement and the Business Cycle: Lumps and Bumps
Russell Cooper, John Haltiwanger and Laura Power      921-946

The Response of Household Consumption to Income Tax Refunds
Nicholas S. Souleles      947-958

The Reaction of Household Consumption to Predictable Changes in Social Security Taxes
Jonathan A. Parker      959-973

Commodity Taxes under Fiscal Competition: Stackelberg Equilibrium and Optimality
You-Qiang Wang      974-981

Rents, Competition, and Corruption
Alberto Ades and Rafael Di Tella      982-993

The Costs of Carbon Sequestration: A Revealed-Preference Approach
Robert N. Stavins      994-1009

Are Risk Regulators Rational? Evidence from Hazardous Waste Cleanup Decisions
W. Kip Viscusi and James T. Hamilton      1010-1027

Models of Energy Use: Putty-Putty versus Putty-Clay
Andrew Atkeson and Patrick J. Kehoe      1028-1043

The Impact of Global Warming on Agriculture: A Ricardian Analysis: Comment
John Quiggin and John K. Horowitz      1044-1045

The Impact of Global Warming on Agriculture: A Ricardian Analysis: Reply
Robert Mendelsohn and William Nordhaus      1046-1048

The Impact of Global Warming on Agriculture: A Ricardian Analysis: Comment
Roy Darwin      1049-1052

The Impact of Global Warming on Agriculture: A Ricardian Analysis: Reply
Robert Mendelsohn and William Nordhaus      1053-1055

Central-Bank Independence, Economic Behavior, and Optimal Term Lengths: Comment
Xiang Lin      1056-1062

Economists and psychologists argue that individuals skew personal beliefs to accord with their own interests. To test for the presence of self-serving beliefs, we surveyed 1,200 members of the Mormon Church about tithing. A tithe is a voluntary contribution equal to 10 percent of income. Since respondents must decide privately what income items to tithe, we observe how the income definition depends on an individual's religious and financial incentives. We find surprisingly little evidence that an individual's financial situation influences beliefs about what counts as income for the tithe. However, ambiguity increases the role for self-serving biases.

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In recent years workplace smoking policies have become increasingly prevalent and restrictive. Using data from two large-scale national surveys, we investigate whether these policies reduce smoking. Our estimates suggest that workplace bans reduce smoking prevalence by 5 percentage points and daily consumption among smokers by 10 percent. Although workers with better health habits are more likely to work at firms with smoking bans, estimates from systems of equations indicate that these results are not subject to an omitted variables bias. The rapid increase in bans can explain all of the recent drop in smoking among workers relative to nonworkers.

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We report on the design of the new clearinghouse adopted by the National Resident Matching Program, which annually fills approximately 20,000 jobs for new physicians. Because the market has complementarities between applicants and between positions, the theory of simple matching markets does not apply directly. However, computational experiments show the theory provides good approximations. Furthermore, the set of stable matchings, and the opportunities for strategic manipulation, are surprisingly small. A new kind of "core convergence" result explains this; that each applicant interviews only a small fraction of available positions is important. We also describe engineering aspects of the design process.

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We examine strategic interactions between firms and planners in China, comparing behavior between: (i) students and managers with field experience with this situation, (ii) standard versus increased monetary incentives, and (iii) sessions conducted "in context," making explicit reference to interactions between planners and managers, and those without any such references. The dynamics of play are similar across treatments with play only gradually, and incompletely, converging on a pooling equilibrium. A fivefold increase in incentives significantly increases initial levels of strategic play. Games played in context generated greater levels of strategic play for managers, with minimal impact on students.

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This article presents an empirical study of market power in the British electricity industry. Estimates of price-cost markups are derived using direct measures of marginal cost and several approaches that do not rely on cost data. Since two suppliers facing inelastic demand dominate the industry, most oligopoly models predict prices substantially above marginal costs. All estimates indicate that prices, while higher than marginal costs, are not nearly as high as most theoretical models predict. Regulatory constraints, the threat of entry, and financial contracts between the suppliers and their customers are considered as possible explanations for the observed price levels.

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This paper uses direct evidence to evaluate whether asymmetric information is a barrier to trade in the largest market for private insurance in the world: life insurance. We report several findings that seem difficult to reconcile with the conventional theory of insurance under asymmetric information. We conjecture that sellers may know their costs of production better than consumers in this market, as in those for most other products.

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This paper reports findings from an experiment that implements a search-theoretic model of money as a medium of exchange. The question examined is whether subjects learn to adopt the same commodities as media of exchange that the model predicts will be used in equilibrium. We report that subjects have a strong tendency to play "fundamental" rather than "speculative" strategies even in environments where speculative strategies yield higher payoffs. We examine some possible motivations for subjects' behavior and conclude that subjects are mainly motivated by past payoff experience as opposed to the marketability considerations that the theory emphasizes.

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This paper studies a general-equilibrium model of a dynamic economy with menu costs. Each firm's productivity is exposed to idiosyncratic and aggregate productivity shocks around a trend, and the money supply to monetary shocks around a trend. All consumption, pricing, and production decisions are based on optimizing behavior. There exists a staggered Markov perfect equilibrium with prices determined by a two-sided (s, S) markup strategy. The paper analyzes the optimal markup strategy and investigates the dynamics of the price index and the aggregate output. The welfare consequences of the uncertain aggregate productivity and money supply are also examined.

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Empirical research on the permanent-income hypothesis (PIH) has found that consumption growth is excessively sensitive to predictable changes in income. This finding is interpreted as strong evidence against the PIH. We propose an explanation for apparent excess sensitivity that is based on a quantitative equilibrium model of household production in which permanent-income consumers respond to shifts in sectoral wages and prices by substituting work effort and consumption across home and market sectors. Although the PIH is true, this mechanism generates apparent excess sensitivity because market consumption responds to predictable income growth.

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This paper explores investment fluctuations due to discrete changes in a plant's capital stock. The resulting aggregate investment dynamics are surprisingly rich, reflecting the interaction between a replacement cycle, the cross-sectional distribution of the age of the capital stock, and an aggregate shock. Using plant-level data, lumpy investment is procyclical and more likely for older capital. Further, the predicted path of aggregate investment that neglects vintage effects tracks actual aggregate investment reasonably well. However, ignoring fluctuations in the cross-sectional distribution of investment vintages can yield predictable nontrivial errors in forecasting changes in aggregate investment.

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