AEAweb: AER: Contents: September 2001

American Economic Review
Vol. 91, No. 4, September 2001

Contents

Rising U.S. Earnings Inequality and Family Labor Supply: The Covariance Structure of Intrafamily Earnings
Dean R. Hyslop      755-777

Estimating the Effect of Unearned Income on Labor Earnings, Savings, and Consumption: Evidence from a Survey of Lottery Players
Guido W. Imbens, Donald B. Rubin, and Bruce I. Sacerdote     778-794

Schooling and Labor Market Consequences of School Construction in Indonesia: Evidence from an Unusual Policy Experiment
Esther Duflo      795-813

The Division of Spoils: Rent-Sharing and Discrimination in a Regulated Industry
Sandra E. Black and Philip E. Strahan    814-831

What Accounts for the Variation in Retirement Wealth Among U.S. Households?
B. Douglas Bernheim, Jonathan Skinner, and Steven Weinberg      832-857

Increasing Returns Versus National Product Differentiation as an Explanation for the Pattern of U.S.– Canada Trade
Keith Head and John Ries     858-876

Is Free Trade Good for the Environment?
Werner Antweiler, Brian R. Copeland, and M. Scott Taylor      877-908

Telecommunications Infrastructure and Economic Development: A Simultaneous Approach
Lars-Hendrik Röller and Leonard Waverman      909-923

Social Culture and Economic Performance
Hanming Fang    924-937

A Theory of Political Transitions
Daron Acemoglu and James A. Robinson     938-963

Monetary Policy Rules Based on Real-Time Data
Athanasios Orphanides      964-985

Testing for the Lucas Critique: A Quantitative Investigation
Jesper Lindé     986-1005

Quantifying Quality Growth
Mark Bils and Peter J. Klenow      1006-1030

World Income Components: Measuring and Exploiting Risk-Sharing Opportunities
Stefano G. Athanasoulis and Robert J. Shiller    1031-1054

The Declining Price Anomaly in Dutch Dutch Rose Auctions
Gerard J. van den Berg, Jan C. van Ours, and Menno P. Pradhan      1055-1062

Creating Modern Art: The Changing Careers of Painters in France from Impressionism to Cubism
David W. Galenson and Bruce A. Weinberg      1063-1071

The Law of One Price in Scandinavian Duty-Free Stores
Marcus Asplund and Richard Friberg   1072-1083

VAT Base Broadening, Self Supply, and the Informal Sector
John Piggott and John Whalley      1084-1094

Estimating the Value of Political Connections
Raymond Fisman      1095-1102

The Political Geography of Tax H(e)avens and Tax Hells
Nico A. Hansen and Anke S. Kessler      1103-1115

Individual Risk in an Investment-Based Social Security System
Martin Feldstein and Elena Ranguelova    1116-1125

Longevity Expectations and Death: Can People Predict Their Own Demise?
V. Kerry Smith, Donald H. Taylor, Jr., and Frank A. Sloan      1126-1134

Technological Change, Depletion, and the U.S. Petroleum Industry
John T. Cuddington and Diana L. Moss      1135-1148

Intertemporal Depletion of Resource Sites by Spatially Distributed Users
Gérard Gaudet, Michel Moreaux, and Stephen W. Salant    1149-1159

Comparing Apples to Oranges: Productivity Convergence and Measurement Across Industries and Countries:
Comment Anders Sørensen     1160-1167
Reply Andrew B. Bernard and Charles I. Jones      1168-1169

An Asset Allocation Puzzle:
Comment Isabelle Bajeux-Besnainou, James V. Jordan, and Roland Portait      1170-1179

Incorporating Fairness into Game Theory and Economics:
Comment William Robert Nelson, Jr.      1180-1183

This paper studies the labor supply contributions to individual and family earnings inequality during the period of rising wage inequality in the early 1980’s. Working couples have positively correlated labor market outcomes, which are almost entirely attributable to permanent factors. An intertemporal family labor supply model with this feature is used to estimate labor supply elasticities for husbands of 0.05, and wives of 0.40. This implies that labor supply explains little of the rising annual earnings inequality for married men, but over 20 percent of the rise in family inequality and 50 percent of the modest rise in female inequality. (JEL C23, J22)

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This paper provides empirical evidence about the effect of unearned income on earnings, consumption, and savings. Using an original survey of people playing the lottery in Massachusetts in the mid-1980’s, we analyze the effects of the magnitude of lottery prizes on economic behavior. The critical assumption is that among lottery winners the magnitude of the prize is randomly assigned. We find that unearned income reduces labor earnings, with a marginal propensity to consume leisure of approximately 11 percent, with larger effects for individuals between 55 and 65 years old. After receiving about half their prize, individuals saved about 16 percent. (JEL C81, D12, E21, J22, J26)

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Between 1973 and 1978, the Indonesian government engaged in one of the largest school construction programs on record. Combining differences across regions in the number of schools constructed with differences across cohorts induced by the timing of the program suggests that each primary school constructed per 1,000 children led to an average increase of 0.12 to 0.19 years of education, as well as a 1.5 to 2.7 percent increase in wages. This implies estimates of economic returns to education ranging from 6.8 to 10.6 percent. (JEL I2, J31, O15, O22)

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Until the middle of the 1970’s, regulations constrained banks’ ability to enter new markets. Over the subsequent 25 years, states gradually lifted these restrictions. This paper tests whether rents fostered by regulation were shared with labor, and whether firms were discriminating by sharing these rents disproportionately with male workers. We find that average compensation and average wages for banking employees fell after states deregulated. Male wages fell by about 12 percent after deregulation, whereas women’s wages fell by only 3 percent, suggesting that rents were shared mainly with men. Women’s share of employment in managerial positions also increased following deregulation. (JEL G2, J3, J7, L5)

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Even among households with similar socioeconomic characteristics, saving and wealth vary considerably. Life-cycle models attribute this variation to differences in time preference rates, risk tolerance, exposure to uncertainty, relative tastes for work and leisure at advanced ages, and income replacement rates. These factors have testable implications concerning the relation between accumulated wealth and the shape of the consumption profile. Using the Panel Study of Income Dynamics and the Consumer Expenditure Survey, we find little support for these implications. The data are instead consistent with “rule of thumb,” “mental accounting,” or hyperbolic discounting theories of wealth accumulation. (JEL D1, D91, E21)

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We evaluate two alternative models of international trade in differentiated products. An increasing returns model where varieties are linked to firms predicts home market effects: increases in a country’s share of demand cause disproportionate increases in its share of output. In contrast, a constant returns model with national product differentiation predicts a less than proportionate increase. We examine a panel of U.S. and Canadian manufacturing industries to test the models. Although we find support for either model, depending on whether we estimate based on within or between variation, the preponderance of the evidence supports national product differentiation. (JEL F12, F15)

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This paper investigates how openness to international goods markets affects pollution concentrations. We develop a theoretical model to divide trade’s impact on pollution into scale, technique, and composition effects and then examine this theory using data on sulfur dioxide concentrations. We find international trade creates relatively small changes in pollution concentrations when it alters the composition of national output. Estimates of the trade-induced technique and scale effects imply a net reduction in pollution from these sources. Combining our estimates of all three effects yields a somewhat surprising conclusion: freer trade appears to be good for the environment. (JEL F11, Q25)

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In this paper we investigate how telecommunications infrastructure affects economic growth. We use evidence from 21 OECD countries over a 20-year period to examine the impacts that telecommunications developments may have had. We jointly estimate a micromodel for telecommunication investment with a macro production function. We find evidence of a significant positive causal link, especially when a critical mass of telecommunications infrastructure is present. Interestingly, the critical mass appears to be at a level of telecommunications infrastructure that is near universal service. (JEL O57, O47, L69)

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The connection between obtaining higher paying jobs and undertaking some seemingly irrelevant activity is interpreted as “social culture.” In the context of a society trying to adopt a new technology, I show that by allowing the firms to give preferential treatment to workers based on some “cultural activity,” the society can partially overcome an informational free-riding problem. Therefore, social culture may affect the economic performance by altering the effective production technology of the economy. (JEL P17, Z13)

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We develop a theory of political transitions inspired by the experiences of Western Europe and Latin America. Nondemocratic societies are controlled by a rich elite. The initially disenfranchised poor can contest power by threatening revolution, especially when the opportunity cost is low, for example, during recessions. The threat of revolution may force the elite to democratize. Democracy may not consolidate because it is redistributive, and so gives the elite an incentive to mount a coup. Highly unequal societies are less likely to consolidate democracy, and may end up oscillating between regimes and suffer substantial fiscal volatility. (JEL D72, D74, O15, P16)

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This paper examines the magnitude of informational problems associated with the implementation and interpretation of simple monetary policy rules. Using Taylor’s rule as an example, I demonstrate that real-time policy recommendations differ considerably from those obtained with ex post revised data. Further, estimated policy reaction functions based on ex post revised data provide misleading descriptions of historical policy and obscure the behavior suggested by information available to the Federal Reserve in real time. These results indicate that reliance on the information actually available to policy makers in real time is essential for the analysis of monetary policy rules. (JEL E52, E58)

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In this paper, I try to shed some new light on the “puzzle” of why the Lucas critique, believed to be important by most economists, seems to have received very little empirical support. I use a real-business-cycle model to verify that the Lucas critique is quantitatively important in theory, and to examine the properties of the super-exogeneity test, which is used to detect the applicability of the Lucas critique in practice. The results suggest that the superexogeneity test is not capable of detecting the relevance of the Lucas critique in practice in small samples. (JEL C52, C22, E41)

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Using U.S. Consumer Expenditure Surveys, we estimate “quality Engel curves” for 66 durable goods based on the extent richer households pay more for each good. The same data show that the average price paid rises faster from 1980 to 1996 for goods with steeper quality Engel curves, as if households are ascending these curves. BLS prices likewise increase more quickly for goods with steeper quality Engel curves, suggesting the BLS does not fully net out the impact of quality upgrading. We estimate that annual quality growth averages 3.7 percent for our goods, with 2.2 percent showing up as higher inflation. (JEL D12, O40, E31)

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A method is constructed for decomposing the variance of changes in incomes in the world into components, to indicate the most important risk-sharing opportunities among people of the world. A constant absolute risk premium (CARP) model, an intertemporal general-equilibrium model of the world, is presented to permit optimal contract design. For a contract designer maximizing a social welfare function, the optimal contracts maximize the equilibrium world real interest rate. Securities are defined in terms of eigenvectors of a transformed variance matrix. The method is applied using Penn World Table data on the G-7 countries, 1950–1992. (JEL F00, G00, G10)

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The Law of One Price in Scandinavian Duty-Free Stores
Marcus Asplund and Richard Friberg   

No abstract available.

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VAT Base Broadening, Self Supply, and the Informal Sector
John Piggott and John Whalley         

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Estimating the Value of Political Connections
Raymond Fisman        

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The Political Geography of Tax H(e)avens and Tax Hells
Nico A. Hansen and Anke S. Kessler      

No abstract available.

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Individual Risk in an Investment-Based Social Security System
Martin Feldstein and Elena Ranguelova      

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Longevity Expectations and Death: Can People Predict Their Own Demise?
V. Kerry Smith, Donald H. Taylor, Jr., and Frank A. Sloan      

No abstract available.

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Technological Change, Depletion, and the U.S. Petroleum Industry
John T. Cuddington and Diana L. Moss      

No abstract available.

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Intertemporal Depletion of Resource Sites by Spatially Distributed Users
Gérard Gaudet, Michel Moreaux, and Stephen W. Salant    

No abstract available.

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Comparing Apples to Oranges: Productivity Convergence and Measurement Across Industries and Countries:

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Anders Sørensen     

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Andrew B. Bernard and Charles I. Jones     

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An Asset Allocation Puzzle:

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Isabelle Bajeux-Besnainou, James V. Jordan, and Roland Portait     

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Incorporating Fairness into Game Theory and Economics:

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Comment William Robert Nelson, Jr.     

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