American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Bad Beta, Good Beta John Y.Campbell TuomoVuolteenaho 1249 1275 This paper explains the size and value "anomalies" in stock returns using an economically motivated two-beta model. We break the beta of a stock with the market portfolio into two components, one reflecting news about the market's future cash flows and one reflecting news about the market's discount rates. Intertemporal asset pricing theory suggests that the former should have a higher price of risk; thus beta, like cholesterol, comes in "bad" and "good" varieties. Empirically, we find that value stocks and small stocks have considerably higher cash-flow betas than growth stocks and large stocks, and this can explain their higher average returns. The poor performance of the capital asset pricing model (CAPM) since 1963 is explained by the fact that growth stocks and high-past-beta stocks have predominantly good betas with low risk prices. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=1&issue_date=December 2004 10.1257/0002828043052240 http://www.e-aer.org/data/dec04_data_campbell.zip http://www.aeaweb.org/aer/contents/appendices/dec04_app_campbell.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization JosephChen HarrisonHong MingHuang Jeffrey D.Kubik 1276 1302 We investigate the effect of scale on performance in the active money management industry. We first document that fund returns, both before and after fees and expenses, decline with lagged fund size, even after accounting for various performance benchmarks. We then explore a number of potential explanations for this relationship. This association is most pronounced among funds that have to invest in small and illiquid stocks, suggesting that these adverse scale effects are related to liquidity. Controlling for its size, a fund's return does not deteriorate with the size of the family that it belongs to, indicating that scale need not be bad for performance depending on how the fund is organized. Finally, using data on whether funds are solo-managed or team-managed and the composition of fund investments, we explore the idea that scale erodes fund performance because of the interaction of liquidity and organizational diseconomies. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=2&issue_date=December 2004 10.1257/0002828043052277 http://www.e-aer.org/data/dec04_data_hong.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article The Interest Rate, Learning, and Inventory Investment Louis J.Maccini Bartholomew J.Moore HuntleySchaller 1303 1327 This paper presents a model that provides an explanation, based on regime switching in the real interest rate and learning, of why tests based on stock adjustment models, Euler equations, or decision rules—which emphasize short-run fluctuations in inventories and the interest rate—are unlikely to uncover a negative relationship between inventories and the real interest rate. The model, however, predicts that inventories will respond to long-run movements, that is, to regime shifts in the real interest rate. Tests emphasizing cointegration techniques confirm this prediction and show a significant long-run relationship between inventories and the real interest rate. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=3&issue_date=December 2004 10.1257/0002828043052295 http://www.e-aer.org/data/dec04_data_schaller.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Markups, Aggregation, and Inventory Adjustment DanieleCoen-Pirani 1328 1353 In this paper I suggest a unified explanation for two puzzles in the inventory literature: first, estimates of inventory speeds of adjustment in aggregate data are very small relative to the apparent rapid reaction of stocks to unanticipated variations in sales. Second, estimates of inventory speeds of adjustment in firm-level data are significantly higher than in aggregate data. The paper develops a multisector model where inventories are held to avoid stockouts, and price markups vary along the business cycle. The omission of countercyclical markup variations from inventory targets introduces a downward bias in estimates of adjustment speeds obtained from partial adjustment models. When the cyclicality of markups differs across sectors, this downward bias is shown to be more severe with aggregate rather than firm-level data. Similar results apply not only to inventories, but also to labor and prices. Montercarlo simulations of a calibrated version of the model suggest that these biases are quantitatively significant. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=4&issue_date=December 2004 10.1257/0002828043052376 http://www.e-aer.org/data/dec04_data_coen.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Intergenerational Persistence of Earnings: The Role of Early and College Education DiegoRestuccia CarlosUrrutia 1354 1378 Recent empirical evidence from the United States indicates a high degree of persistence in earnings across generations. Designing effective public policies to increase social mobility requires identifying and measuring the major sources of persistence and inequality in earnings. We provide a quantitative model of intergenerational human capital transmission that focuses on three sources: innate ability, early education, and college education. We find that approximately one-half of the intergenerational correlation in earnings is accounted for by parental investment in education, in particular early education. We show that these results have important implications for education policy. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=5&issue_date=December 2004 10.1257/0002828043052213 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Constructing Price Indexes across Space and Time: The Case of the European Union Robert J.Hill 1379 1410 This paper considers the problem of how to construct and reconcile price indexes across space and time. A general taxonomy of panel price index methods, containing four broad classes, is proposed, along with five criteria for discriminating between them. Methods from each of the four classes are then used to compute spatial and temporal price indexes for the 15 countries of the European Union (EU) over the period 1995–2000. Using these panel price indexes, I test whether or not price levels and relative prices converged across the EU over this period. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=6&issue_date=December 2004 10.1257/0002828043052178 http://www.e-aer.org/data/dec04_data_hill.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Rationalizing the Penn World Table: True Multilateral Indices for International Comparisons of Real Income J. PeterNeary 1411 1428 Real incomes are routinely compared internationally using methods that "correct" for deviations from purchasing power parity. The most widely used of these is the Geary method which, though theoretically suspect, underlies the Penn World Table. This paper provides a theoretical foundation for the Geary method which I call the GAIA ( "Geary-Allen International Accounts" ) system. I show that the Geary method is exact when preferences are non-homothetic Leontief and, more generally, gives a ( possibly poor ) approximation to the GAIA benchmark. An empirical application suggests that both it and other widely used methods underestimate the degree of international inequality. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=7&issue_date=December 2004 10.1257/0002828043052286 http://www.e-aer.org/data/dec04_data_neary.zip http://www.aeaweb.org/aer/contents/appendices/dec04_app_neary.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Gibrat's Law for (All) Cities JanEeckhout 1429 1451 Two empirical regularities concerning the size distribution of cities have repeatedly been established: Zipf's law holds (the upper tail is Pareto), and city growth is proportionate. Census 2000 data are used covering the entire size distribution, not just the upper tail. The nontruncated distribution is shown to be lognormal, rather than Pareto. This provides a simple justification for the coexistence of proportionate growth and the resulting lognormal distribution. An equilibrium theory of local externalities that can explain the empirical size distribution of cities is proposed. The driving force is a random productivity process of local economies and the perfect mobility of workers. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=8&issue_date=December 2004 10.1257/0002828043052303 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article An Efficient Ascending-Bid Auction for Multiple Objects Lawrence M.Ausubel 1452 1475 When bidders exhibit multi-unit demands, standard auction methods generally yield inefficient outcomes. This article proposes a new ascending-bid auction for homogeneous goods, such as Treasury bills or telecommunications spectrum. The auctioneer announces a price and bidders respond with quantities. Items are awarded at the current price whenever they are "clinched," and the price is incremented until the market clears. With private values, this (dynamic) auction yields the same outcome as the (sealed-bid) Vickrey auction, but has advantages of simplicity and privacy preservation. With interdependent values, this auction may retain efficiency, whereas the Vickrey auction suffers from a generalized Winner's Curse. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=9&issue_date=December 2004 10.1257/0002828043052330 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article A Group Rule–Utilitarian Approach to Voter Turnout: Theory and Evidence StephenCoate MichaelConlin 1476 1504 This paper explores a group rule–utilitarian approach to understanding voter turnout, inspired by the theoretical work of John C. Harsanyi (1980) and Timothy J. Feddersen and Alvaro Sandroni (2002). It develops a model based on this approach and studies its performance in explaining turnout in Texas liquor referenda. The results are encouraging: the comparative static predictions of the model are broadly consistent with the data, and a structurally estimated version of the model yields reasonable coefficient estimates and fits the data well. The structurally estimated model also outperforms a simple expressive voting model. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=10&issue_date=December 2004 10.1257/0002828043052231 http://www.e-aer.org/data/dec04_data_coate.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article When Does Learning in Games Generate Convergence to Nash Equilibria? The Role of Supermodularity in an Experimental Setting YanChen RobertGazzale 1505 1535 This study clarifies the conditions under which learning in games produces convergence to Nash equilibria in practice. We experimentally investigate the role of supermodularity, which is closely related to the more familiar concept of strategic complementarities, in achieving convergence through learning. Using a game from the literature on solutions to externalities, we find that supermodular and "near-supermodular" games converge significantly better than those far below the threshold of supermodularity. From a little below the threshold to the threshold, the improvement is statistically insignificant. Increasing the parameter far beyond the threshold does not significantly improve convergence. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=11&issue_date=December 2004 10.1257/0002828043052349 http://www.e-aer.org/data/dec04_data_gazzale.zip http://www.aeaweb.org/aer/contents/appendices/dec04_app_gazzale.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Confidence-Enhanced Performance OlivierCompte AndrewPostlewaite 1536 1557 There is ample evidence that emotions affect performance. Positive emotions can improve performance, while negative ones can diminish it. For example, the fears induced by the possibility of failure or of negative evaluations have physiological consequences (shaking, loss of concentration) that may impair performance in sports, on stage, or at school. There is also ample evidence that individuals have distorted recollection of past events and distorted attributions of the causes of success or failure. Recollection of good events or successes is typically easier than recollection of bad ones or failures. Successes tend to be attributed to intrinsic aptitudes or effort, while failures are attributed to bad luck. In addition, these attributions are often reversed when judging the performance of others. The objective of this paper is to incorporate the phenomenon that emotions affect performance into an otherwise standard decision theoretic model and show that in a world where performance depends on emotions, biases in information processing enhance welfare. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=12&issue_date=December 2004 10.1257/0002828043052204 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Addiction and Cue-Triggered Decision Processes B. DouglasBernheim AntonioRangel 1558 1590 We propose a model of addiction based on three premises: (i) use among addicts is frequently a mistake; (ii) experience sensitizes an individual to environmental cues that trigger mistaken usage; (iii) addicts understand and manage their susceptibilities. We argue that these premises find support in evidence from psychology, neuroscience, and clinical practice. The model is tractable and generates a plausible mapping between behavior and the characteristics of the user, substance, and environment. It accounts for a number of important patterns associated with addiction, gives rise to a clear welfare standard, and has novel implications for policy. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=13&issue_date=December 2004 10.1257/0002828043052222 http://www.aeaweb.org/aer/contents/appendices/dec04_app_bernheim.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Capturing Knowledge within and across Firm Boundaries: Evidence from Clinical Development PierreAzoulay 1591 1612 How do firm boundaries influence employees' acquisition of information? Using detailed project-level data and qualitative evidence, I document that pharmaceutical firms are more likely to outsource the coordination of data-intensive clinical trials, while they are more likely to assign knowledge-intensive trials to internal teams. Managers do not choose between market and hierarchy, but between the hierarchy of the firm—in which subjective performance evaluations are combined with flat explicit incentives—and the hierarchy of its subcontractor—whose virtue stems precisely from the ability to provide high-powered incentives on a narrow set of monitorable tasks. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=14&issue_date=December 2004 10.1257/0002828043052259 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Does School Integration Generate Peer Effects? Evidence from Boston's Metco Program Joshua D.Angrist KevinLang 1613 1634 The Metropolitan Council for Educational Opportunity (Metco) is a desegregation program that sends students from Boston schools to more affluent suburbs. Metco increases the number of blacks and reduces test scores in receiving districts. School-level data for Massachusetts and micro data from a large district show no impact of Metco on the scores of white non-Metco students. But the micro estimates show some evidence of an effect on minority third graders, especially girls. Instrumental variables estimates for third graders are imprecise but generally in line with ordinary least squares estimates. Given the localized nature of these results, we conclude that peer effects from Metco are modest and short lived. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=15&issue_date=December 2004 10.1257/0002828043052169 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article International Protection of Intellectual Property Gene M.Grossman Edwin L.-C.Lai 1635 1653 We study the incentives that governments have to protect intellectual property in a trading world economy. We consider a world economy with ongoing innovation in two countries that differ in market size and in their capacity for innovation. After describing the determination of national patent policies in a noncooperative regime of patent protection, we ask, "Why is intellectual property better protected in the North than in the South?" We also study international patent agreements by deriving the properties of an efficient global regime of patent protection and asking whether harmonization of patent policies is necessary or sufficient for global efficiency. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=16&issue_date=December 2004 10.1257/0002828043052312 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Riding the South Sea Bubble PeterTemin Hans-JoachimVoth 1654 1668 This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare's Bank, a fledgling West End London bank, knew that a bubble was in progress and nonetheless invested in the stock: it was profitable to "ride the bubble." Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by such institutional factors as restrictions on short sales or agency problems. Instead, this study demonstrates that predictable investor sentiment can prevent attacks on a bubble; rational investors may attack only when some coordinating event promotes joint action. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=17&issue_date=December 2004 10.1257/0002828043052268 http://www.e-aer.org/data/dec04_data_temin.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Why Parents Play Favorites: Explanations for Unequal Bequests AudreyLight KathleenMcGarry 1669 1681 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=18&issue_date=December 2004 10.1257/0002828043052321 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Partnership Firms, Reputation, and Human Capital Alan D.Morrison William J.WilhelmJr 1682 1692 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=19&issue_date=December 2004 10.1257/0002828043052367 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article The Effect of Health Risk on Housing Values: Evidence from a Cancer Cluster Lucas W.Davis 1693 1704 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=20&issue_date=December 2004 10.1257/0002828043052358 http://www.e-aer.org/data/dec04_data_davis.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Progressive Taxation and Long-Run Growth LiWenli Pierre -DanielSarte 1705 1716 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=21&issue_date=December 2004 10.1257/0002828043052196 http://www.e-aer.org/data/dec04_data_sarte.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 94 5 December 2004 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=94&issue=5&issue_date=December 2004 Journal Article Social Comparisons and Pro-social Behavior: Testing "Conditional Cooperation" in a Field Experiment Bruno S.Frey StephanMeier 1717 1722 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=5&article=22&issue_date=December 2004 10.1257/0002828043052187 ecapitulating early results characterizing the learning process. We then report results from an initial experiment in which we find a surprising degree of positive cross-game learning, contrary to the predictions of commonly employed learning models and to the findings of cognitive psychologists. We next explore two features of the environment that help to explain when and why this positive transfer occurs. First, we examine the effects of abstract versus meaningful context, an issue that has been largely ignored by economists out of the belief that behavior is largely dictated by the deep mathematical structure of a game. In contrast, results from cognitive psychology suggest that behavior may well be sensitive to context employed. Our results show that the use of meaningful context serves as a catalyst for positive transfer. Second, we explore how play by two-person teams differs from play by individuals. The psychology literature is quite pessimistic about the ability of teams to beat a "truth wins" standard based on performance of individuals. But teams easily surpass this norm in our cross-game experiment. We use the dialogues between team members to gain insight into how this transfer occurs, gaining direct confirmation for hypotheses generated by econometric analysis of earlier data. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=93&issue=2&article=33&issue_date=May 2003 10.1257/000282803321947056 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 93 2 May 2003 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=93&issue=2&issue_date=May 2003 Journal Article Testing Political Economy Models of Reform in the Laboratory Timothy N.Cason Vai-LamMui 208 212 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=93&issue=2&article=34&issue_date=May 2003 10.1257/000282803321947065 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 93 2 May 2003 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=93&issue=2&issue_date=May 2003 Journal Article What Can Be Learned from Skeletons that Might Interest Economists, Historians, and Other Social Scientists? Richard H.Steckel 213 220 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=93&issue=2&article=35&issue_date=May 2003 10.1257/000282803321947074 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 93 2 May 2003 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=93&issue=2&issue_date=May 2003 Journal Article