American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Articles Evolution and Intelligent Design Thomas J.SargentNYU 5 37 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=1&issue_date=March 2008 10.1257/aer.98.1.5 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Articles Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show ThierryPostErasmus U Rotterdam Martijn J.van den AssemErasmus U Rotterdam GuidoBaltussenErasmus U Rotterdam Richard H.ThalerU Chicago 38 71 We examine the risky choices of contestants in the popular TV game show "Deal or No Deal" and related classroom experiments. Contrary to the traditional view of expected utility theory, the choices can be explained in large part by previous outcomes experienced during the game. Risk aversion decreases after earlier expectations have been shattered by unfavorable outcomes or surpassed by favorable outcomes. Our results point to reference-dependent choice theories such as prospect theory, and suggest that path-dependence is relevant, even when the choice problems are simple and well defined, and when large real monetary amounts are at stake. (JEL D81) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=2&issue_date=March 2008 10.1257/aer.98.1.38 http://www.e-aer.org/data/mar08/20060455_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Articles Rational Expectations in Games Robert J.AumannCenter for Rationality and Interactive Decision Theory, Hebrew U Jerusalem Jacques H.DrezeCORE, Catholic U Louvain 72 86 A player i's actions in a game are determined by her beliefs about other players; these depend on the game's real-life context, not only its formal description. Define a game situation as a game together with such beliefs; call the beliefs -- and i's resulting expectation -- rational if there is common knowledge of rationality and a common prior. In two-person zero-sum games, i's only rational expectation is the game’s value. In an arbitrary game G, we characterize i's rational expectations in terms of the correlated equilibria of the doubled game 2G in which each of i's strategies in G appears twice. (JEL C72, D83, D84) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=3&issue_date=March 2008 10.1257/aer.98.1.72 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Articles Asymmetric Auctions with Resale IsaHafalirCarnegie Mellon U VijayKrishnaPA State U 87 112 We study first- and second-price auctions with resale in a model with independent private values. With asymmetric bidders, the resulting ineffi ciencies create a motive for post-auction trade which, in our model, takes place via monopoly pricing -- the winner makes a take-it-or-leave-it offer to the loser. We show (a) a first-price auction with resale has a unique monotonic equilibrium; and (b) with resale, the expected revenue from a first-price auction exceeds that from a second-price auction. The inclusion of resale possibilities thus permits a general revenue ranking of the two auctions that is not available when these are excluded. (JEL D44) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=4&issue_date=March 2008 10.1257/aer.98.1.87 http://www.e-aer.org/data/mar08/20060848_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Articles Optimal Gerrymandering: Sometimes Pack, but Never Crack John N.FriedmanU CA, Berkeley Richard T.HoldenMIT 113 44 Standard intuitions for optimal gerrymandering involve concentrating one's extreme opponents in "unwinnable" districts ("packing") and spreading one's supporters evenly over "winnable" districts ("cracking"). These intuitions come from models with either no uncertainty about voter preferences or only two voter types. In contrast, we characterize the solution to a problem in which a gerrymanderer observes a noisy signal of voter preferences from a continuous distribution and creates N districts of equal size to maximize the expected number of districts she wins. Under mild regularity conditions, we show that cracking is never optimal -- one's most ardent supporters should be grouped together. Moreover, for sufficiently precise signals, the optimal solution involves creating a district that matches extreme "Republicans" with extreme "Democrats," and then continuing to match toward the center of the signal distribution. (JEL D72) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=5&issue_date=March 2008 10.1257/aer.98.1.113 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Articles When Does Coordination Require Centralization? RicardoAlonsoU Southern CA WouterDesseinU Chicago NikoMatouschekNorthwestern U 145 79 This paper compares centralized and decentralized coordination when managers are privately informed and communicate strategically. We consider a multidivisional organization in which decisions must be adapted to local conditions but also coordinated with each other. Information about local conditions is dispersed and held by self-interested division managers who communicate via cheap talk. The only available formal mechanism is the allocation of decision rights. We show that a higher need for coordination improves horizontal communication but worsens vertical communication. As a result, decentralization can dominate centralization even when coordination is extremely important relative to adaptation. (JEL D23, D83, L23, M11) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=6&issue_date=March 2008 10.1257/aer.98.1.145 http://www.e-aer.org/data/mar08/20060806_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Articles On the Empirical Content of Quantal Response Equilibrium Philip A.HaileYale U AliHortaçsuU Chicago GrigoryKosenokNew Economic School, Moscow 180 200 The quantal response equilibrium (QRE) notion of Richard D. McKelvey and Thomas R. Palfrey (1995) has recently attracted considerable attention, due in part to its widely documented ability to rationalize observed behavior in games played by experimental subjects. However, even with strong a priori restrictions on unobservables, QRE imposes no falsifiable restrictions: it can rationalize any distribution of behavior in any normal form game. After demonstrating this, we discuss several approaches to testing QRE under additional maintained assumptions. (JEL C72, D84) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=7&issue_date=March 2008 10.1257/aer.98.1.180 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Articles A Dynamic Theory of Public Spending, Taxation, and Debt MarcoBattagliniPrinceton U StephenCoateCornell U 201 36 This paper presents a political economy theory of fiscal policy. Policy choices are made by a legislature that can raise revenues via an income tax and by borrowing. Revenues can be used to finance a public good, whose value is stochastic, and pork-barrel spending. Policymaking cycles between a "business- as-usual" regime in which legislators bargain over pork, and a "responsible policymaking" regime in which policies maximize the collective good. Transitions between regimes are brought about by shocks in the value of the public good. Equilibrium tax rates are too high, public good provision is too low, and debt levels are too high. (JEL D72, E62, H20, H50, H60) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=8&issue_date=March 2008 10.1257/aer.98.1.201 http://www.e-aer.org/data/mar08/20060284_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Articles Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets James B.BushnellU CA Energy Institute, U CA, Berkeley Erin T.MansurYale U CelesteSaraviaU CA Energy Institute, U CA, Berkeley 237 66 This paper examines vertical arrangements in electricity markets. Vertically integrated wholesalers, or those with long-term contracts, have less incentive to raise wholesale prices when retail prices are determined beforehand. For three restructured markets, we simulate prices that define bounds on static oligopoly equilibria. Our findings suggest that vertical arrangements dramatically affect estimated market outcomes. Had regulators impeded vertical arrangements (as in California), our simulations imply vastly higher prices than observed and production inefficiencies costing over 45 percent of those production costs with vertical arrangements. We conclude that horizontal market structure accurately predicts market performance only when accounting for vertical structure. (JEL L11, L13, L94) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=9&issue_date=March 2008 10.1257/aer.98.1.237 http://www.e-aer.org/data/mar08/20050207_data.zip http://www.e-aer.org/data/mar08/20050207_app.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Articles Persistence of Power, Elites, and Institutions DaronAcemogluMIT James A.RobinsonHarvard U 267 93 We construct a model to study the implications of changes in political institutions for economic institutions. A change in political institutions alters the distribution of de jure political power, but creates incentives for investments in de facto political power to partially or even fully offset change in de jure power. The model can imply a pattern of captured democracy, whereby a democratic regime may survive but choose economic institutions favoring an elite. The model provides conditions under which economic or policy outcomes will be invariant to changes in political institutions, and economic institutions themselves will persist over time. (JEL D02, D72) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=10&issue_date=March 2008 10.1257/aer.98.1.267 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Articles Betrayal Aversion: Evidence from Brazil, China, Oman, Switzerland, Turkey, and the United States IrisBohnetHarvard U FionaGreigHarvard U BenediktHerrmannU Nottingham RichardZeckhauserHarvard U 294 310 Due to betrayal aversion, people take risks less willingly when the agent of uncertainty is another person rather than nature. Individuals in six countries (Brazil, China, Oman, Switzerland, Turkey, and the United States) confronted a binary-choice trust game or a risky decision offering the same payoffs and probabilities. Risk acceptance was calibrated by asking individuals their "minimum acceptable probability" (MAP) for securing the high payoff that would make them willing to accept the risky rather than the sure payoff. People's MAPs are generally higher when another person, rather than nature, determines the outcome. This indicates betrayal aversion. (JEL C72, D81, Z13) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=11&issue_date=March 2008 10.1257/aer.98.1.294 http://www.e-aer.org/data/mar08/20051024_data.zip http://www.e-aer.org/data/mar08/20051024_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Articles Female Socialization: How Daughters Affect Their Legislator Fathers Ebonya L.WashingtonYale U 311 32 Parenting daughters, sociologists have shown, increases feminist sympathies. I test the hypothesis that children, much like neighbors or peers, can influence parental behavior. I demonstrate that conditional on total number of children, each daughter increases a congressperson's propensity to vote liberally, particularly on reproductive rights issues. The results identify an important (and previously omitted) explanatory variable in the literature on congressional decision making. Additionally the paper highlights the relevance of child-to-parent behavioral influence. (JEL D72, D83, J16) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=12&issue_date=March 2008 10.1257/aer.98.1.311 http://www.e-aer.org/data/mar08/20050902_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Articles The Mystery of Monogamy Eric D.GouldHebrew U Jerusalem and IZA, Bonn OmerMoavHebrew U Jerusalem and Royal Holloway College, U London AviSimhonHebrew U Jerusalem 333 57 We examine why developed societies are monogamous while rich men throughout history have typically practiced polygyny. Wealth inequality naturally produces multiple wives for rich men in a standard model of the marriage market. However, we demonstrate that higher female inequality in the marriage market reduces polygyny. Moreover, we show that female inequality increases in the process of development as women are valued more for the quality of their children than for the quantity. Consequently, male inequality generates inequality in the number of wives per man in traditional societies, but manifests itself as inequality in the quality of wives in developed societies. (JEL J12, J16, J24, Z13) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=13&issue_date=March 2008 10.1257/aer.98.1.333 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Articles An Equilibrium Model of "Global Imbalances" and Low Interest Rates Ricardo J.CaballeroMIT EmmanuelFarhiHarvard U Pierre-OlivierGourinchasU CA, Berkeley 358 93 The sustained rise in US current account deficits, the stubborn decline in long-run real rates, and the rise in US assets in global portfolios appear as anomalies from the perspective of conventional models. This paper rationalizes these facts as an equilibrium outcome when different regions of the world differ in their capacity to generate financial assets from real investments. Extensions of the basic model generate exchange rate and foreign direct investment excess returns broadly consistent with the recent trends in these variables. The framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment. (JEL: E44, F21, F31, F32) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=14&issue_date=March 2008 10.1257/aer.98.1.358 http://www.e-aer.org/data/mar08/20060199_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Articles Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability? LuciaFosterCenter for Economic Studies, US Bureau of the Census JohnHaltiwangerU MD ChadSyversonU Chicago 394 425 We investigate the nature of selection and productivity growth in industries where we observe producer-level quantities and prices separately. We show there are important differences between revenue and physical productivity. Because physical productivity is inversely correlated with price while revenue productivity is positively correlated with price, previous work linking (revenue- based) productivity to survival confounded the separate and opposing effects of technical efficiency and demand on survival, understating the true impacts of both. Further, we find that young producers charge lower prices than incumbents. Thus the literature understates new producers' productivity advantages and entry's contribution to aggregate productivity growth. (JEL D24, L11, L25) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=15&issue_date=March 2008 10.1257/aer.98.1.394 http://www.e-aer.org/data/mar08/20050803_data.zip http://www.e-aer.org/data/mar08/20050803_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Shorter Papers On the Evolution of Firm Size Distributions PaoloAngeliniBank of Italy AndreaGeneraleBank of Italy 426 38 We study the impact of financial constraints on firm size distribution (FSD). We find that financially constrained firms, identified using various proxies, are smaller than the others (their FSD is more skewed to the right). However, among OECD countries, the FSD of nonconstrained firms virtually overlaps that of the entire sample, suggesting that the overall impact of financial constraints on the FSD is modest. The difference is more pronounced in our sample of firms from non-OECD countries. We conclude that financial constraints cannot be considered the main determinant of the FSD evolution in developed economies. (JEL L11, L25) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=16&issue_date=March 2008 10.1257/aer.98.1.426 http://www.e-aer.org/data/mar08/20050397_data.zip http://www.e-aer.org/data/mar08/20050397_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Shorter Papers Growth Dynamics: The Myth of Economic Recovery ValerieCerraIMF Sweta ChamanSaxenaBank for International Settlements 439 57 Using panel data for a large set of high-income, emerging market, developing, and transition countries, we find robust evidence that the large output loss from financial crises and some types of political crises is highly persistent. The results on financial crises are also highly robust to the assumption on exogeneity. Moreover, we find strong evidence of growth over optimism before financial crises. We also find a distinction between the output impact of civil wars versus other crises, in that there is a partial output rebound for civil wars but no significant rebound for financial crises or the other political crises. (JEL D72, D74, E32, E44, O17, O47) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=17&issue_date=March 2008 10.1257/aer.98.1.439 http://www.e-aer.org/data/mar08/20050666_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Shorter Papers Gambling at Lucky Stores: Empirical Evidence from State Lottery Sales JonathanGuryanU Chicago Melissa S.KearneyU MD 458 73 We show that the week after selling a large-prize Texas Lotto winning ticket, a retailer experiences a 12 to 38 percent relative increase in ticket sales. Some increase persists for up to 40 weeks. We document that the sales response increases with jackpot size and is larger in areas with more economically disadvantaged populations. Sales patterns across games and across retailers are not consistent with most advertising explanations. Furthermore, response patterns are not consistent with representativeness-based explanations for the hot hand or gambler's fallacy; we suggest an alternative explanation for the observed "lucky store" effect. (JEL H27, H71) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=18&issue_date=March 2008 10.1257/aer.98.1.458 http://www.e-aer.org/data/mar08/20050694_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Shorter Papers A Model of Housing in the Presence of Adjustment Costs: A Structural Interpretation of Habit Persistence MarjorieFlavinU CA, San Diego ShinobuNakagawaBank of Japan 474 95 The paper provides a model of household consumption and portfolio allocation which incorporates housing as both a consumption good and a component of wealth. Household utility depends, possibly nonseparably, on two goods: nondurable consumption, which is costlessly adjustable, and housing, which is subject to a nonconvex adjustment cost. Households face housing price risk in the sense that the relative price of housing varies over time, and can invest in a wide variety of financial assets in addition to housing. This single, reasonably tractable, model generates testable implications for portfolio allocation, risk aversion, asset pricing, and the dynamics of nondurable consumption. (JEL D14, G11, R21) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=19&issue_date=March 2008 10.1257/aer.98.1.474 http://www.e-aer.org/data/mar08/20031145_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Shorter Papers A Simple Auction Mechanism for the Optimal Allocation of the Commons Juan-PabloMonteroPontifical Catholic U Chile, Santiago and Center for Energy and Environmental Policy Research, MIT 496 518 Efficient regulation of the commons requires information about the regulated firms that is rarely available to regulators (e.g., cost of pollution abatement). This paper proposes a simple mechanism that implements the first-best for any number of firms: a uniform price, sealed-bid auction of an endogenous number of (transferable) licenses with a fraction of the auction revenues given back to firms. Paybacks, which rapidly decrease with the number of firms, are such that truth-telling is a dominant strategy regardless of whether firms behave non-cooperatively or collusively. The mechanism also provides firms with incentives to invest in socially optimal R&D. (JEL D44, L51, Q21) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=20&issue_date=March 2008 10.1257/aer.98.1.496 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Shorter Papers The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models JónSteinssonColumbia U 519 33 Existing empirical evidence suggests that real exchange rates exhibit hump-shaped dynamics. I show that this is a robust fact across nine large, developed economies. This fact can help explain why sticky price business cycle models have been unable to match the persistence of the real exchange rate. I show that, in response to a number of different real shocks, a two-country sticky price business cycle model yields hump-shaped dynamics for the real exchange rate. The hump-shaped dynamics generated by the model are a powerful source of endogenous persistence that allows the model to match the long half-life of the real exchange rate. (JEL F31) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=21&issue_date=March 2008 10.1257/aer.98.1.519 http://www.e-aer.org/data/mar08/20070484_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Shorter Papers Collective Memory, Cultural Transmission, and Investments RobertaDessíToulouse School of Economics 534 60 I study the transmission of collective memory as a mechanism for cultural transmission, in the presence of social externalities associated with individual cultural investment decisions. The younger generation's decisions depend on beliefs about the quality of existing institutions, norms, and values, which are influenced by collective memory. In culturally homogeneous societies it can be optimal to suppress negative memories while emphasizing positive ones. However, the ability to bias collective memory is costly: it may generate cultural overoptimism and overinvestment in some cases, the reverse in other cases. The scope for welfare-enhancing manipulation of collective memory is reduced, moreover, in culturally heterogeneous societies. (JEL D83, Z13) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=22&issue_date=March 2008 10.1257/aer.98.1.534 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 1 March 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=1&issue_date=March 2008 Shorter Papers Bureaucrats or Politicians? Comment FuhitoKojimaHarvard U 561 62 Alesina and Tabellini (2007) investigate the normative criteria for allocating policy tasks to bureaucrats versus politicians. While they establish criteria with respect to a number of parameters, they do not give a criterion with respect to the degree of imperfect monitoring. We establish an unambiguous criterion about imperfect monitoring. (JEL D72, D73) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=23&issue_date=March 2008 10.1257/aer.98.1.561