American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Journal Article Front Matter (& Dale T. Mortensen: Distinguished Fellow 2008) i iii http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.i 10.1257/aer.99.4.i American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles Can News about the Future Drive the Business Cycle? NirJaimovichStanford U SergioRebeloNorthwestern U 1097 1118 Aggregate and sectoral comovement are central features of business cycles, so the ability to generate comovement is a natural litmus test for macroeconomic models. But it is a test that most models fail. We propose a unified model that generates aggregate and sectoral comovement in response to contemporaneous and news shocks about fundamentals. The fundamentals that we consider are aggregate and sectoral total factor productivity shocks as well as investment-specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and preferences that allow us to parameterize the strength of short-run wealth effects on the labor supply. (JEL E13, E20, E32) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1097 10.1257/aer.99.4.1097 http://www.e-aer.org/data/sept09/20060931_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles Portfolio Claustrophobia: Asset Pricing in Markets with Illiquid Assets Francis A.LongstaffUCLA 1119 44 Many classes of assets are illiquid or nonmarketable in that they cannot always be traded immediately. Thus, a portfolio position in these becomes at least temporarily irreversible. We study the asset-pricing implications of this type of illiquidity in an exchange economy with heterogeneous agents. In this market, one asset is always liquid. The other asset can be traded initially, but then not again until after a "blackout" period. Illiquidity has a dramatic effect. Agents abandon diversification and choose polarized portfolios instead. The value of liquidity can represent a large portion of the equilibrium price of an asset. (JEL G11, G12) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1119 10.1257/aer.99.4.1119 http://www.e-aer.org/data/sept09/20060445_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles Salience and Taxation: Theory and Evidence RajChettyU CA, Berkeley AdamLooneyFederal Reserve Board KoryKroftU CA, Berkeley 1145 77 Using two strategies, we show that consumers underreact to taxes that are not salient. First, using a field experiment in a grocery store, we find that posting tax-inclusive price tags reduces demand by 8 percent. Second, increases in taxes included in posted prices reduce alcohol consumption more than increases in taxes applied at the register. We develop a theoretical framework for applied welfare analysis that accommodates salience effects and other optimization failures. The simple formulas we derive imply that the economic incidence of a tax depends on its statutory incidence, and that even policies that induce no change in behavior can create efficiency losses. (JEL C93, D12, H25, H71) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1145 10.1257/aer.99.4.1145 http://www.e-aer.org/data/sept09/20071103_data.zip http://www.e-aer.org/data/sept09/20071103_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles Decentralized Organizational Learning: An Experimental Investigation AndreasBlumeU Pittsburgh JohnDuffyU Pittsburgh April M.FrancoU Toronto 1178 1205 We experimentally study decentralized organizational learning. Our objective is to understand how learning members of an organization cope with the confounding effects of the simultaneous learning of others. We test the predictions of a stylized, rational agent model of organizational learning that provides sharp predictions as to how learning members of an organization might cope with the simultaneous learning of others as a function of fundamental variables, e.g., firm size and the discount factor. While the problem of learning while others are learning is quite difficult, we find support for the comparative static predictions of the model's unique symmetric equilibrium. (JEL C72, D23, D83) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1178 10.1257/aer.99.4.1178 http://www.e-aer.org/data/sept09/20070495_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking HikaruOgawaNagoya U David E.WildasinU KY 1206 17 We analyze models with interjurisdictional spillovers among heterogeneous jurisdictions, such as CO2 emissions that affect the global environment. Each jurisdiction's emissions depend upon the local stock of capital, which is interjurisdictionally mobile and subject to local taxation. In important cases, decentralized policy-making leads to efficient resource allocation, even in the complete absence of corrective interventions by higher-level governments or coordination of policy through Coasian bargaining. In particular, even when the preferences and production technologies differ among the agents, the decentralized system can result in globally efficient allocation. (JEL D62, H23, H73, H87, Q58) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1206 10.1257/aer.99.4.1206 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles The Origins of State Capacity: Property Rights, Taxation, and Politics TimothyBesleyLondon School of Economics and CIFAR TorstenPerssonInstitute for International Economic Studies, Stockholm U and CIFAR 1218 44 Economists generally assume that the state has sufficient institutional capacity to support markets and levy taxes. This paper develops a framework where "policy choices" in market regulation and taxation are constrained by past investments in legal and fiscal capacity. It studies the economic and political determinants of such investments, demonstrating that legal and fiscal capacity are typically complements. The results show that, among other things, common interest public goods, such as fighting external wars, as well as political stability and inclusive political institutions, are conducive to building state capacity. Some correlations in cross-country data are consistent with the theory. (JEL D72, E62, H11, H20, P14) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1218 10.1257/aer.99.4.1218 http://www.e-aer.org/data/sept09/20071354_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles Spousal Control and Intra-household Decision Making: An Experimental Study in the Philippines NavaAshrafHarvard U 1245 77 I elicit causal effects of spousal observability and communication on financial choices of married individuals in the Philippines. When choices are private, men put money into their personal accounts. When choices are observable, men commit money to consumption for their own benefit. When required to communicate, men put money into their wives' account. These strong treatment effects on men, but not women, appear related more to control than to gender: men whose wives control household savings respond more strongly to the treatment and women whose husbands control savings exhibit the same response. Changes in information and communication interact with underlying control to produce mutable gender-specific outcomes. (JEL D13, D14, J12, J16, O15) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1245 10.1257/aer.99.4.1245 http://www.e-aer.org/data/sept09/20060880_data.zip http://www.e-aer.org/data/sept09/20060880_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles Active and Passive Waste in Government Spending: Evidence from a Policy Experiment OrianaBandieraLondon School of Economics AndreaPratLondon School of Economics TommasoVallettiImperial College London and U Rome "Tor Vergata" 1278 1308 We propose a distinction between active and passive waste as determinants of the cost of public services. Active waste entails utility for the public decision maker, whereas passive waste does not. We analyze purchases of standardized goods by Italian public bodies and exploit a policy experiment associated with a national procurement agency. We find that: (i) some public bodies pay systematically more than others for equivalent goods; (ii) differences are correlated with governance structure; (iii) the variation in prices is principally due to variation in passive rather than active waste; and (iv) passive waste accounts for 83 percent of total estimated waste. (JEL H11, H57, H83) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1278 10.1257/aer.99.4.1278 http://www.e-aer.org/data/sept09/20070928_data.zip http://www.e-aer.org/data/sept09/20070928_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles One Chance in a Million: Altruism and the Bone Marrow Registry Theodore C.BergstromU CA, Santa Barbara Rodney J.GarrattU CA, Santa Barbara DamienSheehan-ConnorWesleyan U 1309 34 Stem cell transplants save lives of many patients with blood diseases. Donation is painful, but rarely has lasting adverse effects. Patients can accept transplants only from donors with compatible immune systems. Those lacking a sibling match must seek donations from the general population. The probability that two unrelated persons are compatible is less than 1/10,000. Health authorities maintain a registry of several million genetically tested potential donors who agree to donate if asked. We find that the benefits of adding registrants of every race exceed costs. We also explore the peculiar structure of voluntary public good provision that faces potential donors. (JEL D64, H41, I11) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1309 10.1257/aer.99.4.1309 http://www.e-aer.org/data/sept09/20071004_data.zip http://www.e-aer.org/data/sept09/20071004_app.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles Institution Formation in Public Goods Games MichaelKosfeldJohann Wolfgang Goethe U Frankfurt and IZA, Bonn AkiraOkadaHitotsubashi U ArnoRiedlMaastricht U and CESifo, Munich 1335 55 Sanctioning institutions are of utmost importance for overcoming free-riding tendencies and enforcing outcomes that maximize group welfare in social dilemma situations. We investigate, theoretically and experimentally, the endogenous formation of institutions in public goods provision. Our theoretical analysis shows that players may form sanctioning institutions in equilibrium, including those governing only a subset of players. The experiment confirms that institutions are formed and that it positively affects cooperation and group welfare. However, the data also shows that success is not guaranteed. Players are unwilling to implement equilibrium institutions in which some players have the opportunity to free ride. Our results emphasize the role of fairness in the institution formation process. (JEL C72, D02, H41) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1335 10.1257/aer.99.4.1335 http://www.e-aer.org/data/sept09/20060885_data.zip http://www.e-aer.org/data/sept09/20060885_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles Tax Changes and Asset Pricing ClemensSialmU TX 1356 83 The tax burden on equity securities has varied substantially over time and remains a source of continuing policy debate. This paper investigates whether investors were compensated for the tax burden of equity securities over the period between 1913 and 2006. Taxes on equity securities vary over time due to changes in dividend and capital gains tax rates and due to changes in corporate payout policies. Equity taxes also vary across firms due to persistent differences in propensities to pay dividends. The results indicate an economically plausible and statistically significant tax capitalization over time and cross-sectionally. (JEL G10, G12, H22, H24, N21, N22) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1356 10.1257/aer.99.4.1356 http://www.e-aer.org/data/sept09/20051100_data.zip http://www.e-aer.org/data/sept09/20051100_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles The Effects of High Stakes High School Achievement Awards: Evidence from a Randomized Trial JoshuaAngristMIT VictorLavyHebrew U Jerusalem and Royal Holloway, U London 1384 1414 The Israeli matriculation certificate is a prerequisite for most postsecondary schooling. In a randomized trial, we attempted to increase certification rates among low-achievers with cash incentives. The experiment used a school-based randomization design offering awards to all who passed their exams in treated schools. This led to a substantial increase in certification rates for girls but had no effect on boys. Affected girls had a relatively high ex ante chance of certification. The increase in girls' matriculation rates translated into an increased likelihood of college attendance. Female matriculation rates increased partly because treated girls devoted extra time to exam preparation. (JEL I21, I28, J16) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1384 10.1257/aer.99.4.1384 http://www.e-aer.org/data/sept09/20060796_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles Monetary Policy Analysis with Potentially Misspecified Models MarcoDel NegroFederal Reserve Bank of New York FrankSchorfheideU PA 1415 50 Policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models faces two challenges: estimation of parameters that are relevant for policy trade-offs, and treatment of the deviations from the cross-equation restrictions. Using post-1982 US data, we study the robustness of the policy prescriptions from a state-of-the-art DSGE model with respect to two approaches to model misspecification pursued in the recent literature: (i) adding shocks to the DSGE model and/or generalizing the processes followed by these shocks; and (ii) explicit modeling of deviations from cross-equation restrictions (DSGE-VAR). (JEL C51, E13, E43, E52, E58) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1415 10.1257/aer.99.4.1415 http://www.e-aer.org/data/sept09/20051010_data.zip http://www.e-aer.org/data/sept09/20051010_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles Technological Revolutions and Stock Prices ĽubošPástorU Chicago PietroVeronesiU Chicago 1451 83 We develop a general equilibrium model in which stock prices of innovative firms exhibit "bubbles" during technological revolutions. In the model, the average productivity of a new technology is uncertain and subject to learning. During technological revolutions, the nature of this uncertainty changes from idiosyncratic to systematic. The resulting bubbles in stock prices are observable ex post but unpredictable ex ante, and they are most pronounced for technologies characterized by high uncertainty and fast adoption. We find empirical support for the model's predictions in 1830-1861 and 1992-2005 when the railroad and Internet technologies spread in the United States. (JEL G12, L86, L92, N21, N22, N71, N72) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1451 10.1257/aer.99.4.1451 http://www.e-aer.org/data/sept09/20051277_data.zip http://www.e-aer.org/data/sept09/20051277_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles Hindsight, Foresight, and Insight: An Experimental Study of a Small-Market Investment Game with Common and Private Values AsenIvanovVA Commonwealth U DanLevinOH State U JamesPeckOH State U 1484 1507 We experimentally test an endogenous-timing investment model in which subjects privately observe their cost of investing and a signal correlated with the common investment return. Subjects overinvest, relative to Nash. We separately consider whether subjects draw inferences, in hindsight, and use foresight to delay profitable investment and learn from market activity. In contrast to Nash, cursed equilibrium, and level-k predictions, behavior hardly changes across our experimental treatments. Maximum likelihood estimates are inconsistent with belief-based theories. We offer an explanation in terms of boundedly rational rules of thumb, based on insights about the game, which provides a better fit than quantal response equilibrium. (JEL C72, D82, D83, G11) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1484 10.1257/aer.99.4.1484 http://www.e-aer.org/data/sept09/20070475_data.zip http://www.e-aer.org/data/sept09/20070475_app.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles Narrow Bracketing and Dominated Choices MatthewRabinU CA, Berkeley GeorgWeizsackerDIW Berlin 1508 43 We show that any decision maker who "narrowly brackets" (evaluates decisions separately) and does not have constant-absolute-risk-averse preferences will make a first-order stochastically dominated combined choice in some simple pair of independent binary decisions. We also characterize the preference-contingent monetary cost from this mistake. Empirically, in a real-stakes laboratory experiment that replicates Tversky and Kahneman's (1981) experiment, 28 percent of participants choose dominated combinations. In a representative survey eliciting hypothetical large-stakes choices, higher proportions do so. Violation rates vary little with personal characteristics. Average preferences are prospect-theoretic, with an estimated 89 percent of people bracketing narrowly. (JEL D12, D81) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1508 10.1257/aer.99.4.1508 http://www.e-aer.org/data/sept09/20071131_data.zip http://www.e-aer.org/data/sept09/20071131_app.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Articles Why Do Sellers (Usually) Prefer Auctions? JeremyBulowStanford U PaulKlempererNuffield College, U Oxford 1544 75 We compare the most common methods for selling a company or other asset when participation is costly: a simple simultaneous auction, and a sequential process in which potential buyers decide in turn whether to enter the bidding. The sequential process is always more efficient. But preemptive bids transfer surplus from the seller to buyers. Because the auction is more conducive to entry -- precisely because of its inefficiency -- it usually generates higher expected revenue. We also discuss the effects of lock-ups, matching rights, break-up fees (as in takeover battles), entry subsidies, etc. (JEL D44, G34, L13) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1544 10.1257/aer.99.4.1544 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Shorter Papers Learning about the Future and Dynamic Efficiency AlexGershkovU Bonn BennyMoldovanuU Bonn 1576 87 We study an allocation problem where a set of objects needs to be allocated to agents arriving over time. The basic model is of the private, independent values type. The dynamically efficient allocation is implementable if the distribution of agents' values is known. Whereas lack of knowledge about the distribution is inconsequential in the static case, endogenous informational externalities arise if the designer gradually learns about the distribution by observing present values. These externalities may prevent the implementation of the dynamically efficient allocation. We provide necessary and sufficient conditions for the efficient allocation to be implementable. (JEL D11, D82) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1576 10.1257/aer.99.4.1576 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Shorter Papers Bank Runs and Institutions: The Perils of Intervention Huberto M.EnnisU Carlos III de Madrid and Federal Reserve Bank of Richmond ToddKeisterFederal Reserve Bank of New York 1588 1607 We study ex post efficient policy responses to a run on the banking system and the ex ante incentives these responses create. We show that the efficient response to a run is typically not to freeze all remaining deposits, since doing so imposes heavy costs on some individuals. Instead, once a run is underway, (benevolent) government institutions would allow additional deposit withdrawals, placing further strain on the banking system. When depositors anticipate these extra withdrawals, their incentive to participate in the run increases. In fact, ex post efficient interventions can generate the conditions necessary for a self-fulfilling run to occur. (JEL G21, G8) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1588 10.1257/aer.99.4.1588 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Shorter Papers Expectation Damages, Divisible Contracts, and Bilateral Investment SusanneOhlendorfU Bonn 1608 18 This paper examines the efficiency of expectation damages as a breach remedy in a bilateral trade setting with renegotiation and relationship-specific investment by the buyer and the seller. As demonstrated by Edlin and Reichelstein (1996), no contract that specifies only a fixed quantity and a fixed per-unit price can induce efficient investment if marginal cost is constant and deterministic. We show that this result does not extend to more general payoff functions. If both parties face the risk of breaching, the first best becomes attainable with a simple price-quantity contract. (JEL D86, K12) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1608 10.1257/aer.99.4.1608 http://www.e-aer.org/data/sept09/20061292_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Shorter Papers Field Centipedes IgnacioPalacios-HuertaLondon School of Economics OscarVolijBen-Gurion U Negev 1619 35 In the centipede game, all standard equilibrium concepts dictate that the player who decides first must stop the game immediately. There is vast experimental evidence, however, that this rarely occurs. We first conduct a field experiment in which highly ranked chess players play this game. Contrary to previous evidence, our results show that69 percent of chess players stop immediately. When we restrict attention to Grandmasters, this percentage escalates to 100 percent. We then conduct a laboratory experiment in which chess players and students are matched in different treatments. When students play against chess players, the outcome approaches the subgame-perfect equilibrium. (JEL C72, C93) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1619 10.1257/aer.99.4.1619 http://www.e-aer.org/data/sept09/20071095_data.zip http://www.e-aer.org/data/sept09/20071095_app.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Shorter Papers VAR Analysis and the Great Moderation LucaBenatiEuropean Central Bank PaoloSuricoBank of England 1636 52 Most analyses of the US Great Moderation are based on structural VARs, and point toward good luck as the main explanation for the recent macroeconomic stability. Based on an estimated New-Keynesian model where the only source of change is the move from passive to active monetary policy, we show that (i) the theoretical VAR innovation variances for all series decrease across regimes; (ii) VAR-based counterfactuals assign a minor role to improved policy; and (iii) VAR impulse-response functions to a monetary shock exhibit little variation across regimes. Our analysis suggests that existing VAR evidence is also compatible with the "good policy" hypothesis. (JEL C32, C52, E13, E52, N12) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1636 10.1257/aer.99.4.1636 http://www.e-aer.org/data/sept09/20061138_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Shorter Papers Art as an Investment and Conspicuous Consumption Good Benjamin R.MandelU CA, Davis 1653 63 This paper provides a simple and empirically plausible model of artworks as investment vehicles. It reconciles the observation that average financial returns for collectibles are low and volatile with the theory of consumption-based asset pricing. Art assets are appealing both for their ability to transfer consumption over time and for their use as signals of wealth, as in the literature on the demand for luxuries. Adding art value to utility, returns also reflect this "conspicuous consumption" dividend; as a result, average financial returns are low. Risk premia for artworks are predicted to be modest or even negative. (JEL G11, Z11) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1653 10.1257/aer.99.4.1653 http://www.e-aer.org/data/sept09/20071294_data.zip http://www.e-aer.org/data/sept09/20071294_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Shorter Papers Offshoring and Volatility: Evidence from Mexico's Maquiladora Industry Paul R.BerginU CA, Davis Robert C.FeenstraU CA, Davis Gordon H.HansonU CA, San Diego 1664 71 This paper studies the second-moment properties of offshoring, the arrangement whereby firms carry out particular stages of production abroad. It documents a new empirical regularity: maquiladora industries in Mexico that are associated with US offshoring experience fluctuations in employment that are twice as volatile as the corresponding industries in the United States. This finding is not attributable simply to higher volatility in the overall Mexican economy, nor to the smaller size of Mexico's industries compared to US counterparts. (JEL F14, F23, L24, L25, L60, O14) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1664 10.1257/aer.99.4.1664 http://www.e-aer.org/data/sept09/20070436_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Shorter Papers Gibrat's Law for (All) Cities: Comment MosheLevyHebrew U Jerusalem 1672 75 Jan Eeckhout (2004) reports that the empirical city size distribution is lognormal, consistent with Gibrat's Law. We show that for the top 0.6 percent of the largest cities, the empirical distribution is dramatically different from the lognormal, and follows a power law. This top part is extremely important as it accounts for more than 23 percent of the population. The empirical hybrid lognormal-power-law distribution revealed may be characteristic of other key distributions, such as the wealth distribution and the income distribution. This distribution is not consistent with a simple Gibrat proportionate effect process, and its origin presents a puzzle yet to be answered. (JEL R11, R12, R23) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1672 10.1257/aer.99.4.1672 http://www.e-aer.org/data/sept09/20051005_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 4 September 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=4 Shorter Papers Gibrat's Law for (All) Cities: Reply JanEeckhoutU PA and ICREA, U Pompeu Fabra 1676 83 This reply refutes the objection raised by Levy (2009) about the fit of the upper tail of the city size distribution in Eeckhout (2004). I show that the method on which his conclusion is based is unsubstantiated. The visual interpretation of the fit on log-log plots is misleading. In addition, the methodology used to estimate a truncated subsample of the distribution while testing its significance against a distribution with prespecified parameters is ill-founded. The main conclusion is that Gibrat's law holds: city sizes follow proportionate growth, thus giving rise to a lognormal size distribution, tail included. (JEL R11, R12, R23) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1676 10.1257/aer.99.4.1676 http://www.e-aer.org/data/sept09/20071478_data.zip