American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Journal Article Front Matter i vii Includes: "Alan S. Blinder: Distinguished Fellow 2011" http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.i 10.1257/aer.102.4.i American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Articles Statistical Modeling of Monetary Policy and Its Effects Christopher A.SimsPrinceton U 1187 1205 http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1187 10.1257/aer.102.4.1187 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Articles Targeting the Poor: Evidence from a Field Experiment in Indonesia ViviAlatasWorld Bank AbhijitBanerjeeMIT RemaHannaHarvard U Benjamin A.OlkenMIT JuliaTobiasStanford U 1206 40 This paper reports an experiment in 640 Indonesian villages on three approaches to target the poor: proxy means tests (PMT), where assets are used to predict consumption; community targeting, where villagers rank everyone from richest to poorest; and a hybrid. Defining poverty based on PPP$2 per capita consumption, community targeting and the hybrid perform somewhat worse in identifying the poor than PMT, though not by enough to significantly affect poverty outcomes for a typical program. Elite capture does not explain these results. Instead, communities appear to apply a different concept of poverty. Consistent with this finding, community targeting results in higher satisfaction. (JEL C93, I32, I38, O12, O15, O18, R23) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1206 10.1257/aer.102.4.1206 http://www.aeaweb.org/aer/data/june2012/20100521_data.zip http://www.aeaweb.org/aer/data/june2012/20100521_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Articles Incentives Work: Getting Teachers to Come to School EstherDufloMIT RemaHannaHarvard U Stephen P.RyanMIT 1241 78 We use a randomized experiment and a structural model to test whether monitoring and financial incentives can reduce teacher absence and increase learning in India. In treatment schools, teachers' attendance was monitored daily using cameras, and their salaries were made a nonlinear function of attendance. Teacher absenteeism in the treatment group fell by 21 percentage points relative to the control group, and the children's test scores increased by 0.17 standard deviations. We estimate a structural dynamic labor supply model and find that teachers respond strongly to financial incentives. Our model is used to compute cost-minimizing compensation policies. (JEL I21, J31, J45, O15) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1241 10.1257/aer.102.4.1241 http://www.aeaweb.org/aer/data/june2012/20081207_data.zip http://www.aeaweb.org/aer/data/june2012/20081207_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Articles Selective Trials: A Principal-Agent Approach to Randomized Controlled Experiments SylvainChassangPrinceton U GerardPadro I MiquelLondon School of Economics ErikSnowbergCA Institute of Technology 1279 1309 We study the design of randomized controlled experiments when outcomes are significantly affected by experimental subjects' unobserved effort expenditure. While standard randomized controlled trials (RCTs) are internally consistent, the unobservability of effort compromises external validity. We approach trial design as a principal-agent problem and show that natural extensions of RCTs--which we call selective trials--can help improve external validity. In particular, selective trials can disentangle the effects of treatment, effort, and the interaction of treatment and effort. Moreover, they can help identify when treatment effects are affected by erroneous beliefs and inappropriate effort expenditure. (JEL C90, D82) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1279 10.1257/aer.102.4.1279 http://www.aeaweb.org/aer/data/june2012/20101040_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Articles Ethnicity and Conflict: An Empirical Study JoanEstebanCSIC, Barcelona and Barcelona GSE LauraMayoralCSIC, Barcelona and Barcelona GSE DebrajRayNYU 1310 42 We examine empirically the impact of ethnic divisions on conflict, by using a specification based on Esteban and Ray (2011). That theory links conflict intensity to three indices of ethnic distribution: polarization, fractionalization, and the Gini-Greenberg index. The empirical analysis verifies that these distributional measures are significant correlates of conflict. These effects persist as we introduce country-specific measures of group cohesion and of the importance of public goods, and combine them with the distributional measures exactly as described by the theory. (JEL D63, D74, J15, O15, O17) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1310 10.1257/aer.102.4.1310 http://www.aeaweb.org/aer/data/june2012/20100805_data.zip http://www.aeaweb.org/aer/data/june2012/20100805_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Articles Information, Animal Spirits, and the Meaning of Innovations in Consumer Confidence Robert B.BarskyU MI Eric R.SimsU Notre Dame 1343 77 Innovations to consumer confidence convey incremental information about economic activity far into the future. Does this reflect a causal effect of animal spirits on economic activity, or news about exogenous future productivity received by consumers? Using indirect inference, we study the impulse responses to confidence innovations in conjunction with an appropriately augmented New Keynesian model. While news, animal spirits, and pure noise all contribute to confidence innovations, the relationship between confidence and subsequent activity is almost entirely reflective of the news component. Confidence innovations are well characterized as noisy measures of changes in expected productivity growth over a relatively long horizon. (JEL D12, D83, D84, E12) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1343 10.1257/aer.102.4.1343 http://www.aeaweb.org/aer/data/june2012/20080928_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Articles Why Does Trend Growth Affect Equilibrium Employment? A New Explanation of an Old Puzzle Michael W. L.ElsbyU Edinburgh Matthew D.ShapiroU MI 1378 1413 That the employment rate appears to respond to changes in trend growth is an enduring macroeconomic puzzle. This paper shows that, in the presence of a return to experience, a slowdown in productivity growth raises reservation wages, thereby lowering aggregate employment. The paper develops new evidence that shows this mechanism is important for explaining the growth-employment puzzle. The combined effects of changes in aggregate wage growth and returns to experience account for all the increase from 1968 to 2006 in nonemployment among low-skilled men and for approximately half the increase in nonemployment among all men. (JEL E24, J24, J31) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1378 10.1257/aer.102.4.1378 http://www.aeaweb.org/aer/data/june2012/20100490_data.zip http://www.aeaweb.org/aer/data/june2012/20100490_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Articles Understanding Bank Runs: The Importance of Depositor-Bank Relationships and Networks RajkamalIyerMIT ManjuPuriDuke U 1414 45 We use unique depositor-level data for a bank that faced a run to understand the factors that affect depositor behavior. We find uninsured depositors are most likely to run. Deposit insurance helps, but is only partially effective. Bank-depositor relationships mitigate runs, suggesting that relationship with depositors help banks reduce fragility. In addition, we also find that social networks matter. Finally, we find long-term effects of a solvent bank run in that depositors who run do not return back to the bank. Our results help understand the underlying dynamics of bank runs and hold important policy implications. (JEL D12, G21, O16, Z13) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1414 10.1257/aer.102.4.1414 http://www.aeaweb.org/aer/data/june2012/20080868_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Articles Dynamics and Stability of Constitutions, Coalitions, and Clubs DaronAcemogluMIT GeorgyEgorovNorthwestern U KonstantinSoninNew Economic School, Moscow 1446 76 In dynamic collective decision making, current decisions determine the future distribution of political power and influence future decisions. We develop a general framework to study this class of problems. Under acyclicity, we characterize dynamically stable states as functions of the initial state and obtain two general insights. First, a social arrangement is made stable by the instability of alternative arrangements that are preferred by sufficiently powerful groups. Second, efficiency-enhancing changes may be resisted because of further changes they will engender. We use this framework to analyze dynamics of political rights in a society with different types of extremist views. (JEL D71, D72, K10) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1446 10.1257/aer.102.4.1446 http://www.aeaweb.org/aer/data/june2012/20090312_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Articles The Enduring Impact of the American Dust Bowl: Short- and Long-Run Adjustments to Environmental Catastrophe RichardHornbeckHarvard U 1477 1507 The 1930s American Dust Bowl was an environmental catastrophe that greatly eroded sections of the Plains. The Dust Bowl is estimated to have immediately, substantially, and persistently reduced agricultural land values and revenues in more-eroded counties relative to less-eroded counties. During the Depression and through at least the 1950s, there was limited relative adjustment of farmland away from activities that became relatively less productive in more-eroded areas. Agricultural adjustments recovered less than 25 percent of the initial difference in agricultural costs for more-eroded counties. The economy adjusted predominantly through large relative population declines in more-eroded counties, both during the 1930s and through the 1950s. (JEL N32, N52, Q15, Q18, Q54) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1477 10.1257/aer.102.4.1477 http://www.aeaweb.org/aer/data/june2012/20091347_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Articles The Origins of Ethnolinguistic Diversity SteliosMichalopoulosBrown U 1508 39 This study explores the determinants of ethnolinguistic diversity within as well as across countries, shedding light on its geographic origins. The empirical analysis conducted across countries, virtual countries, and pairs of contiguous regions establishes that geographic variability, captured by variation in regional land quality and elevation, is a fundamental determinant of contemporary linguistic diversity. The findings are consistent with the proposed hypothesis that differences in land endowments gave rise to location-specific human capital, leading to the formation of localized ethnicities. (JEL J15, J24, Z13) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1508 10.1257/aer.102.4.1508 http://www.aeaweb.org/aer/data/june2012/20090179_data.zip http://www.aeaweb.org/aer/data/june2012/20090179_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Articles Competitive Pressure and the Adoption of Complementary Innovations TobiasKretschmerISTO, Ludwig Maximilians U Munich and Ifo Institute, Munich Eugenio J.MiraveteU TX Jose C.PerniasU Jaume I de Castellon 1540 70 Liberalization of the European automobile distribution system in 2002 limits the ability of manufacturers to impose vertical restraints, leading to a substantial increase in competitive pressure among dealers. We estimate an equilibrium model of profit maximization to evaluate how dealers change their innovation adoption strategies following the elimination of exclusive territories. Using French data we evaluate the existence of complementarities between the adoption of software applications and the scale of production. Firms view these innovations as substitutes and concentrate their effort in one type of software as they expand their scale of production. Results are robust to the existence of unobserved heterogeneity. (JEL D24, K21, L21, L22, L62, O32) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1540 10.1257/aer.102.4.1540 http://www.aeaweb.org/aer/data/june2012/20091150_data.zip http://www.aeaweb.org/aer/data/june2012/20091150_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Shorter Papers Evaluating Microfoundations for Aggregate Price Rigidities: Evidence from Matched Firm-Level Data on Product Prices and Unit Labor Cost MikaelCarlssonSveriges Riksbank Oskar NordstromSkansIFAU, Uppsala and IZA, Bonn 1571 95 Using matched data on product-level prices and the producing firm's unit labor cost, we find a moderate pass-through of current idiosyncratic marginal-cost changes. Also, the response does not vary across firms facing very different idiosyncratic shock variances, but identical aggregate conditions. These results do not fit the predictions of Mackowiak and Wiederholt (2009). Neither do firms react strongly to predictable marginal-cost changes, as expected from Mankiw and Reis (2002). We find that firms consider both current and expected future marginal cost when setting prices. This points toward impediments to continuous price adjustments as a key driver of monetary non-neutrality. http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1571 10.1257/aer.102.4.1571 http://www.aeaweb.org/aer/data/june2012/20100575_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Shorter Papers On the Timing and Pricing of Dividends Julesvan BinsbergenNorthwestern U and Stanford U MichaelBrandtDuke U RalphKoijenU Chicago and Tilburg U 1596 1618 We present evidence on the term structure of the equity premium. We recover prices of dividend strips, which are short-term assets that pay dividends on the stock index every period up to period T and nothing thereafter. It is short-term relative to the index because the index pays dividends in perpetuity. We find that expected returns, Sharpe ratios, and volatilities on short-term assets are higher than on the index, while their CAPM betas are below one. Short-term assets are more volatile than their realizations, leading to excess volatility and return predictability. Our findings are inconsistent with many leading theories. http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1596 10.1257/aer.102.4.1596 http://www.aeaweb.org/aer/data/june2012/20101209_data.zip http://www.aeaweb.org/aer/data/june2012/20101209_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Shorter Papers The Finnish Great Depression: From Russia with Love YuriyGorodnichenkoU CA, Berkeley Enrique G.MendozaU MD Linda L.TesarU MI 1619 44 Why did Finland experience, in 1991-1993, the deepest recession observed in an industrialized country since the 1930s? Using a dynamic general equilibrium model with labor frictions, we argue that the collapse of the Soviet-Finnish trade was a major contributor to the contraction. Finland's experience mirrors that of the transition economies of Eastern Europe, which suffered similar deep recessions coupled with institutional changes. By focusing on the Finnish case, we isolate the effects of the Finnish-Soviet trade collapse and shed new light on the sources of recessions in transition economies. http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1619 10.1257/aer.102.4.1619 http://www.aeaweb.org/aer/data/june2012/20101018_data.zip http://www.aeaweb.org/aer/data/june2012/20101018_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Shorter Papers The Currency of Reciprocity: Gift Exchange in the Workplace SebastianKubeU Bonn Michel AndreMarechalU Zurich ClemensPuppeKarlsruhe Institute of Technology 1644 62 What determines reciprocity in employment relations? We conducted a controlled field experiment to measure the extent to which monetary and nonmonetary gifts affect workers' performance. We find that nonmonetary gifts have a much stronger impact than monetary gifts of equivalent value. We also observe that when workers are offered the choice, they prefer receiving money, but reciprocate as if they received a nonmonetary gift. This result is consistent with the common saying, "it's the thought that counts." We underline this point by showing that monetary gifts can effectively trigger reciprocity if the employer invests more time and effort into the gift's presentation. http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1644 10.1257/aer.102.4.1644 http://www.aeaweb.org/aer/data/june2012/20100161_data.zip http://www.aeaweb.org/aer/data/june2012/20100161_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Shorter Papers Risk Aversion and the Labor Margin in Dynamic Equilibrium Models Eric T.SwansonFederal Reserve Bank of San Francisco 1663 91 The household's labor margin has a substantial effect on risk aversion, and hence asset prices, in dynamic equilibrium models even when utility is additively separable between consumption and labor. This paper derives simple, closed-form expressions for risk aversion that take into account the household's labor margin. Ignoring this margin can dramatically overstate the household's true aversion to risk. Risk premia on assets priced with the stochastic discount factor increase essentially linearly with risk aversion, so measuring risk aversion correctly is crucial for asset pricing in the model. http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1663 10.1257/aer.102.4.1663 http://www.aeaweb.org/aer/data/june2012/20100128_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Shorter Papers Credit Spreads and Business Cycle Fluctuations SimonGilchristBoston U EgonZakrajsekFederal Reserve Board 1692 1720 Using micro-level data, we construct a credit spread index with considerable predictive power for future economic activity. We decompose the credit spread into a component that captures firm-specific information on expected defaults and a residual component--the excess bond premium. Shocks to the excess bond premium that are orthogonal to the current state of the economy lead to declines in economic activity and asset prices. An increase in the excess bond premium appears to reflect a reduction in the risk-bearing capacity of the financial sector, which induces a contraction in the supply of credit and a deterioration in macroeconomic conditions. http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1692 10.1257/aer.102.4.1692 http://www.aeaweb.org/aer/data/june2012/20100787_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Shorter Papers Do Matching Frictions Explain Unemployment? Not in Bad Times PascalMichaillatLondon School of Economics 1721 50 This paper proposes a search-and-matching model of unemployment in which jobs are rationed: the labor market does not clear in the absence of matching frictions. This job shortage arises in an economic equilibrium from the combination of some wage rigidity and diminishing marginal returns to labor. In recessions, job rationing is acute, driving the rise in unemployment, whereas matching frictions contribute little to unemployment. Intuitively in recessions, jobs are lacking, the labor market is slack, and recruiting is easy and inexpensive, so matching frictions do not matter much. In a calibrated model, cyclical fluctuations in the composition of unemployment are large. http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1721 10.1257/aer.102.4.1721 http://www.aeaweb.org/aer/data/june2012/20101010_data.zip http://www.aeaweb.org/aer/data/june2012/20101010_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Shorter Papers Taxes, Cigarette Consumption, and Smoking Intensity: Comment JasonAbrevayaU TX LauraPuzzelloMonash U 1751 63 This paper re-examines Adda and Cornaglia's (2006) evidence on the compensatory behavior of smokers who, in face of higher taxes, are found to reduce their consumption of cigarettes while maintaining their cotinine--a biomarker for nicotine--levels constant. This comment examines the robustness of the empirical findings in Adda and Cornaglia (2006) using: appropriate clustered standard errors, a larger sample from the same years and survey as the data in Adda and Cornaglia (2006), cigarette-prices instead of and in addition to cigarette-taxes, and sampling weights. The empirical findings of Adda and Cornaglia (2006) are not robust. Further, little systematic evidence of compensatory behavior is found among subsamples of smokers. http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1751 10.1257/aer.102.4.1751 http://www.aeaweb.org/aer/data/june2012/20080265_data.zip http://www.aeaweb.org/aer/data/june2012/20080265_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 4 June 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=4 Journal Article Independent Auditor's Report 1764 1772 http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.4.1764 10.1257/aer.102.4.1764