American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Journal Article Front Matter i vii Including William C. Brainard: Distinguished Fellow 2011 http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.i 10.1257/aer.102.5.i American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles A Field Study on Matching with Network Externalities MariagiovannaBaccaraWashington U in St Louis AyseImrohorogluU Southern CA Alistair J.WilsonU Pittsburgh LeeatYarivCA Institute of Technology 1773 1804 We study the effects of network externalities within a protocol for matching faculty to offices in a new building. Using web and survey data on faculty's attributes and choices, we identify the different layers of the social network: institutional affiliation, coauthorships, and friendships. We quantify the effects of network externalities on choices and outcomes, disentangle the layers of the networks, and quantify their relative influence. Finally, we assess the protocol used from a welfare perspective. Our study suggests the importance and feasibility of accounting for network externalities in assignment problems and evaluates techniques that can be employed to this end. (JEL C78, C93, D62, D85, Z13) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.1773 10.1257/aer.102.5.1773 http://www.aeaweb.org/aer/data/aug2012/20090908_data.zip http://www.aeaweb.org/aer/data/aug2012/20090908_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles Pay for Percentile GadiBarlevyFederal Reserve Bank of Chicago DerekNealU Chicago 1805 31 We propose an incentive scheme for educators that links compensation to the ranks of their students within comparison sets. Under certain conditions, this scheme induces teachers to allocate socially optimal levels of effort. Moreover, because this scheme employs only ordinal information, it allows education authorities to employ completely new assessments at each testing date without ever having to equate various assessments. This removes incentives for teachers to teach to a particular assessment form and eliminates opportunities to influence reward pay by corrupting assessment scales. Education authorities can employ separate no-stakes assessment systems to track trends in scaled measures of student achievement. (JEL I21, I28, J33, J45) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.1805 10.1257/aer.102.5.1805 http://www.aeaweb.org/aer/data/aug2012/20091243_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles Europe's Tired, Poor, Huddled Masses: Self-Selection and Economic Outcomes in the Age of Mass Migration RanAbramitzkyStanford U Leah PlattBoustanUCLA KatherineErikssonUCLA 1832 56 During the age of mass migration (1850-1913), one of the largest migration episodes in history, the United States maintained a nearly open border, allowing the study of migrant decisions unhindered by entry restrictions. We estimate the return to migration while accounting for migrant selection by comparing Norway-to-US migrants with their brothers who stayed in Norway in the late nineteenth century. We also compare fathers of migrants and nonmigrants by wealth and occupation. We find that the return to migration was relatively low (70 percent) and that migrants from urban areas were negatively selected from the sending population. (JEL J11, J61, N31, N33) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.1832 10.1257/aer.102.5.1832 http://www.aeaweb.org/aer/data/aug2012/20100051_data.zip http://www.aeaweb.org/aer/data/aug2012/20100051_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles Social Capital and Social Quilts: Network Patterns of Favor Exchange Matthew O.JacksonStanford U and Santa Fe Institute TomasRodriguez-BarraquerEuropean U Institute, Florence XuTanStanford U 1857 97 We examine the informal exchange of favors in societies such that any two individuals interact too infrequently to sustain exchange, but such that the social pressure of the possible loss of multiple relationships can sustain exchange. Patterns of exchange that are locally enforceable and renegotiation-proof necessitate that all links are "supported": any two individuals exchanging favors have a common friend. In symmetric settings, such robust networks are "social quilts": tree-like unions of completely connected subnetworks. Examining favor exchange networks in 75 villages in rural India, we find high levels of support and identify characteristics that correlate with support. (JEL D85, O12, O18, Z13) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.1857 10.1257/aer.102.5.1857 http://www.aeaweb.org/aer/data/aug2012/20100760_data.zip http://www.aeaweb.org/aer/data/aug2012/20100760_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles A Rational Expectations Approach to Hedonic Price Regressions with Time-Varying Unobserved Product Attributes: The Price of Pollution PatrickBajariU MN Jane CooleyFruehwirthU Cambridge Kyoo ilKimU MN ChristopherTimminsDuke U 1898 1926 We propose a new strategy for a pervasive problem in the hedonics literature: recovering hedonic prices in the presence of time-varying correlated unobservables. Our approach relies on an assumption about home buyer rationality, under which prior sales prices can be used to control for time-varying unobservable attributes of the house or neighborhood. Using housing transactions data from California's Bay Area between 1990 and 2006, we apply our estimator to recover marginal willingness to pay for reductions in three of the EPA's "criteria" air pollutants. Our findings suggest that ignoring bias from time-varying correlated unobservables considerably understates the benefits of a pollution reduction policy. (JEL D12, D84, Q53, Q58, R21) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.1898 10.1257/aer.102.5.1898 http://www.aeaweb.org/aer/data/aug2012/20100097_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles The Impact of Family Income on Child Achievement: Evidence from the Earned Income Tax Credit Gordon B.DahlU CA, San Diego LanceLochnerU Western Ontario 1927 56 Using an instrumental variables strategy, we estimate the causal effect of income on children's math and reading achievement. Our identification derives from the large, nonlinear changes in the Earned Income Tax Credit. The largest of these changes increased family income by as much as 20 percent, or approximately $2,100, between 1993 and 1997. Our baseline estimates imply that a $1,000 increase in income raises combined math and reading test scores by 6 percent of a standard deviation in the short run. Test gains are larger for children from disadvantaged families and robust to a variety of alternative specifications. (JEL H24, H31, I21, I38, J13) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.1927 10.1257/aer.102.5.1927 http://www.aeaweb.org/aer/data/aug2012/20050400_data.zip http://www.aeaweb.org/aer/data/aug2012/20050400_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles Bundling and Competition for Slots Doh-ShinJeonToulouse School of Economics and U Toulouse I, Capitole DomenicoMenicucciU Florence 1957 85 We consider competition between sellers selling multiple distinct products to a buyer having k slots. Under independent pricing, a pure strategy equilibrium often does not exist, and equilibrium in mixed strategy is never efficient. When bundling is allowed, each seller has an incentive to bundle his products, and an efficient "technology-renting" equilibrium always exists. Furthermore, in the case of digital goods or when sales below marginal cost are banned, all equilibria are efficient. Comparing the mixed-strategy equilibrium with the technology-renting equilibrium reveals that bundling often increases the buyer's surplus. Finally, we derive clear-cut policy implications.(JEL D43, D86, K21, L13, L14, L41, L82) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.1957 10.1257/aer.102.5.1957 http://www.aeaweb.org/aer/data/aug2012/20090847_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles Fund Managers, Career Concerns, and Asset Price Volatility VeronicaGuerrieriU Chicago PeterKondorCentral European U, Budapest 1986 2017 We propose a model of delegated portfolio management with career concerns. Investors hire fund managers to invest their capital either in risky bonds or in riskless assets. Some managers have superior information on default risk. Based on past performance, investors update beliefs on managers and make firing decisions. This leads to career concerns that affect managers' investment decisions, generating a countercyclical "reputational premium." When default risk is high, return on bonds is high to compensate uninformed managers for the high risk of being fired. As default risk changes over time, the reputational premium amplifies price volatility. (JEL G11, G12, G23, L84) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.1986 10.1257/aer.102.5.1986 http://www.aeaweb.org/aer/data/aug2012/20100550_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles Organ Allocation Policy and the Decision to Donate Judd B.KesslerU PA Alvin E.RothHarvard U 2018 47 Organ donations from deceased donors provide the majority of transplanted organs in the United States, and one deceased donor can save numerous lives by providing multiple organs. Nevertheless, most Americans are not registered organ donors despite the relative ease of becoming one. We study in the laboratory an experimental game modeled on the decision to register as an organ donor and investigate how changes in the management of organ waiting lists might impact donations. We find that an organ allocation policy giving priority on waiting lists to those who previously registered as donors has a significant positive impact on registration. (JEL C91, D64, I11) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.2018 10.1257/aer.102.5.2018 http://www.aeaweb.org/aer/data/aug2012/20100693_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles Katrina's Children: Evidence on the Structure of Peer Effects from Hurricane Evacuees Scott A.ImbermanU Houston Adriana D.KuglerGeorgetown U Bruce I.SacerdoteDartmouth College 2048 82 In 2005, Hurricanes Katrina and Rita forced many children to relocate across the Southeast. While schools quickly enrolled evacuees, families in receiving schools worried about the impacts on incumbent students. We find no effect, on average, of the inflow of evacuees on achievement in Houston. In Louisiana we find little impact on average and we reject linear-in-means models. Moreover, we find that student achievement improves with high achieving peers and worsens with low achieving peers. Finally, an increase in the inflow of evacuees raised incumbent absenteeism and disciplinary problems in Houston's secondary schools. (JEL I21, Q54) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.2048 10.1257/aer.102.5.2048 http://www.aeaweb.org/aer/data/aug2012/20091305_data.zip http://www.aeaweb.org/aer/data/aug2012/20091305_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles What Do You Think Would Make You Happier? What Do You Think You Would Choose? Daniel J.BenjaminCornell U OriHeffetzCornell U Miles S.KimballU MI AlexRees-JonesCornell U 2083 2110 Would people choose what they think would maximize their subjective well-being (SWB)? We present survey respondents with hypothetical scenarios and elicit both choice and predicted SWB rankings of two alternatives. While choice and predicted SWB rankings usually coincide in our data, we find systematic reversals. We identify factors--such as predicted sense of purpose, control over one's life, family happiness, and social status--that help explain hypothetical choice controlling for predicted SWB. We explore how our findings vary by SWB measure and by scenario. Our results have implications regarding the use of SWB survey questions as a proxy for utility. (JEL D03, I31) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.2083 10.1257/aer.102.5.2083 http://www.aeaweb.org/aer/data/aug2012/20101267_data.zip http://www.aeaweb.org/aer/data/aug2012/20101267_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles Industrial Structure and Capital Flows KeyuJinLondon School of Economics and Political Science 2111 46 This paper provides a new theory of international capital flows. In a framework that integrates factor-proportions-based trade and financial capital flows, a novel force emerges: capital tends to flow toward countries that become more specialized in capital-intensive industries. This "composition" effect competes with the standard force that channels capital toward the location where it is scarcer. If the composition effect dominates, capital flows away from the country hit by a positive labor force/productivity shock--a flow "reversal." Extended to a quantitative framework, the model generates sizable current account imbalances between developing and developed countries broadly consistent with the data. (JEL F14, F21, F32, F41, L16, O19) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.2111 10.1257/aer.102.5.2111 http://www.aeaweb.org/aer/data/aug2012/20091182_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles Spatial Differentiation and Vertical Mergers in Retail Markets for Gasoline Jean-FrancoisHoudeU PA 2147 82 This paper studies an empirical model of spatial competition applied to gasoline markets. The main feature is to specify commuting paths as the "locations" of consumers in a Hotelling-style model. As a result, spatial differentiation depends in an intuitive way on the structure of the road network and the direction of traffic flows. The model is estimated using panel data on the Quebec City gasoline market and used to evaluate the consequences of a recent vertical merger. Difference-in-difference and counterfactual simulation methods are compared, and the results, to a large extent, validate the assumptions of the demand model. (JEL G34, L13, L42, L81, Q41, R41) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.2147 10.1257/aer.102.5.2147 http://www.aeaweb.org/aer/data/aug2012/20090640_data.zip http://www.aeaweb.org/aer/data/aug2012/20090640_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles Revealed Attention YusufcanMasatliogluU MI DaisukeNakajimaU MI Erkut Y.OzbayU MD 2183 2205 The standard revealed preference argument relies on an implicit assumption that a decision maker considers all feasible alternatives. The marketing and psychology literatures, however, provide well-established evidence that consumers do not consider all brands in a given market before making a purchase (Limited Attention). In this paper, we illustrate how one can deduce both the decision maker's preference and the alternatives to which she pays attention and inattention from the observed behavior. We illustrate how seemingly compelling welfare judgments without specifying the underlying choice procedure are misleading. Further, we provide a choice theoretical foundation for maximizing a single preference relation under limited attention. (JEL D11, D81) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.2183 10.1257/aer.102.5.2183 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles Heuristic Thinking and Limited Attention in the Car Market NicolaLaceteraU Toronto Devin G.PopeU Chicago Justin R.SydnorU WI 2206 36 Can heuristic information processing affect important product markets? Analyzing over 22 million wholesale used-car transactions, we find evidence of left-digit bias in the processing of odometer values, whereby individuals focus on the number's leftmost digits. The bias leads to discontinuous drops in sale prices at 10,000-mile odometer thresholds, along with smaller drops at 1,000-mile thresholds. These findings reveal that information-processing heuristics matter even in markets with large stakes and easily observed information. We model left-digit bias in an inattention framework and structurally estimate the inattention parameter. Empirical patterns suggest the results are driven by final customers rather than professional agents. (JEL D12, D44, D83, L81) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.2206 10.1257/aer.102.5.2206 http://www.aeaweb.org/aer/data/aug2012/20100631_data.zip http://www.aeaweb.org/aer/data/aug2012/20100631_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Articles The Multi-unit Assignment Problem: Theory and Evidence from Course Allocation at Harvard EricBudishU Chicago EstelleCantillonFree U Brussels 2237 71 We use theory and field data to study the draft mechanism used to allocate courses at Harvard Business School. We show that the draft is manipulable in theory, manipulated in practice, and that these manipulations cause significant welfare loss. Nevertheless, we find that welfare is higher than under its widely studied strategyproof alternative. We identify a new link between fairness and welfare that explains why the draft performs well despite the costs of strategic behavior, and then design a new draft that reduces these costs. We draw several broader lessons for market design, regarding Pareto efficiency, fairness, and strategyproofness. (JEL D63, D82, I23) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.2237 10.1257/aer.102.5.2237 http://www.aeaweb.org/aer/data/aug2012/20091443_data.zip http://www.aeaweb.org/aer/data/aug2012/20091443_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Shorter Papers Durable Consumption and Asset Management with Transaction and Observation Costs FernandoAlvarezU Chicago LuigiGuisoEinaudi Institute for Economics and Finance, Rome FrancescoLippiU Sassari and Einaudi Institute for Economics and Finance, Rome 2272 2300 The empirical evidence on rational inattention lags the theoretical developments: micro evidence on one of the most immediate consequences of observation costs--the infrequent observation of state variables--is not available in standard datasets. We contribute to filling the gap using new household surveys. To match these data we modify existing models, shifting the focus from nondurable to durable consumption. The model features both observation and transaction costs and implies a mixture of time-dependent and state-dependent rules. Numerical simulations explain the frequencies of trading and observation of the median investor with small observation costs and larger transaction costs. (JEL D12, D14, E21, G11) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.2272 10.1257/aer.102.5.2272 http://www.aeaweb.org/aer/data/aug2012/20100633_data.zip http://www.aeaweb.org/aer/data/aug2012/20100633_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Shorter Papers Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications GabrielJimenezBank of Spain StevenOngenaTilburg U Jose-LuisPeydroU Pompeu Fabra and Barcelona GSE JesusSaurinaBank of Spain 2301 26 We analyze the impact of monetary policy on the supply of bank credit. Monetary policy affects both loan supply and demand, thus making identification a steep challenge. We therefore analyze a novel, supervisory dataset with loan applications from Spain. Accounting for time-varying firm heterogeneity in loan demand, we find that tighter monetary and worse economic conditions substantially reduce loan granting, especially from banks with lower capital or liquidity ratios; responding to applications for the same loan, weak banks are less likely to grant the loan. Finally, firms cannot offset the resultant credit restriction by applying to other banks. (JEL E32, E44, E52, G21, G32) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.2301 10.1257/aer.102.5.2301 http://www.aeaweb.org/aer/data/aug2012/20100064_data.zip http://www.aeaweb.org/aer/data/aug2012/20100064_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Shorter Papers Skill Dispersion and Trade Flows MatildeBombardiniU British Columbia GiovanniGallipoliU British Columbia GermanPupatoGetulio Vargas Foundation, Rio de Janeiro 2327 48 Is skill dispersion a source of comparative advantage? In this paper we use microdata from the International Adult Literacy Survey to show that the effect of skill dispersion on trade flows is quantitatively similar to that of the aggregate endowment of human capital. In particular we investigate, and find support for, the hypothesis that countries with a more dispersed skill distribution specialize in industries characterized by lower complementarity of workers' skills. The result is robust to the introduction of controls for alternative sources of comparative advantage, as well as to alternative measures of industry-level skill complementarity. (JEL F14, F16, J24, J31) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.2327 10.1257/aer.102.5.2327 http://www.aeaweb.org/aer/data/aug2012/20091234_data.zip http://www.aeaweb.org/aer/data/aug2012/20091234_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Shorter Papers Interjurisdictional Spillovers, Decentralized Policymaking, and the Elasticity of Capital Supply ThomasEichnerU Hagen MarcoRunkelBerlin U Technology 2349 57 This paper points to the important role that the elasticity of aggregate capital supply with respect to the net rate of return to capital plays for the efficiency of policymaking in a decentralized economy with mobile capital and spillovers among jurisdictions. In accordance with previous studies, we show that under the assumption of a fixed capital supply (zero capital supply elasticity) the decentralized policy choice is optimal. If the capital supply elasticity is strictly positive, however, capital tax rates are inefficiently low in the decentralized equilibrium. (JEL E22, E61, H25, H77) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.2349 10.1257/aer.102.5.2349 http://www.aeaweb.org/aer/data/aug2012/20101112_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 5 August 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=5 Shorter Papers The Hidden Advantage of Delegation: Pareto Improvements in a Gift Exchange Game GaryCharnessU CA, Santa Barbara RamonCobo-ReyesU Granada and Globe, Cartuja NataliaJimenezU Granada and Globe, Cartuja Juan A.LacombaU Granada and Globe, Cartuja FranciscoLagosU Granada and Globe, Cartuja 2358 79 This paper analyzes the effect on performance and earnings of delegating the wage choice to employees. Our results show that such delegation significantly increases effort levels. Moreover, we observe a Pareto improvement, as the earnings of both employers and employees increase when employers delegate than when they do not. Interestingly, we also find that the employees' performance under delegation is higher than under nondelegation, even for similar wages. While there is strong evidence that behavior reflects strategic considerations, this result also holds for one-shot interactions. A possible nonstrategic motivation explaining the positive reaction to delegation is a sense of enhanced responsibility. (JEL J31, J33, J41) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.2358 10.1257/aer.102.5.2358 http://www.aeaweb.org/aer/data/aug2012/20100589_data.zip