American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Journal Article Front Matter i viii Includes: Daniel Kahneman: Distinguished Fellow 2011 http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.i 10.1257/aer.102.6.i American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles The Collateral Channel: How Real Estate Shocks Affect Corporate Investment ThomasChaneyU Chicago DavidSraerBendheim Center for Finance, Princeton U DavidThesmarHEC Paris 2381 2409 What is the impact of real estate prices on corporate investment? In the presence of financing frictions, firms use pledgeable assets as collateral to finance new projects. Through this collateral channel, shocks to the value of real estate can have a large impact on aggregate investment. To compute the sensitivity of investment to collateral value, we use local variations in real estate prices as shocks to the collateral value of firms that own real estate. Over the 1993-2007 period, the representative US corporation invests $0.06 out of each $1 of collateral. (JEL D22, G31, R30) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2381 10.1257/aer.102.6.2381 http://www.aeaweb.org/aer/data/oct2012/20091306_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles Modeling the Change of Paradigm: Non-Bayesian Reactions to Unexpected News PietroOrtolevaCA Institute of Technology 2410 36 Bayes' rule has two well-known limitations: 1) it does not model the reaction to zero-probability events; 2) a sizable empirical evidence documents systematic violations of it. We characterize axiomatically an alternative updating rule, the Hypothesis Testing model. According to it, the agent follows Bayes' rule if she receives information to which she assigned a probability above a threshold. Otherwise, she looks at a prior over priors, updates it using Bayes' rule for second-order priors, and chooses the prior to which the updated prior over priors assigns the highest likelihood. We also present an application to equilibrium refinement in game theory. (JEL D11, D81, D83) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2410 10.1257/aer.102.6.2410 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles Markups and Firm-Level Export Status JanDe LoeckerPrinceton U FredericWarzynskiAarhus U 2437 71 In this paper, we develop a method to estimate markups using plant-level production data. Our approach relies on cost-minimizing producers and the existence of at least one variable input of production. The suggested empirical framework relies on the estimation of a production function and provides estimates of plant-level markups without specifying how firms compete in the product market. We rely on our method to explore the relationship between markups and export behavior. We find that markups are estimated significantly higher when controlling for unobserved productivity; that exporters charge, on average, higher markups and that markups increase upon export entry. (JEL D22, D24, F14, L11, L60) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2437 10.1257/aer.102.6.2437 http://www.aeaweb.org/aer/data/oct2012/20090747_data.zip http://www.aeaweb.org/aer/data/oct2012/20090747_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles The Evolution of Brand Preferences: Evidence from Consumer Migration Bart J.BronnenbergTilburg U Jean-Pierre H.DubeU Chicago MatthewGentzkowU Chicago 2472 2508 We study the long-run evolution of brand preferences, using new data on consumers' life histories and purchases of consumer packaged goods. Variation in where consumers have lived in the past allows us to isolate the causal effect of past experiences on current purchases, holding constant contemporaneous supply-side factors. We show that brand preferences form endogenously, are highly persistent, and explain 40 percent of geographic variation in market shares. Counterfactuals suggest that brand preferences create large entry barriers and durable advantages for incumbent firms and can explain the persistence of early-mover advantage over long periods. (JEL D12, L11, M31, M37) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2472 10.1257/aer.102.6.2472 http://www.aeaweb.org/aer/data/oct2012/20100941_data.zip http://www.aeaweb.org/aer/data/oct2012/20100941_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles The Contribution of Large and Small Employers to Job Creation in Times of High and Low Unemployment GiuseppeMoscariniYale U FabienPostel-VinayU Bristol 2509 39 We document a negative correlation, at business cycle frequencies, between the net job creation rate of large employers and the level of aggregate unemployment that is much stronger than for small employers. The differential growth rate of employment between initially large and small employers has an unconditional correlation of -0.5 with the unemployment rate, and varies by about 5 percent over the business cycle. We exploit several datasets from the United States, Denmark, and France, both repeated cross sections and job flows with employer longitudinal information, spanning the last four decades and several business cycles. We discuss implications for theories of factor demand. (JEL D22, E23, E32, J23, L25) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2509 10.1257/aer.102.6.2509 http://www.aeaweb.org/aer/data/oct2012/20091077_data.zip http://www.aeaweb.org/aer/data/oct2012/20091077_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles The Rise of the Service Economy Francisco J.BueraFederal Reserve Bank of Minneapolis and UCLA Joseph P.KaboskiU Notre Dame 2540 69 This paper analyzes the role of specialized high-skilled labor in the disproportionate growth of the service sector. Empirically, the importance of skill-intensive services has risen during a period of increasing relative wages and quantities of high-skilled labor. We develop a theory in which demand shifts toward more skill- intensive output as productivity rises, increasing the importance of market services relative to home production. Consistent with the data, the theory predicts a rising level of skill, skill premium, and relative price of services that is linked to this skill premium. (JEL J24, L80, L90) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2540 10.1257/aer.102.6.2540 http://www.aeaweb.org/aer/data/oct2012/20070991_data.zip http://www.aeaweb.org/aer/data/oct2012/20070991_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles Liquidity, Monetary Policy, and the Financial Crisis: A New Monetarist Approach Stephen D.WilliamsonWashington U in St Louis and Federal Reserve Bank of Richmond 2570 2605 A model of public and private liquidity integrates financial intermediation theory with a New Monetarist monetary framework. Non-passive fiscal policy and costs of operating a currency system imply that an optimal policy deviates from the Friedman rule. A liquidity trap can exist in equilibrium away from the Friedman rule, and there exists a permanent nonneutrality of money, driven by an illiquidity effect. Financial frictions can produce a financial-crisis phenomenon that can be mitigated by conventional open market operations working in an unconventional manner. Private asset purchases by the central bank are either irrelevant or they reallocate credit and redistribute income. (JEL E13, E44, E52, E62, G01) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2570 10.1257/aer.102.6.2570 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles How General Are Risk Preferences? Choices under Uncertainty in Different Domains LiranEinavStanford U AmyFinkelsteinMIT IulianaPascuMIT Mark R.CullenStanford U 2606 38 We analyze the extent to which individuals' choices over five employer-provided insurance coverage decisions and one 401(k) investment decision exhibit systematic patterns, as would be implied by a general utility component of risk preferences. We provide evidence consistent with an important domain-general component that operates across all insurance choices. We find a considerably weaker relationship between one's insurance decisions and 401(k) asset allocation, although this relationship appears larger for more "financially sophisticated" individuals. Estimates from a stylized coverage choice model suggest that up to 30 percent of our sample makes choices that may be consistent across all 6 domains. (JEL D12, D14, D81, G22, J33) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2606 10.1257/aer.102.6.2606 http://www.aeaweb.org/aer/data/oct2012/20100050_data.zip http://www.aeaweb.org/aer/data/oct2012/20100050_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles Sinking, Swimming, or Learning to Swim in Medicare Part D Jonathan D.KetchamAZ State U ClaudioLucarelliCornell U and LDI, U PA Eugenio J.MiraveteU TX M. ChristopherRoebuckRXEconomics, Hunt Valley, MD 2639 73 Under Medicare Part D, senior citizens choose prescription drug insurance offered by numerous private insurers. We examine nonpoor enrollees- actions in 2006 and 2007 using panel data. Our sample reduced overspending by $298 on average, with gains by 81 percent of them. The greatest improvements were by those who overspent most in 2006 and by those who switched plans. Decisions to switch depended on individuals' overspending in 2006 and on individual-specific effects of changes in their current plans. The oldest consumers and those initiating medications for Alzheimer's disease improved by more than average, suggesting that real-world institutions help overcome cognitive limitations. (JEL D14, G22, H51, I13, I18) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2639 10.1257/aer.102.6.2639 http://www.aeaweb.org/aer/data/oct2012/20100605_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles Maturity, Indebtedness, and Default Risk SatyajitChatterjeeFederal Reserve Bank of Philadelphia BurcuEyigungorFederal Reserve Bank of Philadelphia 2674 99 We advance quantitative-theoretic models of sovereign debt by proving the existence of a downward sloping equilibrium price function for long-term debt and implementing a novel method to accurately compute it. We show that incorporating long-term debt allows the model to match Argentina's average external debt-to-output ratio, average spread on external debt, the standard deviation of spreads, and simultaneously improve upon the model's ability to account for Argentina's other cyclical facts. We also investigated the welfare properties of maturity length and showed that if the possibility of self-fulfilling rollover crises is taken into account, long-term debt is superior to short-term debt. (JEL E23, E32, F34, O11, O19) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2674 10.1257/aer.102.6.2674 http://www.aeaweb.org/aer/data/oct2012/20090138_data.zip http://www.aeaweb.org/aer/data/oct2012/20090138_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles Trade Costs, Asset Market Frictions, and Risk Sharing DoireannFitzgeraldStanford U 2700 2733 I use bilateral import data to test for and quantify the importance of trade costs and asset market frictions in explaining the failure of perfect international consumption risk sharing. I find that while frictions in international asset markets significantly impede optimal consumption risk sharing between developed and developing countries over the period 1970-2000, developed countries are close to optimal risk sharing with each other. Trade costs, in contrast, significantly impede risk sharing for all countries. (JEL E21, E44, F14, F41, G15) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2700 10.1257/aer.102.6.2700 http://www.aeaweb.org/aer/data/oct2012/20070490_data.zip http://www.aeaweb.org/aer/data/oct2012/20070490_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles Disaster Risk and Business Cycles FrancoisGourioBoston U 2734 66 Motivated by the evidence that risk premia are large and countercyclical, this paper studies a tractable real business cycle model with a small risk of economic disaster, such as the Great Depression. An increase in disaster risk leads to a decline of employment, output, investment, stock prices, and interest rates, and an increase in the expected return on risky assets. The model matches well data on quantities, asset prices, and particularly the relations between quantities and prices, suggesting that variation in aggregate risk plays a significant role in some business cycles. (JEL E13, E32, E44, G32) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2734 10.1257/aer.102.6.2734 http://www.aeaweb.org/aer/data/oct2012/20100375_data.zip http://www.aeaweb.org/aer/data/oct2012/20100375_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles But Who Will Monitor the Monitor? DavidRahmanU MN 2767 97 Suppose that providing incentives for a group of individuals in a strategic context requires a monitor to detect their deviations. What about the monitor's deviations? To address this question, I propose a contract that makes the monitor responsible for monitoring, and thereby provides incentives even when the monitor's observations are not only private, but costly, too. I also characterize exactly when such a contract can provide monitors with the right incentives to perform. In doing so, I emphasize virtual enforcement and suggest its implications for the theory of repeated games. (JEL C78, D23, D82, D86) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2767 10.1257/aer.102.6.2767 http://www.aeaweb.org/aer/data/oct2012/20090980_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles Reset Price Inflation and the Impact of Monetary Policy Shocks MarkBilsU Rochester Peter J.KlenowStanford U Benjamin A.MalinFederal Reserve Board 2798 2825 Many business cycle models use a flat short-run Phillips curve, due to time-dependent pricing and strategic complementarities, to explain fluctuations in real output. But, in doing so, these models predict unrealistically high persistence and stability of US inflation in recent decades. We calculate "reset price inflation"--based on new prices chosen by the subsample of price changers--to dissect this discrepancy. We find that the models generate too much persistence and stability both in reset price inflation and in the way reset price inflation is converted into actual inflation. Our findings present a challenge to existing explanations for business cycles. (JEL E31, E52) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2798 10.1257/aer.102.6.2798 http://www.aeaweb.org/aer/data/oct2012/20090247_data.zip http://www.aeaweb.org/aer/data/oct2012/20090247_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles Physician Agency and Adoption of Generic Pharmaceuticals ToshiakiIizukaU Tokyo 2826 58 I examine physician agency in health care services in the context of the choice between brand-name and generic pharmaceuticals. I examine micro-panel data from Japan, where physicians can legally make profits by prescribing and dispensing drugs. The results indicate that physicians often fail to internalize patient costs, explaining why cheaper generics are infrequently adopted. Doctors respond to markup differentials between the two versions, indicating another agency problem. However, generics' markup advantages are shortlived, which limits their impact on increasing generic adoption. Additionally, state dependence and heterogeneous doctor preferences affected generics' adoption. Policy makers can target these factors to improve static efficiency. (JEL D82, I11, J44, L65) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2826 10.1257/aer.102.6.2826 http://www.aeaweb.org/aer/data/oct2012/20090599_data.zip http://www.aeaweb.org/aer/data/oct2012/20090599_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Rebalancing? YiLiChienFederal Reserve Bank of St Louis HaroldColeU PA HannoLustigUCLA 2859 96 Our paper examines whether the failure of unsophisticated investors to rebalance their portfolios can help to explain the countercyclical volatility of aggregate risk compensation in financial markets. To answer this question, we set up a model in which a large mass of investors do not rebalance their portfolio shares in response to aggregate shocks, while a smaller mass of active investors do. We find that intermittent rebalancers more than double the effect of aggregate shocks on the time variation in risk premia by forcing active traders to sell more shares in good times and buy more shares in bad times. (JEL D14, E32, G11, G12) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2859 10.1257/aer.102.6.2859 http://www.aeaweb.org/aer/data/oct2012/20100568_data.zip http://www.aeaweb.org/aer/data/oct2012/20100568_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles The Strategy of Manipulating Conflict SandeepBaligaNorthwestern U TomasSjostromRutgers U 2897 2922 Two players choose hawkish or dovish actions in a conflict game with incomplete information. An "extremist," who can either be a hawk or a dove, attempts to manipulate decision making. If actions are strategic complements, a hawkish extremist increases the likelihood of conflict, and reduces welfare, by sending a public message which triggers hawkish behavior from both players. If actions are strategic substitutes, a dovish extremist instead sends a public message which causes one player to become more dovish and the other more hawkish. A hawkish (dovish) extremist is unable to manipulate decision making if actions are strategic substitutes (complements). (JEL D74, D82) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2897 10.1257/aer.102.6.2897 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Articles Credit Market Consequences of Improved Personal Identification: Field Experimental Evidence from Malawi XavierGineWorld Bank and BREAD, Washington, DC JessicaGoldbergU MD DeanYangU MI and BREAD, Ann Arbor, MI 2923 54 We implemented a randomized field experiment in Malawi examining borrower responses to being fingerprinted when applying for loans. This intervention improved the lender's ability to implement dynamic repayment incentives, allowing it to withhold future loans from past defaulters while rewarding good borrowers with better loan terms. As predicted by a simple model, fingerprinting led to substantially higher repayment rates for borrowers with the highest ex ante default risk, but had no effect for the rest of the borrowers. We provide unique evidence that this improvement in repayment rates is accompanied by behaviors consistent with less adverse selection and lower moral hazard. (JEL D14, D82, G21, O12, O16) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2923 10.1257/aer.102.6.2923 http://www.aeaweb.org/aer/data/oct2012/20101090_data.zip http://www.aeaweb.org/aer/data/oct2012/20101090_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Shorter Papers Testing Models of Consumer Search Using Data on Web Browsing and Purchasing Behavior BaburDe Los SantosIN U AliHortacsuU Chicago Matthijs R.WildenbeestIN U 2955 80 Using a large dataset on web browsing and purchasing behavior we test to what extent consumers are searching in accordance to various search models. We find that the benchmark model of sequential search with a known price distribution can be rejected based on recall patterns found in the data as well as the absence of dependence of search decisions on prices. Our findings suggest fixed sample size search provides a more accurate description of search behavior. We then utilize the fixed sample size search model to estimate demand elasticities of online bookstores in an environment where store preferences are heterogeneous. (JEL D12, D83, L81) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2955 10.1257/aer.102.6.2955 http://www.aeaweb.org/aer/data/oct2012/20100200_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Shorter Papers Inequality at Work: The Effect of Peer Salaries on Job Satisfaction DavidCardU CA, Berkeley AlexandreMasPrinceton U EnricoMorettiU CA, Berkeley EmmanuelSaezU CA, Berkeley 2981 3003 We study the effect of disclosing information on peers' salaries on workers' job satisfaction and job search intentions. A randomly chosen subset of University of California employees was informed about a new website listing the pay of University employees. All employees were then surveyed about their job satisfaction and job search intentions. Workers with salaries below the median for their pay unit and occupation report lower pay and job satisfaction and a significant increase in the likelihood of looking for a new job. Above-median earners are unaffected. Differences in pay rank matter more than differences in pay levels. (JEL I23, J28, J31, J64) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2981 10.1257/aer.102.6.2981 http://www.aeaweb.org/aer/data/oct2012/20110453_data.zip http://www.aeaweb.org/aer/data/oct2012/20110453_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Shorter Papers Credit Traps EfraimBenmelechNorthwestern U Nittai K.BergmanMIT 3004 32 This paper studies the limitations of monetary policy in stimulating credit and investment. We show that, under certain circumstances, unconventional monetary policies fail in that liquidity injections into the banking sector are hoarded and not lent out. We use the term "credit traps" to describe such situations and show how they can arise due to the interplay between financing frictions, liquidity, and collateral values. We show that small contractions in monetary policy can lead to a collapse in lending. Our analysis demonstrates how quantitative easing may be useful in increasing collateral prices, bank lending, and aggregate investment. (JEL E44, E52, E58, G01) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.3004 10.1257/aer.102.6.3004 http://www.aeaweb.org/aer/data/oct2012/20100818_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Shorter Papers Economic Growth with Bubbles AlbertoMartinCREI, U Pompeu Fabra JaumeVenturaCREI, U Pompeu Fabra 3033 58 We develop a stylized model of economic growth with bubbles in which changes in investor sentiment lead to the appearance and collapse of macroeconomic bubbles or pyramid schemes. These bubbles mitigate the effects of financial frictions. During bubbly episodes, unproductive investors demand bubbles while productive investors supply them. These transfers of resources improve economic efficiency thereby expanding consumption, the capital stock and output. When bubbly episodes end, there is a fall in consumption, the capital stock and output. We argue that the stochastic equilibria of the model provide a natural way of introducing bubble shocks into business cycle models. (JEL E22, E23, E32, E44, O41) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.3033 10.1257/aer.102.6.3033 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Shorter Papers The Colonial Origins of Comparative Development: An Empirical Investigation: Comment David Y.AlbouyU MI 3059 76 Acemoglu, Johnson, and Robinson's (2001) seminal article argues property-rights institutions powerfully affect national income, using estimated mortality rates of early European settlers to instrument capital expropriation risk. However, 36 of the 64 countries in the sample are assigned mortality rates from other countries, often based on mistaken or conflicting evidence. Also, incomparable mortality rates from populations of laborers, bishops, and soldiers--often on campaign--are combined in a manner that favors the hypothesis. When these data issues are controlled for, the relationship between mortality and expropriation risk lacks robustness, and instrumental-variable estimates become unreliable, often with infinite confidence intervals. (JEL D02, E23, F54, I12, N40, O43, P14) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.3059 10.1257/aer.102.6.3059 http://www.aeaweb.org/aer/data/oct2012/20041216_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 102 6 October 2012 http://www.aeaweb.org/issue.php?journal=AER&volume=102&issue=6 Shorter Papers The Colonial Origins of Comparative Development: An Empirical Investigation: Reply DaronAcemogluMIT SimonJohnsonMIT James A.RobinsonHarvard U 3077 3110 Acemoglu, Johnson, and Robinson (2001) established that economic institutions today are correlated with expected mortality of European colonialists. David Albouy argues this relationship is not robust. He drops all data from Latin America and much of the data from Africa, making up almost 60 percent of our sample, despite much information on the mortality of Europeans in those places during the colonial period. He also includes a "campaign" dummy that is coded inconsistently; even modest corrections undermine his claims. We also show that limiting the effect of outliers strengthens our results, making them robust to even extreme versions of Albouy's critiques. (JEL D02, E23, F54, I12, N40, O43, P14) http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.3077 10.1257/aer.102.6.3077 http://www.aeaweb.org/aer/data/oct2012/20110390_data.zip