American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Matching with Contracts John WilliamHatfield Paul R.Milgrom 913 935 We develop a model of matching with contracts which incorporates, as special cases, the college admissions problem, the Kelso-Crawford labor market matching model, and ascending package auctions. We introduce a new "law of aggregate demand" for the case of discrete heterogeneous workers and show that, when workers are substitutes, this law is satisfied by profit-maximizing firms. When workers are substitutes and the law is satisfied, truthful reporting is a dominant strategy for workers in a worker-offering auction/matching algorithm. We also parameterize a large class of preferences satisfying the two conditions. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=1&issue_date=September 2005 10.1257/0002828054825466 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Bidding with Securities: Auctions and Security Design Peter M.DeMarzo IlanKremer AndrzejSkrzypacz 936 959 We study security-bid auctions in which bidders compete for an asset by bidding with securities whose payments are contingent on the asset's realized value. In formal security-bid auctions, the seller restricts the security design to an ordered set and uses a standard auction format (e.g., first- or second-price). In informal settings, bidders offer arbitrary securities and the seller chooses the most attractive bid, based on his beliefs, ex post. We characterize equilibrium and show that steeper securities yield higher revenues, that auction formats can be ranked based on the security design, and that informal auctions lead to the lowest possible revenues. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=2&issue_date=September 2005 10.1257/0002828054825475 http://www.e-aer.org/data/sept05_app_demarzo.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Fairness and Redistribution AlbertoAlesina George-MariosAngeletos 960 980 Different beliefs about the fairness of social competition and what determines income inequality influence the redistributive policy chosen in a society. But the composition of income in equilibrium depends on tax policies. We show how the interaction between social beliefs and welfare policies may lead to multiple equilibria or multiple steady states. If a society believes that individual effort determines income, and that all have a right to enjoy the fruits of their effort, it will choose low redistribution and low taxes. In equilibrium, effort will be high and the role of luck will be limited, in which case market outcomes will be relatively fair and social beliefs will be self-fulfilled. If, instead, a society believes that luck, birth, connections, and/or corruption determine wealth, it will levy high taxes, thus distorting allocations and making these beliefs self-sustained as well. These insights may help explain the cross-country variation in perceptions about income inequality and choices of redistributive policies. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=3&issue_date=September 2005 10.1257/0002828054825655 http://www.e-aer.org/data/sept05_data_alesina.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Legislative Bargaining under Weighted Voting James M.SnyderJr. Michael M.Ting StephenAnsolabehere 981 1004 Organizations often distribute resources through weighted voting. We analyze this setting using a noncooperative bargaining game based on the Baron-Ferejohn (1989) model. Unlike analyses derived from cooperative game theory, we find that each voter's expected payoff is proportional to her voting weight. An exception occurs when many high-weight voters exist, as low-weight voters may expect disproportionately high payoffs due to proposal power. The model also predicts that, ex post, the coalition formateur (the party chosen to form a coalition) will receive a disproportionately high payoff. Using data from coalition governments from 1946 to 2001, we find strong evidence of such formateur effects. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=4&issue_date=September 2005 10.1257/0002828054825538 http://www.e-aer.org/data/sept05_data_snyder.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article The Political Economy of Corporate Governance MarcoPagano Paolo F.Volpin 1005 1030 We analyze the political determinants of investor and employment protection. Our model predicts that proportional electoral systems are conducive to weaker investor protection and stronger employment protection than majoritarian systems. This prediction is consistent with international panel data evidence. The proportionality of the voting system is significantly and negatively correlated with shareholder protection in a panel of 45 countries, and positively correlated with employment protection in a panel of 21 OECD countries. Other political variables also affect regulatory outcomes, especially for the labor market. The origin of the legal system has some additional explanatory power only for employment protection. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=5&issue_date=September 2005 10.1257/0002828054825646 http://www.e-aer.org/data/sept05_data_pagano.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article The Market for News SendhilMullainathan AndreiShleifer 1031 1053 We investigate the market for news under two assumptions: that readers hold beliefs which they like to see confirmed, and that newspapers can slant stories toward these beliefs. We show that, on the topics where readers share common beliefs, one should not expect accuracy even from competitive media: competition results in lower prices, but common slanting toward reader biases. On topics where reader beliefs diverge (such as politically divisive issues), however, newspapers segment the market and slant toward extreme positions. Yet in the aggregate, a reader with access to all news sources could get an unbiased perspective. Generally speaking, reader heterogeneity is more important for accuracy in media than competition per se. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=6&issue_date=September 2005 10.1257/0002828054825619 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Incomplete Contracts and the Product Cycle PolAntràs 1054 1073 I present a model in which the incomplete nature of contracts governing international transactions limits the extent to which the production process can be fragmented across borders. Because of contractual frictions, goods are initially manufactured in the same country where product development takes place. Only when the good becomes sufficiently standardized is the manufacturing stage of production shifted to a low-wage foreign location. Solving for the optimal organizational structure, I develop a new version of the product cycle hypothesis in which manufacturing is shifted abroad first within firm boundaries, and only at a later stage to independent foreign firms. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=7&issue_date=September 2005 10.1257/0002828054825600 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Secrecy and Safety Andrew F.Daughety Jennifer F.Reinganum 1074 1091 We provide a model showing that the use of confidential settlement as a strategy for a firm facing tort litigation leads to lower average safety of products sold than would occur if the firm were committed to openness. A rational risk-neutral consumer's response in a market, wherein a firm engages in confidential settlements, may be to reduce demand. A firm committed to openness incurs higher liability and R&D costs, though product demand is not diminished. We identify conditions such that, if the cost of credible auditing (to verify openness) is low enough, a firm prefers to eschew confidentiality. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=8&issue_date=September 2005 10.1257/0002828054825673 http://www.e-aer.org/data/sept05_app_daughety.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Optimal Expectations Markus K.Brunnermeier Jonathan A.Parker 1092 1118 Forward-looking agents care about expected future utility flows, and hence have higher current felicity if they are optimistic. This paper studies utility-based biases in beliefs by supposing that beliefs maximize average felicity, optimally balancing this benefit of optimism against the costs of worse decision making. A small optimistic bias in beliefs typically leads to first-order gains in anticipatory utility and only second-order costs in realized outcomes. In a portfolio choice example, investors overestimate their return and exhibit a preference for skewness; in general equilibrium, investors' prior beliefs are endogenously heterogeneous. In a consumption-saving example, consumers are both overconfident and overoptimistic. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=9&issue_date=September 2005 10.1257/0002828054825493 http://www.e-aer.org/data/sept05_data_brunnermeier.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Precautionary Saving and Consumption Fluctuations Jonathan A.Parker BrucePreston 1119 1143 This paper uses the consumption Euler equation to derive a decomposition of consumption growth into four sources. These four sources are new information, and three sources of predictable consumption growth: intertemporal substitution, changes in the preferences for consumption, and incomplete markets for consumption insurance. Using household-level data, we implement this decomposition for the average growth rate of consumption expenditures on nondurable goods in the United States from 1982 to 1997. The economic importance of precautionary saving rivals that of the real interest rate, but the relative importance of each source of movement in the volatility of consumption is not precisely measured. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=10&issue_date=September 2005 10.1257/0002828054825556 http://www.e-aer.org/data/sept05_data_parker.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan JoePeek Eric S.Rosengren 1144 1166 We examine the misallocation of credit in Japan associated with the perverse incentives faced by banks to provide additional credit to the weakest firms. Firms are more likely to receive additional bank credit if they are in poor financial condition, because troubled Japanese banks have an incentive to allocate credit to severely impaired borrowers in order to avoid the realization of losses on their own balance sheets. This "evergreening" behavior is more prevalent among banks that have reported capital ratios close to the required minimum, and is compounded by the incentives arising from extensive corporate affiliations. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=11&issue_date=September 2005 10.1257/0002828054825691 http://www.e-aer.org/data/sept05_data_peek.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Homeownership, Community Interactions, and Segregation KarlaHoff ArijitSen 1167 1189 We show that individuals with identical preferences and abilities can self-organize into communities with starkly different civic environments. Specifically, we consider a multi-community city where community quality depends upon residents' efforts to prevent crime, improve local governance, etc. Homeownership raises incentives for such civic efforts, but is beyond the reach of the poor. Within-community externalities lead to segregated cities: the rich reside in healthy homeowner communities, while the poor live in dysfunctional renter communities. Tenure segregation in the United States accords well with our prediction. We study alternative tax-subsidy policies to expand homeownership and to promote integration of homeowners and renters. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=12&issue_date=September 2005 10.1257/0002828054825682 http://www.e-aer.org/data/sept05_app_hoff.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India AbhijitBanerjee LakshmiIyer 1190 1213 We analyze the colonial land revenue institutions set up by the British in India, and show that differences in historical property rights institutions lead to sustained differences in economic outcomes. Areas in which proprietary rights in land were historically given to landlords have significantly lower agricultural investments and productivity in the post-independence period than areas in which these rights were given to the cultivators. These areas also have significantly lower investments in health and education. These differences are not driven by omitted variables or endogeneity problems; they probably arise because differences in historical institutions lead to very different policy choices. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=13&issue_date=September 2005 10.1257/0002828054825574 http://www.e-aer.org/data/sept05_data_banerjee.zip http://www.e-aer.org/data/sept05_app_banerjee.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article How Do Patent Laws Influence Innovation? Evidence from Nineteenth-Century World's Fairs PetraMoser 1214 1236 Studies of innovation have focused on the effects of patent laws on the number of innovations, but have ignored effects on the direction of technological change. This paper introduces a new dataset of close to fifteen thousand innovations at the Crystal Palace World's Fair in 1851 and at the Centennial Exhibition in 1876 to examine the effects of patent laws on the direction of innovation. The paper tests the following argument: if innovative activity is motivated by expected profits, and if the effectiveness of patent protection varies across industries, then innovation in countries without patent laws should focus on industries where alternative mechanisms to protect intellectual property are effective. Analyses of exhibition data for 12 countries in 1851 and 10 countries in 1876 indicate that inventors in countries without patent laws focused on a small set of industries where patents were less important, while innovation in countries with patent laws appears to be much more diversified. These findings suggest that patents help to determine the direction of technical change and that the adoption of patent laws in countries without such laws may alter existing patterns of comparative advantage across countries. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=14&issue_date=September 2005 10.1257/0002828054825501 http://www.e-aer.org/data/sept05_data_moser.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article The Central Role of Noise in Evaluating Interventions That Use Test Scores to Rank Schools Kenneth Y.Chay Patrick J.McEwan MiguelUrquiola 1237 1258 Many programs reward or penalize schools based on students' average performance. Mean reversion is a potentially serious hindrance to the evaluation of such interventions. Chile's 900 Schools Program (P-900) allocated resources based on cutoffs in schools' mean test scores. This paper shows that transitory noise in average scores and mean reversion lead conventional estimation approaches to overstate the impacts of such programs. It further shows how a regression-discontinuity design can be used to control for reversion biases. It concludes that P-900 had significant effects on test score gains, albeit much smaller than is widely believed. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=15&issue_date=September 2005 10.1257/0002828054825529 http://www.e-aer.org/data/sept05_data_mcewan.zip http://www.e-aer.org/data/sept05_app_mcewan.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Effective Exchange Rates and the Classical Gold Standard Adjustment Luis A. V.Catão Solomos N.Solomou 1259 1275 Using a new international dataset of trade-weighed exchange rates, this paper highlights a neglected adjustment mechanism in the classical gold standard literature. Since gold-pegged countries traded extensively with economies operating more flexible monetary regimes and where parity change was a common adjustment device to systemic shocks, we show that such parity adjustments induced worldwide swings in nominal effective exchange rates. These translated into real exchange rate variations to which trade balances responded with an average elasticity of unity and in the direction of restoring external disequilibria. We conclude that some nominal exchange rate flexibility thus present in the pre-1914 system was instrumental to international payments adjustment. http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=16&issue_date=September 2005 10.1257/0002828054825565 http://www.e-aer.org/data/sept05_data_catao.zip http://www.e-aer.org/data/sept05_app_catao.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Does Britain or the United States Have the Right Gasoline Tax? Ian W. H.Parry Kenneth A.Small 1276 1289 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=17&issue_date=September 2005 10.1257/0002828054825510 http://www.e-aer.org/data/sept05_app_parry.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Uncertainty and Hyperbolic Discounting ParthaDasgupta EricMaskin 1290 1299 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=18&issue_date=September 2005 10.1257/0002828054825637 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article When Optimal Choices Feel Wrong: A Laboratory Study of Bayesian Updating, Complexity, and Affect GaryCharness DanLevin 1300 1309 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=19&issue_date=September 2005 10.1257/0002828054825583 http://www.e-aer.org/data/sept05_data_charness.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Does School Choice Lead to Sorting? Evidence from Tiebout Variation MiguelUrquiola 1310 1326 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=20&issue_date=September 2005 10.1257/0002828054825484 http://www.e-aer.org/data/sept05_data_urquiola.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Racial Discrimination in Labor Markets with Posted Wage Offers KevinLang MichaelManove William T.Dickens 1327 1340 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=21&issue_date=September 2005 10.1257/0002828054825547 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article State "Currencies" and the Transition to the U.S. Dollar: Reply—Including a New View from Canada Farley W.Grubb 1341 1348 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=22&issue_date=September 2005 10.1257/0002828054825664 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Meetings with Costly Participation: Comment FrancescoDe Sinopoli GiovannaIannantuoni 1349 1350 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=23&issue_date=September 2005 10.1257/0002828054825628 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 95 4 September 2005 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=95&issue=4&issue_date=September 2005 Journal Article Meetings with Costly Participation: Reply Martin J.Osborne Jeffrey S.Rosenthal Matthew A.Turner 1351 1354 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=4&article=24&issue_date=September 2005 10.1257/0002828054825592 >Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 93 2 May 2003 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=93&issue=2&issue_date=May 2003 Journal Article Testing Political Economy Models of Reform in the Laboratory Timothy N.Cason Vai-LamMui 208 212 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=93&issue=2&article=34&issue_date=May 2003 10.1257/000282803321947065 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 93 2 May 2003 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=93&issue=2&issue_date=May 2003 Journal Article What Can Be Learned from Skeletons that Might Interest Economists, Historians, and Other Social Scientists? Richard H.Steckel 213 220 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=93&issue=2&article=35&issue_date=May 2003 10.1257/000282803321947074 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 93 2 May 2003 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=93&issue=2&issue_date=May 2003 Journal Article