American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Regular Article Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill? ThomasLemieux 461 498 This paper shows that a large fraction of the 1973-2003 growth in residual wage inequality is due to composition effects linked to the secular increase in experience and education, two factors associated with higher within-group wage dispersion. The level and growth in residual wage inequality are also overstated in the March Current Population Survey (CPS) because, unlike the May or Outgoing Rotation Group (ORG) CPS, it does not measure directly the hourly wages of workers paid by the hour. The magnitude and timing of the growth in residual wage inequality provide little evidence of a pervasive increase in the demand for skill due to skill-biased technological change. (JEL J31) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=2&issue_date=June 2006 10.1257/aer.96.3.461 http://www.e-aer.org/data/june06_data_20040490.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Regular Article The World Technology Frontier FrancescoCaselli Wilbur JohnColemanII 499 522 We study cross-country differences in the aggregate production function when skilled and unskilled labor are imperfect substitutes. We find that there is a skill bias in cross-country technology differences. Higher-income countries use skilled labor more efficiently than lower-income countries, while they use unskilled labor relatively and, possibly, absolutely less efficiently. We also propose a simple explanation for our findings: rich countries, which are skilled-labor abundant, choose technologies that are best suited to skilled workers; poor countries, which are unskilled-labor abundant, choose technologies more appropriate to unskilled workers. We discuss alternative explanations, such as capital-skill complementarity and differences in schooling quality. (JEL E13, E23, J31, O14) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=3&issue_date=June 2006 10.1257/aer.96.3.499 http://www.e-aer.org/data/june06_data_20040383.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Regular Article Medium-Term Business Cycles DiegoComin MarkGertler 523 551 Over the postwar period, many industrialized countries have experienced significant medium-frequency oscillations between periods of robust growth versus relative stagnation. Conventional business cycle filters, however, tend to sweep these oscillations into the trend. In this paper we explore whether they may, instead, reflect a persistent response of economic activity to the high-frequency fluctuations normally associated with the cycle. We define as the medium-term cycle the sum of the highand medium-frequency variation in the data, and then show that these kinds of fluctuations are substantially more volatile and persistent than are the conventional measures. These fluctuations, further, feature significant procyclical movements in both embodied and disembodied technological change, and research and development (R&D), as well as the efficiency and intensity of resource utilization. We then develop a model of medium-term business cycles. A virtue of the framework is that, in addition to offering a unified approach to explaining the high- and mediumfrequency variation in the data, it fully endogenizes the movements in productivity that appear central to the persistence of these fluctuations. For comparison, we also explore how well an exogenous productivity model can explain the facts. (JEL E3, O3) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=4&issue_date=June 2006 10.1257/aer.96.3.523 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Regular Article Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle? PhilippeBacchetta EricVan Wincoop 552 576 Empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables. We introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts. Consistent with the evidence, the model implies that (a) observed fundamentals account for little of exchange rate volatility in the short to medium run, (b) over long horizons, the exchange rate is closely related to observed fundamentals, (c) exchange rate changes are a weak predictor of future fundamentals, and (d) the exchange rate is closely related to order flow. (JEL F3, F4, G0, G1, E0) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=5&issue_date=June 2006 10.1257/aer.96.3.552 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Regular Article Media Frenzies in Markets for Financial Information Laura L.Veldkamp 577 601 Emerging equity markets witness occasional surges in prices (frenzies) and crossmarket price dispersion (herds), accompanied by abundant media coverage. An information market complementarity can explain these anomalies. Because information has high fixed costs, high volume makes it inexpensive. Low prices induce investors to buy information that others buy. Given two identical assets, investors learn about one; abundant information reduces its payoff risk and raises its price. Transitions between low-information/low-asset-price and high-information/highasset- price equilibria resemble frenzies. Equity data and new panel data on news coverage support the model's predictions: Asset market movements generate news and news raises prices and price dispersion. (JEL D82, G12, G14) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=6&issue_date=June 2006 10.1257/aer.96.3.577 http://www.e-aer.org/data/june06_data_20030973.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Regular Article An Efficient Dynamic Auction for Heterogeneous Lawrence M.Ausubel 602 629 This article proposes a new dynamic design for auctioning multiple heterogeneous commodities. An auctioneer wishes to allocate K types of commodities among n bidders. The auctioneer announces a vector of current prices, bidders report quantities demanded at these prices, and the auctioneer adjusts the prices. Units are credited to bidders at the current prices as their opponents' demands decline, and the process continues until every commodity market clears. Bidders, rather than being assumed to behave as price-takers, are permitted to strategically exercise their market power. Nevertheless, the proposed auction yields Walrasian equilibrium prices and, as from a Vickrey-Clarke-Groves mechanism, an efficient allocation. (JEL D44) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=7&issue_date=June 2006 10.1257/aer.96.3.602 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Regular Article Superstition and Rational Learning DrewFudenberg David K.Levine 630 651 We argue that some, but not all, superstitions can persist when learning is rational and players are patient, and illustrate our argument with an example inspired by the Code of Hammurabi. The code specified an "appeal by surviving in the river" as a way of deciding whether an accusation was true. According to our theory, a mechanism that uses superstitions two or more steps off the equilibrium path, such as "appeal by surviving in the river," is more likely to persist than a superstition where the false beliefs are only one step off the equilibrium path. (JEL C72, C73, D83, D84) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=8&issue_date=June 2006 10.1257/aer.96.3.630 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Regular Article Matching and Price Competition JeremyBulow JonathanLevin 652 668 We develop a model in which firms set impersonal salary levels before matching with workers. Wages fall relative to any competitive equilibrium while profits rise almost as much, implying little inefficiency. Furthermore, the best firms gain the most from the system while wages become compressed. In light of our results, we discuss the performance of alternative institutions and the recent antitrust case against the National Resident Matching Program. (JEL D44, J41, L44) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=9&issue_date=June 2006 10.1257/aer.96.3.652 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Regular Article A Change Would Do You Good .... An Experimental Study on How to Overcome Coordination Failure in Organizations JordiBrandts David J.Cooper 669 693 We study how financial incentives can be used to overcome a history of coordination failure using controlled laboratory experiments. Subjects' payoffs depend on coordinating at high effort levels. In an initial phase, the benefits of coordination are low, and play typically converges to an inefficient outcome. We then explore varying financial incentives to coordinate at a higher effort level. An increase in the benefits of coordination leads to improved coordination, but large increases have no more impact than small increases. Once subjects have coordinated on a higher effort level, reductions in the incentives to coordinate have little effect on behavior. (JEL C92, D23, J31, L23, M52) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=10&issue_date=June 2006 10.1257/aer.96.3.669 http://www.e-aer.org/data/june06_data_20040237.zip http://www.e-aer.org/data/june06_app_20040237.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Regular Article Paying Not to Go to the Gym StefanoDellaVigna UlrikeMalmendier 694 719 How do consumers choose from a menu of contracts? We analyze a novel dataset from three U.S. health clubs with information on both the contractual choice and the day-to-day attendance decisions of 7,752 members over three years. The observed consumer behavior is difficult to reconcile with standard preferences and beliefs. First, members who choose a contract with a flat monthly fee of over $70 attend on average 4.3 times per month. They pay a price per expected visit of more than $17, even though they could pay $10 per visit using a 10-visit pass. On average, these users forgo savings of $600 during their membership. Second, consumers who choose a monthly contract are 17 percent more likely to stay enrolled beyond one year than users committing for a year. This is surprising because monthly members pay higher fees for the option to cancel each month. We also document cancellation delays and attendance expectations, among other findings. Leading explanations for our findings are overconfidence about future self-control or about future efficiency. Overconfident agents overestimate attendance as well as the cancellation probability of automatically renewed contracts. Our results suggest that making inferences from observed contract choice under the rational expectation hypothesis can lead to biases in the estimation of consumer preferences. (JEL D00, D12, D91) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=11&issue_date=June 2006 10.1257/aer.96.3.694 http://www.e-aer.org/data/june06_data_20020916.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Regular Article Handcuffs for the Grabbing Hand? Media Capture and Government Accountability TimothyBesley AndreaPrat 720 736 It has long been recognized that the media play an essential role in government accountability. Even in the absence of censorship, however, the government may influence news content by maintaining a "cozy" relationship with the media. This paper develops a model of democratic politics in which media capture is endogenous. The model offers insights into the features of the media market that determine the ability of the government to exercise such capture and hence to influence political outcomes. (JEL D72, D73, L82) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=12&issue_date=June 2006 10.1257/aer.96.3.720 http://www.e-aer.org/data/june06_app_20040569.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Regular Article Pareto-Improving Social Security Reform when Financial Markets are Incomplete!? DirkKrueger FelixKubler 737 755 This paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a Pareto improvement. When returns to capital and wages are imperfectly correlated, a system that endows retired households with claims to labor income enhances the sharing of aggregate risk between generations. Our quantitative analysis shows that, abstracting from the capital crowding-out effect, the introduction of social security represents a Pareto-improving reform, even when the economy is dynamically efficient. However, the severity of the crowding-out effect in general equilibrium tends to overturn these gains. (JEL D58, D91, E62, H31, H55) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=13&issue_date=June 2006 10.1257/aer.96.3.737 http://www.e-aer.org/data/june06_data_20031194.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Regular Article On the Simple Economics of Advertising, Marketing, and Product Design Justin P.Johnson David P.Myatt 756 784 We propose a framework for analyzing transformations of demand. Such transformations frequently stem from changes in the dispersion of consumers' valuations, which lead to rotations of the demand curve. In many settings, profits are a U-shaped function of dispersion. High dispersion is complemented by niche production, and low dispersion is complemented by mass-market supply. We investigate numerous applications, including product design; advertising, marketing and sales advice; and the construction of quality-differentiated product lines. We also suggest a new taxonomy of advertising, distinguishing between hype, which shifts demand, and real information, which rotates demand. (JEL D8, L1, M3). http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=14&issue_date=June 2006 10.1257/aer.96.3.756 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Shorter Papers Exclusive Dealing and Entry, when Buyers Compete ChiaraFumagalli MassimoMotta 785 795 Rasmusen et al. (1991) and Segal and Whinston (2000) show that an incumbent monopolist might prevent entry of a more efficient competitor by exploiting externalities among buyers. We show that their results hold only when downstream competition among buyers is weak. Under fierce downstream competition, if entry took place, a free buyer would become more competitive and increase its output and profits at the expense of buyers that sign an exclusive deal with the incumbent. Anticipating that orders from a single buyer would trigger entry, no buyer will sign the exclusive deal and entry will occur. This result is robust across different specifications of the game. (JEL: K21, L12, L42) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=15&issue_date=June 2006 10.1257/aer.96.3.785 http://www.e-aer.org/data/june06_app_20030697.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Shorter Papers Investment Behavior, Observable Expectations, and Internal Funds Jason G.Cummins Kevin A.Hassett Stephen D.Oliner 796 810 We use earnings forecasts from securities analysts to construct a new measure of the neoclassical fundamentals that drive investment spending. We find that investment responds significantly to our new measure of fundamentals but is insensitive to cash flow, even for firms typically thought to be liquidity constrained. These results have two key implications. First, fundamentals may be more important for investment spending than would be suggested by the results to date from investment-q models. Second, the positive cash-flow effects obtained in such models may reflect a failure to control properly for fundamentals rather than the presence of financial constraints. (JEL: D92, E22) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=16&issue_date=June 2006 10.1257/aer.96.3.796 http://www.e-aer.org/data/june06_data_20020734.zip http://www.e-aer.org/data/june06_app_20020734.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Shorter Papers General versus Specific Skills in Labor Markets with Search Frictions and Firing Costs EtienneWasmer 811 831 Human capital investments are not independent of the aggregate state of labor markets: frictions and slackness of the labor market raise the returns to specific human capital investments relative to general investments. We build a macroeconomic model with two pure strategy regimes. In the pure G-regime, workers invest in general skills. This occurs when they face high turnover labor markets and in the absence of employment protection. The pure 5-regime in which workers invest in skills specific to their job appears when employment protection is high enough. Implications for a characterization of Europe-United States differences are provided in conclusion. (JEL: J63, J30) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=17&issue_date=June 2006 10.1257/aer.96.3.811 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Shorter Papers Training and Lifetime Income BurhanettinKuruscu 832 846 This paper challenges the notion that on-the-job training investments are quantitatively important for workers' welfare and argues that on-the-job training may not increase lifetime income by more than 1 percent. I argue that it is very difficult to reconcile the slowdown in wage growth late in a worker's career with optimizing behavior unless the technology for learning on the job is such that it generates very low gains from training. The analysis is based on a nonparametric methodology for estimating the learning technology from wage profiles; the results are arrived at by comparing the lifetime income when the worker optimally invests in his human capital to the one where he does not make any investments. (JEL: E24, J24, J31) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=18&issue_date=June 2006 10.1257/aer.96.3.832 http://www.e-aer.org/data/june06_data_20030612.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Shorter Papers Long-Term Educational Consequences of Secondary School Vouchers: Evidence from Administrative Records in Colombia JoshuaAngrist EricBettinger MichaelKremer 847 862 Colombia's PACES program provided over 125,000 poor children with vouchers that covered the cost of private secondary school. The vouchers were renewable annually conditional on adequate academic progress. Since many vouchers were assigned by lottery, program effects can reliably be assessed by comparing lottery winners and losers. Estimates using administrative records suggest the PACES program increases secondary school completion rates by 15 to 20 percent. Correcting for the greater percentage of lottery winners taking college admissions tests, the program increased test scores by two-tenths of a standard deviation in the distribution of potential test scores. (JEL: I21, J12, I28) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=19&issue_date=June 2006 10.1257/aer.96.3.847 http://www.e-aer.org/data/june06_data_20040734.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Shorter Papers Incarceration Length, Employment, and Earnings Jeffrey R.Kling 863 876 This paper estimates effects of increases in incarceration length on employment and earnings prospects of individuals after their release from prison. I utilize a variety of research designs including controlling for observable factors and using instrumental variables for incarceration length based on randomly assigned judges with different sentencing propensities. The results show no consistent evidence of adverse labor market consequences of longer incarceration length using any of the analytical methods in either the state system in Florida or the federal system in California. (JEL: J24; K42) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=20&issue_date=June 2006 10.1257/aer.96.3.863 http://www.e-aer.org/data/june06_data_20040775.doc http://www.e-aer.org/data/june06_app_20040775.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Shorter Papers Will International Rules on Subsidies Disrupt the World Trading System? KyleBagwell Robert W.Staiger 877 895 We provide a first formal analysis of the international rules that govern the use of subsidies to domestic production. Our analysis highlights the impact of the new subsidy disciplines that were added to GATT rules with the creation of the WTO. While GATT subsidy rules were typically viewed as weak and inadequate, our results suggest that the key changes introduced by the WTO subsidy rules may ultimately do more harm than good to the multilateral trading system by undermining the ability of tariff negotiations to serve as the mechanism for expanding market access to more efficient levels. (JEL: F02, F11, F13, F15, F53) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=21&issue_date=June 2006 10.1257/aer.96.3.877 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Shorter Papers Preferential Trade Agreements as Stumbling Blocks for Multilateral Trade Liberalization: Evidence for the United States NunoLim 896 914 Most countries are members of preferential trade agreements (PTAs). The effect of these agreements has attracted much interest and raised the question of whether PTAs promote or slow multilateral trade liberalization, i.e., whether they are a "building block" or "stumbling block" to multilateral liberalization. Despite this long-standing concern with PTAs and the lack of theoretical consensus, there is no systematic evidence on whether they are actually a stumbling block to multilateral liberalization. We use detailed data on U.S. multilateral tariffs to provide the first systematic evidence that the direct effect of PTAs was to generate a stumbling block to its MTL. We also provide evidence of reciprocity in multilateral tariff reductions. (JEL: D78; F13; F14; F15) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=22&issue_date=June 2006 10.1257/aer.96.3.896 http://www.e-aer.org/data/june06_data_20031331.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 96 3 June 2006 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=96&issue=3&issue_date=June 2006 Back Matter Auditors' Report/Audited Financial Statements 915 923 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=96&issue=3&article=23&issue_date=June 2006 10.1257/aer.96.3.915