American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles The Missing Motivation in Macroeconomics George A.Akerlof 5 36 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=1&issue_date=March 2007 10.1257/aer.97.1.5 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles Competence Implies Credibility GiuseppeMoscarini 37 63 The (reputation for) competence of a central bank at doing its job makes monetary policy under discretion credible and transparent. Based on its reading of the state of the economy, the central bank announces its policy intentions to the public in a cheap-talk game. The precision of its private signal measures its competence. The fineness of the equilibrium message space measures its credibility and transparency. This is increasing in the competence/inflation bias ratio: the public expects a competent central bank to use its discretion more to pursue its "objective" targets than to surprise expectations and stimulate output. (JEL E52, E58) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=2&issue_date=March 2007 10.1257/aer.97.1.37 http://www.e-aer.org/data/mar07/20040192_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles Modeling the Transition to a New Economy: Lessons from Two Technological Revolutions AndrewAtkeson Patrick J.Kehoe 64 88 Many view the period after the Second Industrial Revolution as a paradigm of a transition to a new economy following a technological revolution, including the Information Technology Revolution. We build a quantitative model of diffusion and growth during transitions to evaluate that view. With a learning process quantified by data on the life cycle of US manufacturing plants, the model accounts for the key features of the transition after the Second Industrial Revolution. But we find that features like those will occur in other transitions only if a large amount of knowledge about old technologies exists before the transition begins. (JEL L60, N61, N62, N71, N72, O33) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=3&issue_date=March 2007 10.1257/aer.97.1.64 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk HannoLustig AdrienVerdelhan 89 117 Aggregate consumption growth risk explains why low interest rate currencies do not appreciate as much as the interest rate differential and why high interest rate currencies do not depreciate as much as the interest rate differential. Domestic investors earn negative excess returns on low interest rate currency portfolios and positive excess returns on high interest rate currency portfolios. Because high interest rate currencies depreciate on average when domestic consumption growth is low and low interest rate currencies appreciate under the same conditions, low interest rate currencies provide domestic investors with a hedge against domestic aggregate consumption growth risk. (JEL E21, E43, F31, G11) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=4&issue_date=March 2007 10.1257/aer.97.1.89 http://www.e-aer.org/data/mar07/20050585_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles Inefficiency in Legislative Policymaking: A Dynamic Analysis MarcoBattaglini StephenCoate 118 149 This paper develops an infinite horizon model of public spending and taxation in which policy decisions are determined by legislative bargaining. The policy space incorporates both productive and distributive public spending and distortionary taxation. The productive spending is investing in a public good that benefits all citizens (e.g., national defense) and the distributive spending is district-specific transfers (e.g., pork-barrel spending). Investment in the public good creates a dynamic linkage across policymaking periods. The analysis explores the dynamics of legislative policy choices, focusing on the efficiency of the steady-state level of taxation and allocation of spending. (JEL D72, E62, H20, H50) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=5&issue_date=March 2007 10.1257/aer.97.1.118 http://www.e-aer.org/data/mar07/20050737_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles Decision Making in Committees: Transparency, Reputation, and Voting Rules GilatLevy 150 168 In this paper I analyze the effect of transparency on decision making in committees. I focus on committees whose members are motivated by career concerns. The main result is that when the decision-making process is secretive (when individual votes are not revealed to the public), committee members comply with preexisting biases. For example, if the voting rule demands a supermajority to accept a reform, individuals vote more often against reforms. Transparent committees are therefore more likely to accept reforms. I also find that coupled with the right voting rule, a secretive procedure may induce better decisions than a transparent one. (JEL D71, D72) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=6&issue_date=March 2007 10.1257/aer.97.1.150 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles Bureaucrats or Politicians? Part I: A Single Policy Task AlbertoAlesina GuidoTabellini 169 179 This paper investigates the normative criteria that guide the allocation of a policy task to an elected politician versus an independent bureaucrat. The bureaucrat is preferable for technical tasks for which ability is more important than effort, or if there is great uncertainty about whether the policymaker has the required abilities. The optimal allocation of redistributive tasks is ambiguous, and depends on how the bureaucrat can be instructed. But irrespective of the normative conclusion, the politician prefers not to delegate redistributive policies. (JEL D72, D73, D82) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=7&issue_date=March 2007 10.1257/aer.97.1.169 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles The Motivation and Bias of Bureaucrats CanicePrendergast 180 196 Many individuals are motivated to exert effort because they care about their jobs, rather than because there are monetary consequences to their actions. The intrinsic motivation of bureaucrats is the focus of this paper, and three primary results are shown. First, bureaucrats should be biased. Second, sometimes this bias takes the form of advocating for their clients more than would their principal, while in other cases, they are more hostile to their interests. For a range of bureaucracies, those who are biased against clients lead to more efficient outcomes. Third, self-selection need not produce the desired bias. Instead, selection to bureaucracies is likely to be bifurcated, in the sense that it becomes composed of those who are most preferred by the principal, and those who are least preferred. (JEL D64, D73, D82) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=8&issue_date=March 2007 10.1257/aer.97.1.180 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles Urban Evolutions: The Fast, the Slow, and the Still GillesDuranton 197 221 With the use of French and US data, new and systematic evidence is provided about the rapid location changes of industries across cities (the fast). Cities are also slowly moving up and down the urban hierarchy (the slow), while the size distribution of cities is skewed to the right and very stable (the still). The model proposed here reproduces these three features. Small, innovation-driven shocks lead to the churning of industries across cities. Then, cities slowly grow or decline following net gains or losses of industries. These changes occur within a stable distribution. The quantitative implications of the model are also explored. (JEL R12, R32) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=9&issue_date=March 2007 10.1257/aer.97.1.197 http://www.e-aer.org/data/mar07/20050827_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles Market Share Dynamics and the "Persistence of Leadership" Debate JohnSutton 222 241 A new 45-industry, 23-year, dataset for Japan is used to investigate the duration of industry leadership. A new scaling relationship linking a firm's current market share with the standard deviation of market share changes is reported. This relationship discriminates in a powerful way between rival candidate theoretical models of market share dynamics. It also makes possible a useful simplification in testing a benchmark model of a Markovian kind. Relative to that model, it is found that at least some industries display a "Chandlerian" bias toward longer durations of leadership than would be present in the benchmark model. (JEL D43, L13) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=10&issue_date=March 2007 10.1257/aer.97.1.222 http://www.e-aer.org/data/mar07/20040421_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords BenjaminEdelman MichaelOstrovsky MichaelSchwarz 242 259 We investigate the "generalized second-price" (GSP) auction, a new mechanism used by search engines to sell online advertising. Although GSP looks similar to the Vickrey-Clarke-Groves (VCG) mechanism, its properties are very different. Unlike the VCG mechanism, GSP generally does not have an equilibrium in dominant strategies, and truth-telling is not an equilibrium of GSP. To analyze the properties of GSP, we describe the generalized English auction that corresponds to GSP and show that it has a unique equilibrium. This is an ex post equilibrium, with the same payoffs to all players as the dominant strategy equilibrium of VCG. (JEL D44, L81, M37) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=11&issue_date=March 2007 10.1257/aer.97.1.242 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles Credible Sales Mechanisms and Intermediaries DavidMcAdams MichaelSchwarz 260 276 We consider a seller who faces several buyers and lacks access to an institution to credibly close a sale. If buyers anticipate that the seller may negotiate further, they will prefer to wait before making their best and final offers. This in turn induces the seller to bargain at length with buyers, even if doing so is costly. When the seller's cost of soliciting another round of offers is either very large or very small, the seller credibly commits to an auction and experiences negligible bargaining costs. Otherwise, there may be several rounds of increasing offers and significant seller losses. In these situations, an intermediary with a sufficiently valuable reputation and/or weak marginal incentives regarding price can create value by credibly committing to help sell the object without delay. (JEL C78, D44) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=12&issue_date=March 2007 10.1257/aer.97.1.260 http://www.e-aer.org/data/mar07/20060453_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles Imprecision as an Account of the Preference Reversal Phenomenon David J.Butler Graham C.Loomes 277 297 Many individuals' choices and valuations involve a degree of uncertainty/imprecision. This paper reports an experiment designed to obtain some measure of imprecision and to examine the extent to which it can explain preference reversals of two opposite forms, one of which appears not to have been reported previously. The model of imprecision we examine not only predicts both patterns but also provides an account of earlier results that are otherwise not well explained. The results suggest that any successful descriptive theory of choice and valuation will need to allow in some way for the imprecision surrounding people's decisions. (JEL C91, D11, D81) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=13&issue_date=March 2007 10.1257/aer.97.1.277 http://www.e-aer.org/data/mar07/20050175_data.zip http://www.e-aer.org/data/mar07/20050175_app.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles Do Workers Work More if Wages Are High? Evidence from a Randomized Field Experiment ErnstFehr LorenzGoette 298 317 Most previous studies on intertemporal labor supply found very small or insignificant substitution effects. It is possible that these results are due to constraints on workers' labor supply choices. We conducted a field experiment in a setting in which workers were free to choose hours worked and effort per hour. We document a large positive elasticity of overall labor supply and an even larger elasticity of hours, which implies that the elasticity of effort per hour is negative. We examine two candidate models to explain these findings: a modified neoclassical model with preference spillovers across periods, and a model with reference dependent, lossaverse preferences. With the help of a further experiment, we can show that only loss-averse individuals exhibit a negative effort response to the wage increase. (JEL J22, J31) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=14&issue_date=March 2007 10.1257/aer.97.1.298 http://www.e-aer.org/data/mar07/20020849_data.zip http://www.e-aer.org/data/mar07/20020849_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles The Effect of Court-Ordered Hiring Quotas on the Composition and Quality of Police JustinMcCrary 318 353 Arguably the most aggressive affirmative action program ever implemented in the United States was a series of court-ordered racial hiring quotas imposed on municipal police departments. My best estimate of the effect of court-ordered affirmative action on work-force composition is a 14-percentage-point gain in the fraction African American among newly hired officers. Evidence on police performance is mixed. Despite substantial black-white test score differences on police department entrance examinations, city crime rates appear unaffected by litigation. However, litigation lowers slightly both arrests per crime and the fraction black among serious arrestees. (JEL H76, J15, J78, K31) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=15&issue_date=March 2007 10.1257/aer.97.1.318 http://www.e-aer.org/data/mar07/20040300_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles The Economic Impacts of Climate Change: Evidence from Agricultural Output and Random Fluctuations in Weather OlivierDeschênes MichaelGreenstone 354 385 This paper measures the economic impact of climate change on US agricultural land by estimating the effect of random year-to-year variation in temperature and precipitation on agricultural profits. The preferred estimates indicate that climate change will increase annual profits by $1.3 billion in 2002 dollars (2002$) or 4 percent. This estimate is robust to numerous specification checks and relatively precise, so large negative or positive effects are unlikely. We also find the hedonic approach—which is the standard in the previous literature—to be unreliable because it produces estimates that are extremely sensitive to seemingly minor choices about control variables, sample, and weighting. (JEL L25, Q12, Q51, Q54) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=16&issue_date=March 2007 10.1257/aer.97.1.354 http://www.e-aer.org/data/mar07/20040638_data.zip http://www.e-aer.org/data/mar07/20040638_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Articles What Are Stock Investors’ Actual Historical Returns? Evidence from Dollar-Weighted Returns Ilia D.Dichev 386 401 The existing literature typically does not differentiate between security returns and the returns of investors in these securities. This study clarifies that investor and security returns differ because of the timing and magnitude of investor capital flows into and out of these securities. The empirical results indicate that actual investor returns are systematically lower than buy-and-hold returns for nearly all major international stock markets. These results imply that the historical equity premium and the cost of equity capital are likely lower than previously thought. (JEL G11, G12, G15) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=17&issue_date=March 2007 10.1257/aer.97.1.386 http://www.e-aer.org/data/mar07/20041213_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Shorter Papers Consumer Bankruptcy: A Fresh Start IgorLivshits JamesMacGee MichèleTertilt 402 418 Consumer bankruptcy provides partial insurance against bad luck, but, by driving up interest rates, makes life-cycle smoothing more difficult. We argue that to assess this trade-off one needs a quantitative model of consumer bankruptcy with three key features: life-cycle component, idiosyncratic earnings uncertainty, and expense uncertainty (exogenous negative shocks to household balance sheets). We find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules. More persistent shocks make the bankruptcy option more desirable. Larger transitory shocks have the opposite effect. Our findings suggest the current US bankruptcy system may be desirable for reasonable parameter values. (JEL D14, D91, K35) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=18&issue_date=March 2007 10.1257/aer.97.1.402 http://www.e-aer.org/data/mar07/20030636_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Shorter Papers Simple Cost-Sharing Contracts Leon YangChu David E. M.Sappington 419 428 We extend William Rogerson's (2003) intriguing analysis of simple procurement contracts to settings where the supplier’s innate production cost is not necessarily distributed uniformly. Although the simple contract that Rogerson analyzes performs remarkably well when the smaller cost realizations are relatively likely, it can perform poorly when the larger cost realizations are relatively likely. We show that in all settings under consideration, a simple pair of contracts – one that involves linear cost sharing and one that involves full cost reimbursement – can always secure more than 73 percent of the gain achieved with a fully optimal contract. (JEL D86) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=19&issue_date=March 2007 10.1257/aer.97.1.419 http://www.e-aer.org/data/mar07/20050562_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Shorter Papers Structural Change in a Multisector Model of Growth L. RachelNgai Christopher A.Pissarides 429 443 We study a multisector model of growth with differences in TFP growth rates across sectors and derive sufficient conditions for the coexistence of structural change, characterized by sectoral labor reallocation and balanced aggregate growth. The conditions are weak restrictions on the utility and production functions. Along the balanced growth path, labor employed in the production of consumption goods gradually moves to the sector with the lowest TFP growth rate, until in the limit it is the only sector with nontrivial employment of this kind. The employment shares of intermediate and capital goods remain constant during the reallocation process. (JEL O41) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=20&issue_date=March 2007 10.1257/aer.97.1.429 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Shorter Papers Individual Perceptions of the Criminal Justice System LanceLochner 444 460 This paper empirically examines belief updating of the perceived probability of arrest and its criminal deterrence effects using two longitudinal data sources. While beliefs about the probability of arrest are positively correlated with local official arrest rates, they are unresponsive to information acquired from random individuals and local neighborhood conditions. Importantly, perceptions respond to changes in an individual's criminal and arrest history. Young males who engage in crime without getting arrested revise their perceived probability of arrest downward, while those who are arrested revise their probability upward. Estimates suggest that beliefs about the probability of arrest significantly deter crime. (JEL K42) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=21&issue_date=March 2007 10.1257/aer.97.1.444 http://www.e-aer.org/data/mar07/20050140_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Shorter Papers Vignettes and Self-Reports of Work Disability in the United States and the Netherlands ArieKapteyn James P.Smith Arthurvan Soest 461 473 In contrast to the believed similarity in their health outcomes, workers in different Western countries report very different rates of work disability. Using new data from the United States and the Netherlands, we offer a partial resolution to this paradox. We find that observed differences in reported work disability largely stem from the fact that Dutch respondents have a lower threshold in reporting whether they have a work disability than American respondents. For those who do not suffer from pain, work disability is similar in both countries once thresholds are the same. For respondents with pain, however, a significant difference remains. (JEL J14, J28) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=22&issue_date=March 2007 10.1257/aer.97.1.461 http://www.e-aer.org/data/mar07/20041059_data.zip http://www.e-aer.org/data/mar07/20041059_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Shorter Papers Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank OlivierJeanne Lars E. O.Svensson 474 490 Central banks target CPI inflation; independent central banks are concerned about their balance sheet and the level of their capital. The first fact makes it difficult for a central bank to implement the optimal escape from a liquidity trap, because it undermines a commitment to overshoot the inflation target. We show that the second fact provides a solution. Capital concerns provide a mechanism for an independent central bank to commit to inflate ex post. The optimal policy can take the form of a currency depreciation combined with a crawling peg, a policy advocated by Svensson as the "Foolproof Way" to escape from a liquidity trap. (JEL E31, E52, E58, E62) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=23&issue_date=March 2007 10.1257/aer.97.1.474 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Shorter Papers Conditional Cash Transfers, Public Provision of Private Goods, and Income Redistribution FirouzGahvari EnlinsonMattos 491 502 This paper examines the role of cash transfers as a screening device when combined with in-kind transfers. It shows that linking in-kind to cash transfers makes first-best redistribution possible despite the government's inability to tell rich and poor individuals apart. Moreover, the maximal attainable welfare for the poor can be pushed beyond its first-best level by distorting downward the quality of the indivisible good the poor receive relative to the cash value of their net transfers. Using in-kind transfers alone, as in Besley and Coate (1991), leads to a third-best solution. (JEL D31, H23, H41) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=24&issue_date=March 2007 10.1257/aer.97.1.491 http://www.e-aer.org/data/mar07/20050013_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Shorter Papers Credit Traps and Credit Cycles KiminoriMatsuyama 503 516 We develop a simple macroeconomic model of credit market imperfections with heterogeneous investment projects. The projects differ in productivity, the investment requirement, and the severity of agency problems behind the borrowing constraints. A movement in borrower net worth shifts the composition of the credit between projects with different productivity levels, thereby causing endogenous investment-specific technological change. Furthermore, such endogenous technological change in turn affects borrower net worth. These composition effects could give rise to credit traps, credit collapse, leapfrogging, credit cycles, and growth miracles in the dynamics of the aggregate investment and borrower net worth. (JEL E22, E44, O33) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=25&issue_date=March 2007 10.1257/aer.97.1.503 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Shorter Papers Minimax Play at Wimbledon: Comment Shih-HsunHsu Chen-YingHuang Cheng-TaoTang 517 523 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=26&issue_date=March 2007 10.1257/aer.97.1.517 http://www.e-aer.org/data/mar07/20040604_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Shorter Papers Testing for Indeterminacy: An Application to U.S. Monetary Policy: Comment AndreasBeyer Roger E. A.Farmer 524 529 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=27&issue_date=March 2007 10.1257/aer.97.1.524 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Shorter Papers Testing for Indeterminacy: An Application to U.S. Monetary Policy: Reply Thomas A.Lubik FrankSchorfheide 530 533 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=28&issue_date=March 2007 10.1257/aer.97.1.530 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 97 1 March 2007 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=97&issue=1&issue_date=March 2007 Shorter Papers Secession and the Limits of Taxation: Toward a Theory of Internal Exit: Comment Grégoire RotaGraziosi 534 538 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=97&issue=1&article=29&issue_date=March 2007 10.1257/aer.97.1.534