American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Shorter Papers A Note on Different Approaches to Index Number Theory Matthijsvan VeelenU Amsterdam Royvan der WeideWorld Bank and U Amsterdam 1722 30 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=26&issue_date=September 2008 10.1257/aer.98.4.1722 http://www.e-aer.org/data/sept08/20051070_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Shorter Papers Testing for a Reference Consumer in International Comparisons of Living Standards IanCrawfordU Oxford and IFS J. PeterNearyU Oxford 1731 32 http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=27&issue_date=September 2008 10.1257/aer.98.4.1731 http://www.e-aer.org/data/sept08/20080460_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Shorter Papers All-or-Nothing Monitoring Rui R.ZhaoU Albany, SUNY 1619 28 A principal can observe both the output and input of an agent who works at a job involving multiple tasks. We provide a simple theory that explains why it may be optimal for the principal to use only an output-based incentive contract, even though the principal can monitor the agent's actions perfectly in all but one task and knows exactly which action is optimal for each task. (JEL D82, D86, M54) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=19&issue_date=September 2008 10.1257/aer.98.4.1619 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Shorter Papers Commitment and Conflict in Bilateral Bargaining ToreEllingsenStockholm School of Economics TopiMiettinenMax Planck Institute of Economics, Jena 1629 35 Building on previous work by Schelling and Crawford, we study a model of bilateral bargaining in which negotiators can make binding commitments at a low positive cost c. Most of our results concern outcomes that survive iterated strict dominance. If commitment attempts never fail, there are three such outcomes. In two of them, all the surplus goes to one player. In the third, there is a high probability of conflict. If commitment attempts succeed with probability q < 1, the unique outcome that survives iterated strict dominance entails conflict with probability q2. When c = 0, analogous results hold if the requirement of iterated strict dominance is replaced by iterated weak dominance. (JEL C78, D84) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=20&issue_date=September 2008 10.1257/aer.98.4.1629 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Shorter Papers Leveling the Playing Field: Sincere and Sophisticated Players in the Boston Mechanism Parag A.PathakHarvard U TayfunSonmezBoston College 1636 52 Empirical and experimental evidence suggests different levels of sophistication among families in the Boston Public School student assignment plan. We analyze the preference revelation game induced by the Boston mechanism with sincere players who report their true preferences and sophisticated players who play a best response. We characterize the set of Nash equilibrium outcomes as the set of stable matchings of a modified economy, where sincere students lose priority to sophisticated students. Any sophisticated student weakly prefers her assignment under the Pareto-dominant Nash equilibrium of the Boston mechanism to her assignment under the recently adopted student-optimal stable mechanism. (JEL D82, I21) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=21&issue_date=September 2008 10.1257/aer.98.4.1636 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Shorter Papers The Limited Influence of Unemployment on the Wage Bargain Robert E.HallStanford U Paul R.MilgromStanford U 1653 74 When a job-seeker and an employer meet, find a prospective joint surplus, and bargain over the wage, conditions in the outside labor market, including especially unemployment, may have limited influence. The job-seeker's only credible threat during bargaining is to hold out for a better deal. The employer's threat is to delay bargaining. Consequently, the outcome of the bargain depends on the relative costs of delays to the parties, rather than on the payoffs that result from exiting negotiations. Modeling bargaining in this way makes wages less responsive to unemployment. A stochastic model of the labor market with credible bargaining and reasonable parameter values yields larger employment fluctuations than does the standard Mortensen-Pissarides model. (JEL J22, J23, J31, J64) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=22&issue_date=September 2008 10.1257/aer.98.4.1653 http://www.e-aer.org/data/sept08/20060037_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Shorter Papers Trade Policy and Loss Aversion CarolineFreundWorld Bank CaglarOzdenWorld Bank 1675 91 We develop a political economy model where loss aversion and reference dependence are important in shaping people’s preferences over trade policy. The policy implications of the augmented model differ in three ways: there is a region of compensating protection, where a decline in the world price leads to an offsetting increase in protection, such that a constant domestic price is maintained; protection following a single negative price shock will be persistent; and irrespective of the extent of lobbying, there will be a deviation from free trade that favors loss-making industries. The augmented model explains protections of the US steel industry since 1980. (JEL F13, F14, L61) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=23&issue_date=September 2008 10.1257/aer.98.4.1675 http://www.e-aer.org/data/sept08/20041133_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Shorter Papers The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited MarcusHagedornInstitute for Empirical Research, U Zurich IouriiManovskiiU PA 1692 1706 Recently, a number of authors have argued that the standard search model cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies, given shocks of a plausible magnitude. We propose a new calibration strategy of the standard model that uses data on the cost of vacancy creation and cyclicality of wages to identify the two key parameters –- the value of nonmarket activity and the bargaining weights. Our calibration implies that the model is consistent with the data. (JEL E24, E32, J31, J63, J64) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=24&issue_date=September 2008 10.1257/aer.98.4.1692 http://www.e-aer.org/data/sept08/20060403_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Shorter Papers Distorted Gravity: The Intensive and Extensive Margins of International Trade ThomasChaneyU Chicago 1707 21 By considering a model with identical firms, Krugman (1980) predicts that a higher elasticity of substitution between goods magnifies the impact of trade barriers on trade flows. In this paper, I introduce firm heterogeneity in a simple model of international trade. I prove that the extensive margin and the intensive margin are affected by the elasticity of substitution in exact opposite directions. When the distribution of productivity across firms is Pareto, the predictions of the Krugman model with representative firms are overturned: the impact of trade barriers on trade flows is dampened by the elasticity of substitution, and not magnified. (JEL F12, F13) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=25&issue_date=September 2008 10.1257/aer.98.4.1707 http://www.e-aer.org/data/sept08/20050798_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Articles Explaining Changes in Female Labor Supply in a Life-Cycle Model OrazioAttanasioU College London and Institute for Fiscal Studies HamishLowU Cambridge and Institute for Fiscal Studies VirginiaSanchez-MarcosU Cantabria 1517 52 This paper studies the life-cycle labor supply of three cohorts of American women, born in the 1930s, 1940s, and 1950s. We focus on the increase in labor supply of mothers between the 1940s and 1950s cohorts. We construct a lifecycle model of female participation and savings, and calibrate the model to match the behavior of the middle cohort. We investigate which changes in the determinants of labor supply account for the increases in participation early in the life-cycle observed for the youngest cohort. A combination of a reduction in the cost of children alongside a reduction in the wage-gender gap is needed. (JEL D91, J16, J22, J31) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=14&issue_date=September 2008 10.1257/aer.98.4.1517 http://www.e-aer.org/data/sept08/20040372_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Articles Giffen Behavior and Subsistence Consumption Robert T.JensenWatson Institute for International Studies, Brown U Nolan H.MillerHarvard U 1553 77 This paper provides the first real-world evidence of Giffen behavior, i.e., upward sloping demand. Subsidizing the prices of dietary staples for extremely poor households in two provinces of China, we find strong evidence of Giffen behavior for rice in Hunan, and weaker evidence for wheat in Gansu. The data provide new insight into the consumption behavior of the poor, who act as though maximizing utility subject to subsistence concerns. We find that their elasticity of demand depends significantly, and nonlinearly, on the severity of their poverty. Understanding this heterogeneity is important for the effective design of welfare programs for the poor. (JEL D12, O12) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=15&issue_date=September 2008 10.1257/aer.98.4.1553 http://www.e-aer.org/data/sept08/20070790_data.zip http://www.e-aer.org/data/sept08/20070790_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Shorter Papers Restructuring Research: Communication Costs and the Democratization of University Innovation AjayAgrawalU Toronto AviGoldfarbU Toronto 1578 90 We report evidence that Bitnet adoption facilitated increased research collaboration between US universities. However, not all institutions benefited equally. Using panel data from seven top engineering journals, Bitnet connection records, and institution ranking data, we find that middle-tier universities were the primary beneficiaries; they benefited largely by increasing their collaboration with top-tier schools. Furthermore, we find that the magnitude of this effect is greatest for co-located pairs. Thus, the advent of Bitnet – and likely of subsequent networks – seems to have increased the role of middle-tier universities as producers of new knowledge in the national innovation system. (JEL D85, I23, O31, O33) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=16&issue_date=September 2008 10.1257/aer.98.4.1578 http://www.e-aer.org/data/sept08/20060092_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Shorter Papers The Cycle of Violence? An Empirical Analysis of Fatalities in the Palestinian-Israeli Conflict David A.JaegerGraduate Center, CUNY and U Bonn M. DanielePasermanBoston U and Hebrew U Jerusalem 1591 1604 This paper examines the dynamics of violence in the Palestinian-Israeli conflict during the Second Intifada. Using data on the daily number of fatalities between September 2000 and January 2005, we estimate reaction functions for both Israelis and Palestinians and find evidence of Granger causality from Palestinian to Israeli violence, but not vice versa. This finding is consistent using either the incidence or level of fatalities and is robust to the specification of the lag structure and the level of time aggregation. We find no evidence that the Palestinians and Israelis are engaged in a predictable "tit-for-tat" cycle of violence. (JEL D74, H56, O17) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=17&issue_date=September 2008 10.1257/aer.98.4.1591 http://www.e-aer.org/data/sept08/20051054_data.zip http://www.e-aer.org/data/sept08/20051054_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Shorter Papers The Relationship between Economic Status and Child Health: Evidence from the United States SimonCondliffeWest Chester U PA Charles R.LinkU DE 1605 18 Anne Case et al. (2002), using cross-sectional data, found a positive relationship between children's health and income, with income's protective effect increasing with age. Janet Currie and Mark Stabile (2003), using a panel of Canadian children, found that low- and high-SES children respond similarly to health shocks, but the low-SES children are subject to more shocks as they age. Our study examines this relationship using panel data for US children. We find some support for the latter result of Currie and Stabile but also evidence that low- and high-SES children respond differently to specific health shocks. (JEL D31, I12, J13) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=18&issue_date=September 2008 10.1257/aer.98.4.1605 http://www.e-aer.org/data/sept08/20050399_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Articles The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India PhilippeAghionHarvard U RobinBurgessLondon School of Economics Stephen J.ReddingLondon School of Economics FabrizioZilibottiInstitute for Empirical Research in Economics, U Zurich 1397 1412 We study whether the effects on registered manufacturing output of dismantling the License Raj—a system of central controls regulating entry and production activity in this sector—vary across Indian states with different labor market regulations. The effects are found to be unequal across Indian states with different labor market regulations. In particular, following delicensing, industries located in states with pro-employer labor market institutions grew more quickly than those in pro-worker environments. (JEL J50, L52,L60, O14, O15, O25) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=9&issue_date=September 2008 10.1257/aer.98.4.1397 http://www.e-aer.org/data/sept08/20060654_data.zip http://www.e-aer.org/data/sept08/20060654_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Articles Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market Asim IjazKhwajaHarvard U AtifMianU Chicago 1413 42 We examine the impact of liquidity shocks by exploiting cross-bank liquidity variation induced by unanticipated nuclear tests in Pakistan. We show that for the same firm borrowing from two different banks, its loan from the bank experiencing a 1 percent larger decline in liquidity drops by an additional 0.6 percent. While banks pass their liquidity shocks on to firms, large firms— particularly those with strong business or political ties—completely compensate this loss by additional borrowing through the credit market. Small firms are unable to do so and face large drops in overall borrowing and increased financial distress. (JEL E44, G21, G32, L25) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=10&issue_date=September 2008 10.1257/aer.98.4.1413 http://www.e-aer.org/data/sept08/20060982_data.pdf http://www.e-aer.org/data/sept08/20060982_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Articles The Power of Focal Points Is Limited: Even Minute Payoff Asymmetry May Yield Large Coordination Failures Vincent P.CrawfordU CA, San Diego UriGneezyU CA, San Diego YuvalRottenstreichNYU 1443 58 Since Schelling, it has often been assumed that players make use of salient decision labels to achieve coordination. Consistent with previous work, we find that given equal payoffs, salient labels yield frequent coordination. However, given even minutely asymmetric payoffs, labels lose much of their effectiveness and miscoordination abounds. This raises questions about the extent to which the effectiveness of focal points based on label salience persists beyond the special case of symmetric games. The patterns of miscoordination we observe vary with the magnitude of payoff differences in intricate ways that suggest nonequilibrium accounts based on "level-k" thinking and "team reasoning." (JEL C72, C92) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=11&issue_date=September 2008 10.1257/aer.98.4.1443 http://www.e-aer.org/data/sept08/20050181_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Articles Optimal Contracting with Endogenous Social Norms PaulFischerPA State U StevenHuddartPA State U 1459 75 Research in sociology and ethics suggests that individuals adhere to social norms of behavior established by their peers. Within an agency framework, we model endogenous social norms by assuming that each agent’s cost of implementing an action depends on the social norm for that action, defined to be the average level of that action chosen by the agent’s peer group. We show how endogenous social norms alter the effectiveness of monetary incentives, determine whether it is optimal to group agents in a single or two separate organizations, and may give rise to a costly adverse selection problem when agents' sensitivities to social norms are unobservable. (JEL D23, D82, D86, Z13) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=12&issue_date=September 2008 10.1257/aer.98.4.1459 http://www.e-aer.org/data/sept08/20040399_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Articles Great Expectations and the End of the Depression Gauti B.EggertssonFederal Reserve Bank of New York 1476 1516 This paper suggests that the US recovery from the Great Depression was driven by a shift in expectations. This shift was caused by President Franklin Delano Roosevelt's policy actions. On the monetary policy side, Roosevelt abolished the gold standard and—even more importantly—announced the explicit objective of inflating the price level to pre-Depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending, which made his policy objective credible. These actions violated prevailing policy dogmas and initiated a policy regime change as in Sargent (1983) and Temin and Wigmore (1990). The economic consequences of Roosevelt are evaluated in a dynamic stochastic general equilibrium model with nominal frictions. (JEL D84, E52, E62, N12, N42) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=13&issue_date=September 2008 10.1257/aer.98.4.1476 http://www.e-aer.org/data/sept08/20051309_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Articles Language, Meaning, and Games: A Model of Communication, Coordination, and Evolution StefanoDemichelisU Pavia Jorgen W.WeibullStockholm School of Economics 1292 1311 Language is a powerful coordination device. We generalize the cheap-talk approach to pre-play communication by way of introducing a meaning correspondence between messages and actions, and by postulating two axioms met by natural languages. Players have a lexicographic preference, second to material payoffs, against deviating from the meaning correspondence. Under two-sided communication in generic and symmetric nxn-coordination games, a Nash equilibrium component in such a lexicographic communication game is evolutionarily stable if and only if it results in the unique Pareto efficient outcome of the underlying game. We extend the analysis to one-sided communication in arbitrary finite two-player games. (JEL C72, C73, Z13) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=5&issue_date=September 2008 10.1257/aer.98.4.1292 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Articles The Brain as a Hierarchical Organization IsabelleBrocasU Southern CA, Los Angeles Juan D.CarrilloU Southern CA, Los Angeles 1312 46 Based on recent neuroscience evidence, we model the brain as a dual-system organization subject to three conflicts: asymmetric information, temporal horizon, and incentive salience. Under the first and second conflicts, we show that the uninformed system imposes a positive link between consumption and labor at every period. Furthermore, decreasing impatience endogenously emerges as a consequence of these two conflicts. Under the first and third conflicts, it becomes optimal to set a consumption cap. Finally, we discuss the behavioral implications of these rules for choice bracketing and expense tracking, and for consumption over the life cycle. (JEL D11, D74, D82, D87, D91) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=6&issue_date=September 2008 10.1257/aer.98.4.1312 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Articles How Strong Are Weak Patents? JosephFarrellU CA, Berkeley CarlShapiroU CA, Berkeley 1347 69 We study the welfare economics of probabilistic patents that are licensed without a full determination of validity. We examine the social value of instead determining patent validity before licensing to downstream technology users, in terms of deadweight loss (ex post) and innovation incentives (ex ante). We relate the value of such pre-licensing review to the patent's strength, i.e., the probability it would hold up in court, and to the per-unit royalty at which it would be licensed. We then apply these results using a game-theoretic model of licensing to downstream oligopolists, in which we show that determining patent validity prior to licensing is socially beneficial. (JEL D82, K11, L24, O34 ) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=7&issue_date=September 2008 10.1257/aer.98.4.1347 http://www.e-aer.org/data/sept08/20051051_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Articles Does Innovation Cause Stock Market Runups? Evidence from the Great Crash TomNicholasHarvard U 1370 96 This article examines the stock market's changing valuation of corporate patentable assets between 1910 and 1939. It shows that the value of knowledge capital increased significantly during the 1920s compared to the 1910s as investors responded to the quality of technological inventions. Innovation was an important driver of the late 1920s stock market runup, and the Great Crash did not reflect a significant revaluation of knowledge capital relative to physical capital. Although substantial quantities of influential patents were accumulated during the post-crash recovery, high technology firms did not earn significant excess returns over low technology firms for most of the 1930s. (JEL G14, N12, N22, O30) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=8&issue_date=September 2008 10.1257/aer.98.4.1370 http://www.e-aer.org/data/sept08/20050283_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Articles Behavioral Equilibrium in Economies with Adverse Selection IgnacioEspondaNYU 1269 91 I propose a new solution concept—behavioral equilibrium—to study environments with players who are naive, in the sense that they fail to account for the informational content of other players' actions. I apply the framework to certain adverse selection settings and show that, contrary to the existing literature, the adverse selection problem is exacerbated when naive players fail to account for selection. More generally, the main distinguishing feature of the framework is that, in equilibrium, beliefs about both fundamentals and strategies are jointly restricted. Consequently, whether a behavioral bias may arise or not is determined endogenously in equilibrium. (JEL C70, D82, D83) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=4&issue_date=September 2008 10.1257/aer.98.4.1269 http://www.e-aer.org/data/sept08/20070196_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Articles Competition and Price Variation When Consumers Are Loss Averse PaulHeidhuesRheinische Friedrich-Wilhelms U Bonn BotondKoszegiU CA, Berkeley 1245 68 We modify the Salop (1979) model of price competition with differentiated products by assuming that consumers are loss averse relative to a reference point given by their recent expectations about the purchase. Consumers' sensitivity to losses in money increases the price responsiveness of demand—and hence the intensity of competition—at higher relative to lower market prices, reducing or eliminating price variation both within and between products. When firms face common stochastic costs, in any symmetric equilibrium the markup is strictly decreasing in cost. Even when firms face different cost distributions, we identify conditions under which a focal-price equilibrium (where firms always charge the same "focal" price) exists, and conditions under which any equilibrium is focal. (JEL D11 , D43, D81, L13) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=3&issue_date=September 2008 10.1257/aer.98.4.1245 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 98 4 September 2008 http://www.aeaweb.org/articles/issue_detail.php?journal=AER&volume=98&issue=4&issue_date=September 2008 Articles Leverage Cycles and the Anxious Economy AnaFostelGeorge Washington U JohnGeanakoplosYale U and Santa Fe Institute 1211 44 We provide a pricing theory for emerging asset classes, like emerging markets, that are not yet mature enough to be attractive to the general public. We show how leverage cycles can cause contagion, flight to collateral, and issuance rationing in a frequently recurring phase we call the anxious economy. Our model provides an explanation for the volatile access of emerging economies to international financial markets, and for three stylized facts we identify in emerging markets and high yield data since the late 1990s. Our analytical framework is a general equilibrium model with heterogeneous agents, incomplete markets, and endogenous collateral, plus an extension encompassing adverse selection. (JEL D53, G12, G14, G15) http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=4&article=2&issue_date=September 2008 10.1257/aer.98.4.1211 http://www.e-aer.org/data/sept08/20060336_data.zip