American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles Governance Institutions and Economic Activity AvinashDixitPrinceton U 5 24 http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.5 10.1257/aer.99.1.5 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles Taxing Capital? Not a Bad Idea after All! Juan CarlosConesaU Autonoma de Barcelona SagiriKitaoU Southern CA DirkKruegerU PA 25 48 We quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks and permanent productivity differences of households. The optimal capital income tax rate is significantly positive at 36 percent. The optimal progressive labor income tax is, roughly, a flat tax of 23 percent with a deduction of $7,200 (relative to average household income of $42,000). The high optimal capital income tax is mainly driven by the life-cycle structure of the model, whereas the optimal progressivity of the labor income tax is attributable to the insurance and redistribution role of the tax system. (JEL E13, H21, H24, H25) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.25 10.1257/aer.99.1.25 http://www.e-aer.org/data/mar09/20060994_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles Liquidity Constraints and Imperfect Information in Subprime Lending WilliamAdamsCitigroup Inc, New York LiranEinavStanford U JonathanLevinStanford U 49 84 We present new evidence on consumer liquidity constraints and the credit market conditions that might give rise to them. We analyze unique data from a large auto sales company serving the subprime market. Short-term liquidity appears to be a key driver of consumer behavior. Demand increases sharply during tax rebate season and purchases are highly sensitive to down-payment requirements. Lenders also face substantial informational problems. Default rates rise significantly with loan size, providing a rationale for loan caps, and higher-risk borrowers demand larger loans. This adverse selection is mitigated, however, by risk-based pricing. (JEL D14, D82, D83, G21) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.49 10.1257/aer.99.1.49 http://www.e-aer.org/data/mar09/20070202_data.zip http://www.e-aer.org/data/mar09/20070202_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles Estate Taxation, Entrepreneurship, and Wealth MarcoCagettiFederal Reserve Board MariacristinaDe NardiFederal Reserve Bank of Chicago 85 111 This paper studies the estate tax in a quantitative framework with business investment, borrowing constraints, estate transmission, and wealth inequality. We find that the estate tax has little effect on the saving and investment decisions of small businesses, but does distort the decisions of larger firms, thereby reducing aggregate output and savings. Removing such distortions by eliminating the estate tax does not necessarily imply that everyone would be better off. If other taxes were raised to reestablish fiscal balance, those at the top of the wealth distribution would experience a large welfare gain, but most of the population would lose. (JEL D31, E21, H22) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.85 10.1257/aer.99.1.85 http://www.e-aer.org/data/mar09/20040521_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles Peers at Work AlexandreMasU CA, Berkeley EnricoMorettiU CA, Berkeley 112 45 We study peer effects in the workplace. Specifically, we investigate whether, how, and why the productivity of a worker depends on the productivity of coworkers in the same team. Using high-frequency data on worker productivity from a large supermarket chain, we find strong evidence of positive productivity spillovers from the introduction of highly productive personnel into a shift. Worker effort is positively related to the productivity of workers who see him, but not workers who do not see him. Additionally, workers respond more to the presence of coworkers with whom they frequently interact. We conclude that social pressure can partially internalize free-riding externalities that are built into many workplaces. (JEL J24, L81, M54) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.112 10.1257/aer.99.1.112 http://www.e-aer.org/data/mar09/20060878_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles Women, Wealth, and Mobility LenaEdlundColumbia U WojciechKopczukColumbia U 146 78 Using estate tax returns data, we observe that the share of women among the very wealthy in the United States peaked in the late 1960s at nearly one-half and then declined to one-third. We argue that this pattern reflects changes in the importance of dynastic wealth, with the share of women proxying for inherited wealth. If so, wealth mobility decreased until the 1970s and rose thereafter. Such an interpretation is consistent with technological change driving longterm trends in mobility and inequality, as well as the recent divergence between top wealth and top income shares documented elsewhere. (JEL D31, J16, J62, O33) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.146 10.1257/aer.99.1.146 http://www.e-aer.org/data/mar09/20060527_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles Class-Size Caps, Sorting, and the Regression-Discontinuity Design MiguelUrquiolaColumbia U EricVerhoogenColumbia U and BREAD, Duke U 179 215 This paper examines how schools' choices of class size and households' choices of schools affect regression-discontinuity-based estimates of the effect of class size on student outcomes. We build a model in which schools are subject to a class-size cap and an integer constraint on the number of classrooms, and higher-income households sort into higher-quality schools. The key prediction, borne out in data from Chile's liberalized education market, is that schools at the class-size cap adjust prices (or enrollments) to avoid adding an additional classroom, which generates discontinuities in the relationship between enrollment and household characteristics, violating the assumptions underlying regression-discontinuity research designs. (JEL D12, I21, I28, O15) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.179 10.1257/aer.99.1.179 http://www.e-aer.org/data/mar09/20060758_data.zip http://www.e-aer.org/data/mar09/20060758_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles Taxes and Employment Subsidies in Optimal Redistribution Programs PaulBeaudryU British Columbia CharlesBlackorbyU Warwick and GREQAM DezsöSzalayU Warwick 216 42 This paper explores how to optimally set taxes and transfers when taxation authorities are uninformed about individuals' value of time in both market and nonmarket activities; and can observe both market-income and time allocated to market employment. We show that optimal redistribution in this environment involves a cutoff wage whereby workers above the cutoff are taxed as they increase their income, while workers earning a wage below the cutoff receive an income supplement as they increase their income. Finally, we show that the optimal program transfers zero income to individuals who choose not to work. 1JEL D31, H21, H23, H242 http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.216 10.1257/aer.99.1.216 http://www.e-aer.org/data/mar09/20050003_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles Rare Disasters, Asset Prices, and Welfare Costs Robert J.BarroHarvard U 243 64 A representative-consumer model with Epstein-Zin-Weil preferences and i.i.d. shocks, including rare disasters, accords with observed equity premia and risk-free rates if the coefficient of relative risk aversion equals 3-4. If the intertemporal elasticity of substitution exceeds one, an increase in uncertainty lowers the price-dividend ratio for equity, and a rise in the expected growth rate raises this ratio. Calibrations indicate that society would willingly reduce GDP by around 20 percent each year to eliminate rare disasters. The welfare cost from usual economic fluctuations is much smaller, though still important, corresponding to lowering GDP by about 1.5 percent each year. (JEL E13, E21, E22, E32) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.243 10.1257/aer.99.1.243 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles Cognition and Incomplete Contracts JeanTiroleToulouse School of Economics 265 94 Thinking about contingencies, designing covenants, and seeing through their implications is costly. Parties to a contract accordingly use heuristics and leave it incomplete. The paper develops a model of limited cognition and examines its consequences for contractual design. (JEL D23, D82, D86, L22) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.265 10.1257/aer.99.1.265 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles The Value of Groups Shaun P.Hargreaves HeapU East Anglia Daniel JohnZizzoU East Anglia 295 323 We present the results of an experiment that attempts to measure the social value of groups. In the experiment, group membership is induced artificially: subjects interact with insiders and outsiders in trust games and periodically enter markets where they can trade group membership. We find that trust falls with groups because of negative discrimination against outsiders. Against this, however, there is evidence that group membership provides a psychological benefit, albeit one that may induce social inertia. Overall, the welfare effects of groups are at best neutral and could be negative. (JEL: D17, Z13) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.295 10.1257/aer.99.1.295 http://www.e-aer.org/data/mar09/20070041_data.zip http://www.e-aer.org/data/mar09/20070041_app.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles The War on Drugs: Methamphetamine, Public Health, and Crime CarlosDobkinU CA, Santa Cruz NancyNicosiaRAND Corporation, Santa Monica, CA 324 49 In mid-1995, a government effort to reduce the supply of methamphetamine precursors successfully disrupted the methamphetamine market and interrupted a trajectory of increasing usage. The price of methamphetamine tripled and purity declined from 90 percent to 20 percent. Simultaneously, amphetaminerelated hospital and treatment admissions dropped 50 percent and 35 percent, respectively. Methamphetamine use among arrestees declined 55 percent. Although felony methamphetamine arrests fell 50 percent, there is no evidence of substantial reductions in property or violent crime. The impact was largely temporary. The price returned to its original level within four months; purity, hospital admissions, treatment admissions, and arrests approached preintervention levels within eighteen months. (JEL I12, K42) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.324 10.1257/aer.99.1.324 http://www.e-aer.org/data/mar09/20050835_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data JeanBoivinHEC Montreal and CIRANO Marc P.GiannoniColumbia U and CIRANO IlianMihovINSEAD, Singapore 350 84 This paper shows that the recent evidence that disaggregated prices are volatile does not necessarily challenge the hypothesis of price rigidity used in a large class of macroeconomic models. We document the effect of macroeconomic and sectoral disturbances by estimating a factor-augmented vector autoregression using a large set of macroeconomic indicators and disaggregated prices. Our main finding is that disaggregated prices appear sticky in response to macroeconomic and monetary disturbances, but flexible in response to sectorspecific shocks. The observed flexibility of disaggregated prices reflects the fact that sector-specific shocks account on average for 85 percent of their monthly fluctuations. (JEL E13, E31, E32, E52) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.350 10.1257/aer.99.1.350 http://www.e-aer.org/data/mar09/20070033_data.zip http://www.e-aer.org/data/mar09/20070033_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles Risk, Ambiguity, and the Rank-Dependence Axioms Mark J.MachinaU CA, San Diego 385 92 Choice problems in the spirit of Ellsberg (1961) suggest that rank-dependent ("Choquet expected utility") preferences over subjective gambles might be subject to the same difficulties that Ellsberg's earlier examples posed for subjective expected utility. These difficulties stem from event-separability properties that rank-dependent preferences partially retain from expected utility, and suggest that nonseparable models of preferences might be better at capturing features of behavior that lead to these paradoxes. (JEL D81) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.385 10.1257/aer.99.1.385 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles Insurer-Provider Networks in the Medical Care Market KatherineHoColumbia U 393 430 I use data on the hospital networks offered by managed care health insurers to estimate the expected division of profits between insurers and providers. I include a simple profit-maximization framework and an additional effect: hospitals that can secure demand without contracting with all insurers (e.g., those most attractive to consumers and those that are capacity constrained) may demand high prices that some insurers refuse to pay. Hospital mergers may also affect price bargaining. I estimate that all three types of hospitals capture higher markups than other providers. These results provide information on the hospital investment incentives generated by bargaining. (JEL G22, G34, I11, L25) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.393 10.1257/aer.99.1.393 http://www.e-aer.org/data/mar09/20051180_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Articles Group Identity and Social Preferences YanChenU MI Sherry XinLiU TX, Dallas 431 57 We present a laboratory experiment that measures the effects of induced group identity on social preferences. We find that when participants are matched with an ingroup member, they show a 47 percent increase in charity concerns and a 93 percent decrease in envy. Likewise, participants are 19 percent more likely to reward an ingroup match for good behavior, but 13 percent less likely to punish an ingroup match for misbehavior. Furthermore, participants are significantly more likely to choose social-welfare-maximizing actions when matched with an ingroup member. All results are consistent with the hypothesis that participants are more altruistic toward an ingroup match. (JEL C91, D03, Z13) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.431 10.1257/aer.99.1.431 http://www.e-aer.org/data/mar09/20061107_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Shorter Papers Excise Taxes with Multiproduct Transactions Stephen F.HamiltonCA Polytechnic State U, San Luis Obispo 458 71 I examine excise taxes levied on multiproduct retailers. Excise taxes reduce equilibrium output and decrease equilibrium product variety in the short run, but taxes can raise output per product in the long run and induce entry. Excise taxes are overshifted into prices in a wide range of cases, including under linear and concave demand conditions, and excise taxes shift less than one-for-one into prices only when demand is highly convex. Multiproduct transactions substantively alter the efficiency of ad valorem and specific forms of excise taxes and affect the comparison of relative tax performance over short-run and long-run time horizons. (JEL H25, H32, L11, L13, L81) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.458 10.1257/aer.99.1.458 http://www.e-aer.org/data/mar09/20071037_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Shorter Papers Diversity in the Workplace JohnMorganU CA, Berkeley FelixVárdyIMF 472 85 We study minority representation in the workplace when employers engage in optimal sequential search and minorities convey noisier signals of ability than mainstream job candidates. The greater signal noise makes it harder for minorities to change employers' prior beliefs. When employers are selective, this leads to minority underrepresentation in the workplace. Diversity improves when the cost of interviewing, the average skill level of candidates, or the opportunity cost of not hiring increases. Reducing the cost of firing also increases minority representation. When employers are sufficiently unselective, the rigidity of employers' beliefs leads to overrepresentation of minorities. (JEL D83, J15, J24, J71, M12, M51) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.472 10.1257/aer.99.1.472 http://www.e-aer.org/data/mar09/20060844_app.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Shorter Papers Indirect Effects of an Aid Program: How Do Cash Transfers Affect Ineligibles' Consumption? ManuelaAngelucciU AZ GiacomoDe GiorgiStanford U 486 508 Cash transfers to eligible households indirectly increase the consumption of ineligible households living in the same villages. This effect operates through insurance and credit markets: ineligible households benefit from the transfers by receiving more gifts and loans and by reducing their savings. Thus, the transfers benefit the local economy at large; looking only at the effect on the treated underestimates their impact. One should analyze the effects of this class of programs on the entire local economy, rather than on the treated only, and use a village-level randomization, rather than selecting treatment nd control subjects from the same community. (JEL H23, I38, O12, O15) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.486 10.1257/aer.99.1.486 http://www.e-aer.org/data/mar09/20060396_data.zip http://www.e-aer.org/data/mar09/20060396_app.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Shorter Papers Political Economy at Any Speed: What Determines Traffic Citations? Michael D.MakowskyTowson U ThomasStratmannGeorge Mason U 509 27 Speeding tickets are determined not only by the speed of the offender, but also by incentives faced by police officers and their vote-maximizing principals. We hypothesize that police officers issue fines more frequently when drivers have a higher opportunity cost of contesting a ticket, and when drivers are not residents of the local municipality. We also predict that local officers are more likely to issue a ticket to out-of-town drivers when fiscal conditions are tight and legal limits prevent increases in property taxes. Using data from traffic stops in Massachusetts, we find support for our hypotheses. (JEL H76, R41) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.509 10.1257/aer.99.1.509 http://www.e-aer.org/data/mar09/20070061_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Shorter Papers Democracy and Foreign Education AntonioSpilimbergoIMF 528 43 Despite the large amount of private and public resources spent on foreign education, there is no systematic evidence that foreign-educated individuals foster democracy in their home countries. Using a unique panel dataset on foreign students starting in the 1950s, I show that foreign-educated individuals promote democracy in their home country, but only if the foreign education is acquired in democratic countries. The results are robust to several estimation techniques, to different definitions of democracy, and to the inclusion of a variety of control variables, including democracy in trading partners, neighboring countries, level of income, and level and stock of education. (JEL D72, I21, O15, O17, P26) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.528 10.1257/aer.99.1.528 http://www.e-aer.org/data/mar09/20070061_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Shorter Papers Doing Good or Doing Well? Image Motivation and Monetary Incentives in Behaving Prosocially DanArielyDuke U AnatBrachaTel Aviv U StephanMeierColumbia U 544 55 This paper experimentally examines image motivation--the desire to be liked and well regarded by others--as a driver in prosocial behavior (doing good), and asks whether extrinsic monetary incentives (doing well) have a detrimental effect on prosocial behavior due to crowding out of image motivation. Using the unique property of image motivation--its dependency on visibility--we show that image is indeed an important part of the motivation to behave prosocially, and that extrinsic incentives crowd out image motivation. Therefore, monetary incentives are more likely to be counterproductive for public prosocial activities than for private ones. (JEL D64, L31, Z13) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.544 10.1257/aer.99.1.544 http://www.e-aer.org/data/mar09/20070958_data.zip http://www.e-aer.org/data/mar09/20070958_app.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 1 March 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=1 Journal Article Front Matter i vi http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.1.i 10.1257/aer.99.1.i