American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Journal Article Front Matter i iv http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.i 10.1257/aer.99.5.i American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Articles Investment in Schooling and the Marriage Market Pierre-AndréChiapporiColumbia U MuratIyigunU CO and Harvard U YoramWeissTel Aviv U and IZA, Bonn 1689 1713 We present a model in which investment in schooling generates two kinds of returns: the labor-market return, resulting from higher wages, and a marriage-market return, defined as the impact of schooling on the marital surplus share one can extract. Men and women may have different incentives to invest in schooling because of different market wages or household roles. This asymmetry can yield a mixed equilibrium with some educated individuals marrying uneducated spouses. When the labor-market return to schooling rises, home production demands less time, and the traditional spousal labor division norms weaken, more women may invest in schooling than men. (JEL I21, J12, J24, J31) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.1689 10.1257/aer.99.5.1689 http://www.e-aer.org/data/dec09/20061151_data.zip http://www.e-aer.org/data/dec09/20061151_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Articles Efficient Pollution Regulation: Getting the Prices Right Nicholas Z.MullerMiddlebury College RobertMendelsohnYale U 1714 39 This paper argues for efficient environmental regulations that equate the marginal damage of pollution to marginal abatement costs across space. The paper estimates the source-specific marginal damages of air pollution and calculates the welfare gain from making the current sulfur dioxide allowance trading program for power plants more efficient. The savings from using trading ratios based on marginal damages are between $310 and $940 million per year. The potential savings from setting aggregate emissions efficiently and from including more sources of air pollution are many times higher. (JEL H23, Q53, Q58) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.1714 10.1257/aer.99.5.1714 http://www.e-aer.org/data/dec09/20071380_data.zip http://www.e-aer.org/data/dec09/20071380_app.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Articles Has Moral Hazard Become a More Important Factor in Managerial Compensation? George-LeviGayleCarnegie Mellon U Robert A.MillerCarnegie Mellon U 1740 69 We estimate a principal-agent model of moral hazard with longitudinal data on firms and managerial compensation over two disjoint periods spanning 60 years to investigate increased value and variability in managerial compensation. We find exogenous growth in firm size largely explains these secular trends in compensation. In our framework, exogenous firm size works through two channels. First, conflicts of interest between shareholders and managers are magnified in large firms, so optimal compensation plans are now more closely linked to insider wealth. Second, the market for managers has become more differentiated, increasing the premium paid to managers of large versus small firms. (JEL D82, L25, M12, M52) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.1740 10.1257/aer.99.5.1740 http://www.e-aer.org/data/dec09/20070864_data.zip http://www.e-aer.org/data/dec09/20070864_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Articles Selling to Overconfident Consumers Michael D.GrubbMIT 1770 1807 Consumers may overestimate the precision of their demand forecasts. This overconfidence creates an incentive for both monopolists and competitive firms to offer tariffs with included quantities at zero marginal cost, followed by steep marginal charges. This matches observed cellular phone service pricing plans in the United States and elsewhere. An alternative explanation with common priors can be ruled out in favor of overconfidence based on observed customer usage patterns for a major US cellular phone service provider. The model can be reinterpreted to explain the use of flat rates and late fees in rental markets, and teaser rates on loans. Nevertheless, firms may benefit from consumers losing their overconfidence. (JEL D12, L11, L96) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.1770 10.1257/aer.99.5.1770 http://www.e-aer.org/data/dec09/20051306_data.zip http://www.e-aer.org/data/dec09/20051306_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Articles Risk Taking by Entrepreneurs GalinaVereshchaginaAZ State U Hugo A.HopenhaynUCLA 1808 30 Entrepreneurs bear substantial risk, but empirical evidence shows no sign of a positive premium. This paper develops a theory of endogenous entrepreneurial risk taking that explains why self-financed entrepreneurs may find it optimal to invest in risky projects offering no risk premium. Consistently with empirical evidence, the model predicts that poorer entrepreneurs are more likely to undertake risky projects. It also finds that incentives for risk taking are stronger when agents are impatient. (JEL G31, G32, L25, L26) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.1808 10.1257/aer.99.5.1808 http://www.e-aer.org/data/dec09/20050582_data.zip http://www.e-aer.org/data/dec09/20050582_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Articles Adaptation and Vertical Integration in the Airline Industry SilkeJanuszewski ForbesU CA, San Diego MaraLedermanU Toronto 1831 49 We explore patterns of vertical integration in the US airline industry. Major airlines subcontract portions of their network to regional partners, which may or may not be owned. We investigate if ownership economizes on ex post renegotiation costs. We estimate whether airlines are more likely to use owned regionals on city pairs with adverse weather (which makes adaptation decisions more frequent) and on city pairs that are more integrated into the major's network (which raises the costs of having adaptation decisions resolved suboptimally). Our results suggest a robust empirical relationship between adaptation and vertical integration in this setting. (JEL L14, L22, L24, L93) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.1831 10.1257/aer.99.5.1831 http://www.e-aer.org/data/dec09/20051176_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Articles Naked Exclusion: An Experimental Study of Contracts with Externalities Claudia M.LandeoU Alberta and Northwestern U Kathryn E.SpierHarvard U 1850 77 This paper reports the results of an experiment on exclusive contracts. We replicate the strategic environment described by Rasmusen, Ramseyer, and Wiley (1991) and Segal and Whinston (2000). Our findings are as follows. First, when the buyers can communicate, discrimination raises the likelihood of exclusion. Second, when the incumbent seller is unable to discriminate and must make the same offers to the buyers, communication reduces the likelihood of exclusion. Communication also induces more generous offers when the seller cannot discriminate, and divide-and-conquer offers when the seller can discriminate. Third, when communication is allowed, payoff endogeneity increases the likelihood of exclusion. (JEL C72, C91, D62, D86, K12, K21, L12, L42) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.1850 10.1257/aer.99.5.1850 http://www.e-aer.org/data/dec09/20080086_data.zip http://www.e-aer.org/data/dec09/20080086_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Articles The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com IgalHendelNorthwestern U AvivNevoNorthwestern U FrançoisOrtalo-MagnéU WI and Toulouse School of Economics 1878 98 We compare house sales on a For-Sale-By-Owner (FSBO) platform to Multiple Listing Service (MLS) sales and find that FSBO precommission prices are no lower, but that FSBO is less effective in terms of time to sell and probability of a sale. We do not find direct evidence of the importance of network size as a reason for the lower effectiveness of FSBO. We do find evidence of endogenous platform differentiation: patient sellers use FSBO while patient buyers transact more often on the MLS (where they avoid patient sellers). We discuss the implications for platform competition, two-sided markets, and welfare. (JEL L85, M31, R31) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.1878 10.1257/aer.99.5.1878 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Articles Innovation Diffusion in Heterogeneous Populations: Contagion, Social Influence, and Social Learning H. PeytonYoungU Oxford 1899 1924 New ideas, products, and practices take time to diffuse, a fact that is often attributed to some form of heterogeneity among potential adopters. This paper examines three broad classes of diffusion models -- contagion, social influence, and social learning -- and shows how to incorporate heterogeneity into each at a high level of generality without losing analytical tractability. Each type of model leaves a characteristic "footprint" on the shape of the adoption curve which provides a basis for discriminating empirically between them. The approach is illustrated using the classic study of Ryan and Gross (1943) on the diffusion of hybrid corn. (JEL D83, O33, Q16, Z13) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.1899 10.1257/aer.99.5.1899 http://www.e-aer.org/data/dec09/20071161_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Articles The Evolution of Time Preference with Aggregate Uncertainty Arthur J.RobsonSimon Fraser U LarrySamuelsonYale U 1925 53 We examine the evolutionary foundations of intertemporal preferences. When all the risk affecting survival and reproduction is idiosyncratic, evolution selects for agents who maximize the discounted sum of expected utility, discounting at the sum of the population growth rate and the mortality rate. Aggregate uncertainty concerning survival rates leads to discount rates that exceed the sum of population growth rate and death rate, and can push agents away from exponential discounting. (JEL D11, D81, D91) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.1925 10.1257/aer.99.5.1925 http://www.e-aer.org/data/dec09/20080116_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Articles Strategy-Proofness versus Efficiency in Matching with Indifferences: Redesigning the NYC High School Match AtilaAbdulkadiroğluDuke U Parag A.PathakMIT Alvin E.RothHarvard U 1954 78 The design of the New York City (NYC) high school match involved trade-offs among efficiency, stability, and strategy-proofness that raise new theoretical questions. We analyze a model with indifferences -- ties -- in school preferences. Simulations with field data and the theory favor breaking indifferences the same way at every school -- single tiebreaking -- in a student-proposing deferred acceptance mechanism. Any inefficiency associated with a realized tiebreaking cannot be removed without harming student incentives. Finally, we empirically document the extent of potential efficiency loss associated with strategy-proofness and stability, and direct attention to some open questions. (JEL C78, D82, I21) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.1954 10.1257/aer.99.5.1954 http://www.e-aer.org/data/dec09/20061275_data.zip http://www.e-aer.org/data/dec09/20061275_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Articles Performance Pay and Teachers' Effort, Productivity, and Grading Ethics VictorLavyHebrew U Jerusalem and Royal Holloway, U London 1979 2011 This paper presents evidence about the effect of individual monetary incentives on English and math teachers in Israel. Teachers were rewarded with cash bonuses for improving their students' performance in high-school matriculation exams. The main identification strategy is based on measurement error in the assignment to treatment variable that produced a randomized treatment sample. The incentives led to significant improvements in test taking rates, conditional pass rates, and mean test scores. Improvements were mediated through changes in teaching methods, enhanced after-school teaching, and increased responsiveness to students' needs. No evidence was found of manipulation of test scores by teachers. (JEL I21, J31, J45) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.1979 10.1257/aer.99.5.1979 http://www.e-aer.org/data/dec09/20060532_data.zip http://www.e-aer.org/data/dec09/20060532_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Articles On the Possibility of Credit Rationing in the Stiglitz-Weiss Model Lutz G.ArnoldU Regensburg John G.RileyUCLA 2012 21 Contrary to what is usually assumed, the expected revenue for lenders as a function of the loan rate cannot be globally hump-shaped in the Stiglitz-Weiss (1981) adverse selection model with a continuum of types. This has important implications. First, if there is credit rationing, there must be at least two equilibrium loan rates. Second, while at the low rate loans are rationed, all those applicants willing to pay the high rate are then served. Numerical analysis shows that unless the joint distribution of risk class and output is rather special, the two loan rate outcome with rationing is unlikely. (JEL D82, G21) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2012 10.1257/aer.99.5.2012 http://www.e-aer.org/data/dec09/20040970_data.zip http://www.e-aer.org/data/dec09/20040970_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Articles Peer-Induced Fairness in Games Teck-HuaHoU CA, Berkeley XuanmingSuU CA, Berkeley 2022 49 People exhibit peer-induced fairness concerns when they look to their peers as a reference to evaluate their endowments. We analyze two independent ultimatum games played sequentially by a leader and two followers. With peer-induced fairness, the second follower is averse to receiving less than the first follower. Using laboratory experimental data, we estimate that peer-induced fairness between followers is two times stronger than distributional fairness between leader and follower. Allowing for heterogeneity, we find that 50 percent of subjects are fairness-minded. We discuss how peer-induced fairness might limit price discrimination, account for low variability in CEO compensation, and explain pattern bargaining. (JEL C72, D63 ) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2022 10.1257/aer.99.5.2022 http://www.e-aer.org/data/dec09/20080107_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Articles A Theory of Demand Shocks GuidoLorenzoniMIT 2050 84 This paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity. Agents are hit by heterogeneous productivity shocks, they observe their own productivity and a noisy public signal regarding aggregate productivity. The public signal gives rise to "noise shocks," which have the features of aggregate demand shocks: they increase output, employment, and inflation in the short run and have no effects in the long run. Numerical examples suggest that the model can generate sizable amounts of noise-driven volatility. (JEL D83, D84, E21, E23, E32) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2050 10.1257/aer.99.5.2050 http://www.e-aer.org/data/dec09/20061137_data.zip http://www.e-aer.org/data/dec09/20061137_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Shorter Papers Mental Accounting in Portfolio Choice: Evidence from a Flypaper Effect James J.ChoiYale U DavidLaibsonHarvard U Brigitte C.MadrianHarvard U 2085 95 Consistent with mental accounting, we document that investors sometimes choose the asset allocation for one account without considering the asset allocation of their other accounts. The setting is a firm that changed its 401(k) matching rules. Initially, 401(k) enrollees chose the allocation of their own contributions, but the firm chose the match allocation. These enrollees ignored the match allocation when choosing their own-contribution allocation. In the second regime, enrollees selected both accounts' allocations, leading them to integrate the two. Own-contribution allocations before the rule change equal the combined own- and match-contribution allocations afterward, whereas combined allocations differ sharply across regimes. (JEL G11, J32) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2085 10.1257/aer.99.5.2085 http://www.e-aer.org/data/dec09/20071395_data.zip http://www.e-aer.org/data/dec09/20071395_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Shorter Papers Intra-industry Foreign Direct Investment LauraAlfaroHarvard U AndrewCharltonCentre for Economic Performance, London School of Economics 2096 2119 We use a new firm-level dataset that establishes the location, ownership, and activity of 650,000 multinational subsidiaries. Using a combination of four-digit-level information and input-output tables, we find the share of vertical FDI (subsidiaries that provide inputs to their parent firms) to be larger than commonly thought, even within developed countries. Most subsidiaries are not readily explained by the comparative advantage considerations whereby multinationals locate activities abroad to take advantage of factor cost differences. Instead, multinationals tend to own the stages of production proximate to their final production, giving rise to a class of high-skill, intra-industry vertical FDI. (JEL G11, J32) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2096 10.1257/aer.99.5.2096 http://www.e-aer.org/data/dec09/20071128_data.zip http://www.e-aer.org/data/dec09/20071128_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Shorter Papers Media Markets and Localism: Does Local News en Espanol Boost Hispanic Voter Turnout? FelixOberholzer-GeeHarvard U JoelWaldfogelU PA 2120 28 In the past decade Americans have increasingly turned their attention to nonlocal information sources, raising concerns about disengagement from local communities. Regulation sometimes seeks to curtail the integration of media markets through the promotion of "localism." This paper examines the role of local media. We make use of the rapid growth of Hispanic communities in the United States to test whether the presence of local television news affects local civic behavior. We find that Hispanic voter turnout increased by 5 to 10 percentage points, relative to non-Hispanic turnout, in markets where Spanish-language local television news became available. (JEL D72, J15, L82) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2120 10.1257/aer.99.5.2120 http://www.e-aer.org/data/dec09/20060614_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Shorter Papers Surprised by the Parimutuel Odds? MarcoOttavianiNorthwestern U Peter NormanSørensenU Copenhagen 2129 34 Empirical analyses of parimutuel betting markets have documented that market probabilities of favorites (longshots) tend to underestimate (overestimate) the corresponding empirical probabilities. We argue that this favorite-longshot bias is consistent with bettors taking simultaneous positions on the basis of private information about the likelihood of different outcomes. The ex post realization of a high market probability indicates favorable information about the occurrence of an outcome -- and the opposite is true for longshots. This explanation for the bias relies on the bettors' inability to incorporate the surprise revealed by the final odds. (JEL D81, D82, L83) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2129 10.1257/aer.99.5.2129 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Shorter Papers Debt Maturity and the International Financial Architecture OlivierJeanneJohns Hopkins U 2135 48 This paper presents a theory of the maturity of international sovereign debt, and derives its implications for the reform of the international financial architecture. The analysis is based on a model in which the need to roll over external debt disciplines the policies of debtor countries, but makes them vulnerable to unwarranted debt crises due to bad shocks. The paper presents a welfare analysis of several measures that have been discussed in recent debates, such as international lending-in-last-resort or the establishment of a mechanism for suspending payments on the external debt of crisis countries. (JEL F34, O19) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2135 10.1257/aer.99.5.2135 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Shorter Papers Departure Times in Y-Shaped Traffic Networks with Multiple Bottlenecks Terry E.DanielU Alberta Eyran J.GischesU AZ AmnonRapoportU AZ 2149 76 We study the departure time decisions of commuters traversing a traffic network with the goal of arriving at a common destination at a specified time. There are costs associated with arriving either too early or too late, and with delays experienced at bottlenecks. Our main hypothesis, based on the Nash equilibrium distribution of departure times, implies that, for certain parameter values, expanding the capacity of an upstream bottleneck can increase the total travel costs in the network. We report the results of a large-group laboratory experiment, which are strongly supportive of this counterintuitive hypothesis, and we discuss the implications. (JEL D85, R41) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2149 10.1257/aer.99.5.2149 http://www.e-aer.org/data/dec09/20070506_data.zip http://www.e-aer.org/data/dec09/20070506_app.pdf American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Shorter Papers Technology, International Trade, and Pollution from US Manufacturing ArikLevinsonGeorgetown U 2177 92 Pollution emitted by US manufacturers declined markedly over the past several decades, even as real manufacturing output increased. I first show that most of the decline in US manufacturing pollution has resulted from changing production processes ("technology"), rather than changes in the mix of goods produced. I then show that increased net imports of polluting goods ("international trade") accounts for only a small portion of the pollution reductions from the changing mix of goods. Together, these two findings demonstrate that shifting polluting industries overseas explains only a minor part -- less than 10 percent -- of the cleanup of US manufacturing. (JEL F18, L23, L60, O30, Q52, Q53) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2177 10.1257/aer.99.5.2177 http://www.e-aer.org/data/dec09/20071363_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Shorter Papers Endogenous Verifiability and Relational Contracting OlaKvaløyU Stavanger Trond E.OlsenNorwegian School of Economics and Business Administration 2193 2208 Principal-agent models usually invoke the strong assumption that the parties know for sure ex ante whether a variable is verifiable or not. This paper assumes that only the probability of verification is known, and that this probability is endogenously determined. We analyze a principal-agent relationship where the verifiability of the agent's output is determined by the principal's investment in drafting an explicit contract. The model is well suited for analyzing the relationship between explicit contracting, legal courts, trust, and relational contracting. In particular, we show how trust -- established through repeated interaction -- and legal courts may induce contractual incompleteness. (JEL D82, D86) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2193 10.1257/aer.99.5.2193 American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Shorter Papers The Retirement Consumption Puzzle: Evidence from a Regression Discontinuity Approach ErichBattistinU Padova and IRVAPP AgarBrugiaviniU Venice "Ca'Foscari" EnricoRettoreU Padova and IRVAPP GuglielmoWeberU Padova and IFS 2209 26 We investigate the size of the consumption drop at retirement in Italy by exploiting pension eligibility information to correct for endogenous retirement. We take a regression discontinuity approach and assume that spending would be smooth around pension eligibility if individuals did not retire. We estimate a 9.8 percent drop associated to retirement. This fall is not driven by liquidity problems for the less well off and can be accounted for by drops in work-related expenses. Retirement also induces a significant drop in the number of grown children living with their parents and this explains most of the retirement consumption drop. (JEL D91, E21, J26, J31) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2209 10.1257/aer.99.5.2209 http://www.e-aer.org/data/dec09/20071180_data.zip http://www.e-aer.org/data/dec09/20071180_app.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Shorter Papers Direct Democracy and Public Employees John G.MatsusakaU Southern CA, Los Angeles 2227 46 In the public sector, employment may be inefficiently high because of patronage, and wages may be inefficiently high because of public employee interest groups. This paper explores whether the initiative process, a direct democracy institution of growing importance, ameliorates these political economy problems. In a sample of 650+ cities, I find that when public employees cannot bargain collectively and patronage could be a problem, initiatives appear to cut employment but not wages. When public employees bargain collectively, driving up wages, the initiative appears to cut wages but not employment. The employment-cutting result is robust; the wage-cutting result survives some but not all robustness tests. (JEL D72, J31, J45, J52) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2227 10.1257/aer.99.5.2227 http://www.e-aer.org/data/dec09/20070509_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Shorter Papers Individual Behavior and Group Membership: Comment MatthiasSutterU Innsbruck and U Gothenburg 2247 57 Charness et al. (2007b) have shown that group membership has a strong effect on individual decisions in strategic games when group membership is salient through payoff commonality. In this comment, I show that their findings also apply to nonstrategic decisions, even when no outgroup exists, and I relate the effects of group membership on individual decisions to joint decision making in teams. I find in an investment experiment that individual decisions with salient group membership are largely the same as team decisions. This finding bridges the literature on team decision making and on group membership effects. (JEL D71, D82, Z13) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2247 10.1257/aer.99.5.2247 http://www.e-aer.org/data/dec09/20080341_data.zip http://www.e-aer.org/data/dec09/20080341_app.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Shorter Papers A Comment on the Economics of Labor Adjustment: Mind the Gap: Evidence from a Monte Carlo Experiment ChristianBayerIGIER, U Commerciale L Bocconi 2258 66 This comment addresses a point raised in Russell Cooper and Jonathan Willis (2003, 2004), which discusses whether the "gap approach" is appropriate to describe the adjustment of production factors. They show that this approach to labor adjustment as applied in Ricardo J. Caballero, Eduardo Engel, and John C. Haltiwanger (1997) and Caballero and Engel (1993) can falsely generate evidence in favor of nonconvex adjustment costs, even if costs are quadratic. Simulating a dynamic model of firm-level employment decisions with quadratic adjustment costs and estimating a gap model from the simulated data, they identify two factors producing this spurious evidence: approximating dynamic adjustment targets by static ones, and estimating the static targets themselves. This comment reassesses whether the first factor indeed leads to spurious evidence in favor of fixed adjustment costs. We show that the numerical approximation of the productivity process is pivotal for Cooper and Willis's finding. With more precise approximations of the productivity process, it becomes rare to falsely reject the quadratic adjustment cost model due to the approximation of dynamic targets by static ones. (JEL E24, J3) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2258 10.1257/aer.99.5.2258 http://www.e-aer.org/data/dec09/20060065_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Shorter Papers A Comment on the Economics of Labor Adjustment: Mind the Gap: Evidence from a Monte Carlo Experiment: Reply RussellCooperU TX and European U Institute Jonathan L.WillisFederal Reserve Bank of Kansas City 2267 76 This note responds to Christian Bayer (2009). Cooper and Willis (2004), hereafter CW, find the aggregate nonlinearities reported in Ricardo Caballero and Eduardo Engel (1993) and Caballero, Engel, and John Haltiwanger (1997) reflect mismeasurement of the employment gap, not nonlinearities in plant-level adjustment. Bayer concludes the CW result is not robust to alternative aggregate shock processes. We concur, but argue that the nonlinearity created by mismeasurement does not disappear. Instead, it is directly related to the level of the aggregate shock. The CW findings are robust for the natural case of unobserved gaps. (JEL E24, J23) http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2267 10.1257/aer.99.5.2267 http://www.e-aer.org/data/dec09/20090079_data.zip American Economic Association Nashville, TN 0002-8282 American Economic Review http://www.aeaweb.org/aer/ 99 5 December 2009 http://www.aeaweb.org/issue.php?journal=AER&volume=99&issue=5 Shorter Papers Corrigendum: Language, Meaning, and Games: A Model of Communication, Coordination, and Evolution StefanoDemichelisU Pavia Jörgen W.WeibullStockholm School of Economics 2277 2277 http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2277 10.1257/aer.99.5.2277